(1) Computer programs of the kind in issue in the present case are written and edited by the author in human readable form. This is known as “source code”. In the present case, some of the source code is written in high-level programming language, and some of it is written in low-level programming language (called “C” and “assembly language” or “assembler” respectively). Source code comprises text files which are intelligible to a suitably skilled person and contain step-by-step instructions defining particular algorithms, and it may be divided into a number of separate modules or libraries, each dealing with a different algorithm or related group of algorithms. (It is SEL’s case that in order to enhance, modify or fix bugs in the program it is in practice essential to have access to, and the right to edit, the source code.)

(2) The form of the program which can be run on the target computer is known as “object code”. A computer program known as a “compiler” is used (possibly in conjunction with other procedures) to turn source code into object code, which is machine-readable and consists of binary numbers as opposed to text. Source code and object code are different forms of a computer program.

(3) A “Hex File” is one form in which object code can be stored. A device known as a “programmer” is used to take the Hex File and to transfer and store it in the appropriate component of the target computer system on which it is to be run. The component may be a memory chip or the memory of the micro-computer itself, depending on the design of the target computer system. A Hex File may be loaded on to production equipment, and used by customers, independently of, and without any need to store or to access, the source code. In addition, aspects of the program, including many site-specific parameters, can be configured by users without the need to modify the source code. However, access to the source code is needed if it is thought necessary or desirable to make changes to the underlying logic of the computer program.

(4) The term “software” embraces intangible program code and associated data. This term is used to distinguish such materials from the computer “hardware”. Software which is stored permanently in components on an electronic circuit board may be referred to as “firmware”. In this case, Hex Files are firmware.

(5) The small computer which forms part of the SEL hardware is referred to in the documents and by the witnesses as a “microcontroller” or “microprocessor” (the technical differences between the two do not matter for present purposes).

(6) “Intel” and “Microchip” are rival manufacturers of microcontrollers.

THE EVIDENCE OF THE WITNESSES

10. I heard oral evidence:

(1) on behalf of SEL and Mr Prescott, from: Mr Prescott; David Van Der Wee (“Mr Van Der Wee”); Mark Gardiner (“Dr Gardiner”) and Gary Keen (“Mr Keen”), the joint managing directors of SEL; William George Pearson (“Mr Pearson”), who joined SEL as a cost accountant in 2016; and Justin Anthos Colin Levine (“Mr Levine”), a consultant who provides services to businesses through the medium of Futurestech Branding and Marketing Limited, and who has been a non-executive director of SEL since June 2017; and

(2) on behalf of Dr Potamianos and BDL from: Dr Potamianos; Stephanie Macdonald (“Mrs Macdonald”), who works (together with her husband) for Martlet Audit Limited, which is part of The Martlet Partnership LLP (“Martlet”), a company founded by her husband, David Macdonald (“Mr Macdonald”), and who provided accounting services to SEL through that medium between October 2007 and May 2016 (and who also worked as accountant and house manager for SRL until May 2016); and Mr Macdonald, a chartered accountant and the founder and director of Martlet, who acted as the accountant to SEL from 1987 to April 2017 and as the accountant to SRL from 2012 to April 2017.

11. Mr Hicks and Ms Page submitted that SEL’s and Mr Prescott’s witnesses were consistent, reliable, straightforward and doing their best to assist the court. In contrast, important aspects of Mrs Macdonald’s evidence seemed unlikely to be right, and, further, contradicted the evidence of Dr Potamianos; whereas Dr Potamianos himself was an unsatisfactory witness whose evidence was evasive, unreliable and self-serving in a number of places, such that both his assertions in contemporary documents and his evidence in these proceedings made in support of his case should not be accepted unless corroborated by other documents or the circumstances generally; and Mr Macdonald was a defensive witness when giving evidence about matters which related to his own conduct.

12. Mr Pavlovich and Mr Riordan submitted the reverse. Mr Prescott’s evidence was coloured by hindsight and by “astonishing vitriol” towards Dr Potamianos, he was forced to change his story in a number of instances, he behaved in an underhand way (for example, in respect of the recruitment of Dr Fells and in secretly recording discussions with Dr Potamianos), and he has disclosed documents late and only after insistence from the solicitors for Dr Potamianos. Mr Keen and Dr Gardiner are simply allies of Mr Prescott, who deferred to him and who provided formulaic responses in cross-examination that they had acted in the best interests of SEL. There was “a shared cavalier approach to the evidence, if not outright collusion”, between Mr Prescott and the two of them. Mr Van Der Wee was an old friend and business associate of Mr Prescott, who was unable to provide much helpful evidence, other than to point to documents relating to the renovations of Peregrine House. Mr Levine was not independent: he has a clear interest in SEL, since he tried to buy it, and since (contrary to his evidence that this is no longer the case) he expects to get shares in SEL once this dispute is resolved. Mr Pearson was eager to support Mr Prescott’s position. In contrast: the evidence of Dr Potamianos was both detailed and candid evidence; Mrs Macdonald was a calm and considered witness in spite of some of the strong allegations that were put to her; and Mr Macdonald found himself in a difficult position, in the middle of an intense dispute between two long-standing clients, which also involved his wife.

13. With regard to Dr Potamianos, Mr Pavlovich and Mr Riordan suggested that it is important to bear in mind the characteristics of his Greek heritage, and they relied on the following observations of by Sir Thomas Bingham in “The Judge as Juror: the Judicial Determination of Factual Issues”, (1985) 38 CLP 1, at 10-11:

“Thirdly, however little insight a judge may gain from the demeanour of a witness of his own nationality when giving evidence, he must gain even less when… the witness belongs to some other nationality… If a Greek, [accused of lying], becomes rhetorical and voluble… what (if any) significance should be attached to that? … To rely on demeanour is in most cases to attach importance to deviations from a norm when there is in truth no norm.”

14. In cases, like the present, which relate to events which happened over many years, in which feelings run high, and in which individuals have taken up entrenched positions in their written evidence by the time the case comes to trial, there are significant risks that witnesses may be honest but mistaken about what took place, and may give evidence about what they would like to think happened rather than what they can truly recollect. These factors make the appraisal of their evidence more difficult. At the end of the day, the best guide to the truth is often to be found not so much in the demeanour of the protagonists, or even concessions made in cross-examination, but in the contemporary documents and in an objective appraisal of the probabilities overall. These matters were discussed more fully in Gestmin SGPS SA v Credit Suisse (UK) Limited, Credit Suisse Securities (Europe) Limited [2013] EWHC 3560 (Comm), in which Leggatt J (as he then was) considered not only the fallibility of memory but also the difficulties to which the process of civil litigation gives rise, before concluding at [22] as follows:

“In the light of these considerations, the best approach for a judge to adopt in the trial of a commercial case is, in my view, to place little if any reliance at all on witnesses’ recollections of what was said in meetings and conversations, and to base factual findings on inferences drawn from the documentary evidence and known or probable facts. This does not mean that oral testimony serves no useful purpose – though its utility is often disproportionate to its length. But its value lies largely, as I see it, in the opportunity which cross-examination affords to subject the documentary record to critical scrutiny and to gauge the personality, motivations and working practices of a witness, rather than in testimony of what the witness recalls of particular conversations and events. Above all, it is important to avoid the fallacy of supposing that, because a witness has confidence in his or her recollection and is honest, evidence based on that recollection provides any reliable guide to the truth.”

15. For these reasons, I have thought it right to focus on the documentary materials, which are extensive in the present case, and to place less weight on the differing accounts and recollections of the witnesses, save where they appear uncontroversial, or objectively probable, or are supported by the contemporary documents. That does not mean that the reliability of the witnesses is of no consequence. Where it is significant, however, I consider that it is often safer to make findings with regard to specific instances, rather than to form a view as to overall reliability and then apply that finding to what may be disparate circumstances. I have made such findings as I consider appropriate below.

THE FACTS

16. SEL was incorporated on 2 September 1987 by Mr Prescott and Mr Van Der Wee to begin business making small direct current (“DC”) electric motor drives (also known as controllers). Mr Prescott has a degree in Physics and a Masters in Control Systems and he was the Technical Director and Chairman, with responsibility for all aspects of the electronic product design, testing, technical literature and customer technical support. Mr Van Der Wee has a degree in Engineering, and he managed everything else.

17. After taking advice from SEL’s accountants, Macdonald & Co, Mr Prescott formed a service company called Sameaim Limited and Mr Van Der Wee formed a service company called Telerace Limited, because, in Mr Prescott’s words, they “wished to minimise tax payments to HMRC”.

18. By 1996 the range of drives designed and offered by SEL had increased to include higher power products. For SEL to compete in the market, it became necessary for it to develop digital (computer controlled) drives, as these can out-perform analogue products. In common with many products, digital electric motor drives consist of hardware and software. The hardware includes a small computer, or microcontroller, while the software determines the way the microcontroller operates and displays and conveys information to users. A crucial feature of the microcontroller is that it determines the flow of electric current through the motor and thus its speed and torque.

19. Dr Potamianos was recommended to SEL as someone who could help SEL to acquire appropriate digital motor controller expertise. He had written a PhD thesis concerning digital drives. Further, he was known to Mr Prescott and Mr Van Der Wee because they had met him when he worked on digital drives for a company called SSD (which was part of the Eurotherm group). Prior to working at SSD, Dr Potamianos had been employed by GEC, and after working for SSD he had moved to another company. Mr Prescott contacted Dr Potamianos, and went to visit him at his house in Harrogate. Dr Potamianos showed Mr Prescott a prototype drive that he had been working on. Mr Prescott concluded that his skill set would be a good fit with SEL’s existing experience.

20. Accordingly, by letter dated 20 September 1996, Mr Prescott offered Dr Potamianos the post of “Head of Research and Development” at SEL. Mr Prescott proposed that “[SEL] will enter into a contract with your new service company for 10% of dispersed profit, with a minimum of £60k per annum”. Mr Prescott explained in some detail the tax advantages for both Dr Potamianos and SEL of Dr Potamianos utilising a service company in comparison to direct employment. In short, if SEL paid a service company £60,000, Dr Potamianos and a second shareholder in the service company (putatively his wife) would receive a net income of about £46,000, and they would avoid paying income tax at the rate of 40%. In contrast, to provide Dr Potamianos with a net income of about £46,000 as a direct employee, it would be necessary for SEL to pay him £70,000 and make other payments totalling about £8,000. Mr Prescott commented in the letter: “We have been using our service companies since 1989 with no problems”. This was a reference to the service companies set up by himself and Mr Van der Wee.

21. BDL was formed as Dr Potamianos’ service company on 11 March 1997. BDL entered into an agreement in writing with SEL entitled “Contract with Service Company” dated 8 May 1997 (“the 1997 Contract”). This is the first of three written agreements between SEL and BDL which lie at the heart of the Source Code claim. The second, entitled “Contract for Services”, is dated 27 March 2000 (“the 2000 Contract”). The third, entitled “Master Consultancy Service Agreement”, is dated 10 November 2015 (“the 2015 Contract”). BDL (and, I infer, in substance, Dr Potamianos) received about £2.1 million in total from SEL between 1998 and 2016 pursuant to these three agreements.

22. Both Mr Prescott and Dr Potamianos state that Dr Potamianos “joined SEL in 1997”. That form of words appears to recognise that SEL recruited Dr Potamianos personally.

23. Mr Prescott further states: “Being a small company we had difficulty competing financially with large corporations when recruiting high level technical people and the personal service company was a tool to enhance the tax efficiency of our remuneration package. The relationship between us was governed by the contracts and [Dr Potamianos] adhered to them”. That language, also, appears to recognise that Dr Potamianos was recruited personally, and that the utilisation of a service company was a mere tool for tax purposes, although it also asserts that the contracts were genuine.

24. Dr Potamianos states that he has never been an employee of SEL, that he has never had an employment contract with SEL, and that he has never been paid a salary by SEL. He also points out that, in emails dated 16 and 18 November 2016, it was stated on behalf of SEL that he and Mr Prescott were not employees of SEL. That evidence is unequivocal, although it may be said to be at least partly self-serving. Whether what Dr Potamianos was paid is properly termed a salary is probably a matter of mixed fact and law, but even if it is a matter of pure fact and his assertions in that regard are taken to be correct, whether he was an employee depends on the true relationship between the parties, and not the label which they chose to use to describe that relationship.

25. During their negotiations, Dr Potamianos had told Mr Prescott that he had an ambition to join the board of SEL, and Mr Prescott had responded that this would be considered after a 2 year period. In due course, on 26 May 1999, Dr Potamianos was appointed a director of SEL, and was given the title “Research and Development Director”.

26. Between the date of the 1997 Contract and until the present dispute arose, Dr Potamianos provided programming services to SEL for SEL’s digital motor controllers. As Head of Research and Development and subsequently Research and Development Director, he was given the sole responsibility for the development of the digital aspects of SEL’s new range of motor controllers. The first range was launched in 2001, and was known as the PL/X range. In addition to working on that range, between 2000 and 2015 Dr Potamianos worked on developing and improving the software for that range. From about 2011, SEL developed a range of controllers for AC motors known as the JL/X series. The technology was based on the PL/X range and the software used is a derivation of the PL/X software. The hardware for the PL/X range was originally based on an Intel supplied microcontroller. In September 2006, Intel announced its intention to discontinue the product. Accordingly, SEL developed replacement hardware based on a Microchip supplied microcontroller. This required Dr Potamianos to modify and re-write of aspects of the PL/X software.

27. For practical purposes, Dr Potamianos was SEL’s sole programmer. However, since the software and the hardware are related, he worked in conjunction with Mr Prescott, Mr Van Der Wee and indeed with other members of SEL’s staff. Dr Potamianos also performed other tasks on behalf of SEL. Initially, Dr Potamianos and Mr Prescott worked in the same office side by side. After the launch of the PL/X range in 2001, Mr Prescott moved back to his own office.

28. BDL points out that “software” is a blanket expression, which is apt to blur the distinctions between source code and object code, and contends that this distinction is of vital importance in the present case. Major planks in the case of BDL and Dr Potamianos are as follows. First, although it is accepted that Dr Potamianos developed source code for a number of motor control algorithms and related programs, subject to a single exception arising under the 2007 Assignment (discussed in paragraph 31(2) below), BDL always retained the source code and only supplied a number of versions of compiled object code to SEL in the form of firmware that could be loaded and executed on SEL’s motor controllers. Second, the object code was all that SEL required to sell its motor controllers, which it did with great success. Third, by the 2007 Assignment, Dr Potamianos sold the intellectual property rights in specified modules of source code to SEL for £400,000 (although BDL and Dr Potamianos recognise that, on their case, he had developed the source code in his capacity as an employee of BDL, such that BDL owned those intellectual property rights). SEL does not accept the accuracy or validity of either of these first two propositions. In particular, SEL disputes that physical retention of the source code is determinative, and in any event SEL asserts that source code was “supplied” by storage on SEL’s equipment and (to some extent) as reflected in invoices for “Contract Works”. As to the third proposition, SEL accepts that the 2007 Assignment included some source code, but SEL contends, in a nutshell, that it can be read and given effect on the basis that all that it covered was pre-1997 work product.

29. The main released versions of the software for the PL/X range comprise versions 2.11 to 5.23 for the Intel based product. Version 6.10 released on 1 January 2014 is the first Microchip release. There was no new version released by BDL/Dr Potamianos after version 6.13 on 20 January 2015. Dr Potamianos contends that further development is not necessary, but SEL disagrees. It is SEL’s case that Dr Potamianos essentially stopped work on software development in early 2015, for reasons which seem likely to be connected to the issues which have led to the present proceedings.

30. According to the evidence of Dr Potamianos, including that given orally at trial:

(1) He stored the source code that he wrote for the Intel versions on the desktop computer (belonging to SEL) that he used at SEL’s premises.

(2) He stored the source code that he wrote for Microchip versions 6.09 to 6.11 inclusive (a) on SEL’s server, in differently named sub-folders, and (b) on that same desktop computer.

(3) However, between June and September 2014 (a) he moved these Microchip versions to other differently named sub-folders on SEL’s server and (b) he destroyed that desktop computer.

31. Until 2007, Mr Prescott and Mr Van Der Wee were equal 50% shareholders in SEL. At that time, Mr Van Der Wee wished to retire. This resulted in the following transactions and agreements:

(1) First, on 19 July 2007, Mr Prescott purchased Mr Van Der Wee’s shareholding for £600,000. Mr Prescott thereby became the sole shareholder in SEL.

(2) Second, on 23 July 2007, Dr Potamianos as “Assignor” executed an assignment in favour of SEL as “Assignee” of “intellectual property and other property rights and interests in (among other things) “the goodwill of the Business” and “the exclusive right to the Trade Name” and “all Intellectual Property Rights of whatever kind in the Software” for a consideration of £400,000 (“the 2007 Assignment”). In the 2007 Assignment, “Business” was defined as “the business carried on by the Assignor using the Software”, “Trade Name” was defined as “the trade name DC Motor Control Algorithms”, and “Software” was defined as “that software more particularly described in the schedule hereto, owned by the Assignor including all intellectual property rights affecting the same”. On the face of it, therefore: (a) the 2007 Assignment was made between Dr Potamianos personally on the one hand and SEL on the other hand; and (b) it had nothing to do with BDL, or any intellectual property or other rights or interests of BDL.

(3) Third, on 24 July 2007, there was a meeting of the board of directors of SEL, comprising Mr Prescott and Dr Potamianos. According to the Minutes of that meeting, it was resolved to issue 302 shares in SEL to Dr Potamianos and “Dr Potamianos was present and paid the sum of £400,000 in full for [those] shares”. Dr Potamianos thereby became the holder of 40% of the shares in SEL.

(4) Fourth, SEL and BDL entered into an agreement in writing dated 25 July 2007 which recorded their agreement that “as from the date hereof the terms and conditions of the [1997 Contract] shall be considered fully terminated and to have no ongoing or continuing effect nor shall any of its terms be enforceable by either party against the other whether in the future or retrospectively”. This suggests that the parties regarded the provisions of the 1997 Contract as having some (unspecified) contractual effect up until 2007 in spite of the fact that they had entered into the 2000 Contract and, in particular, a number of provisions in the 2000 Contract were directly contradictory to provisions in the 1997 Contract.

(5) Fifth, Mr Prescott and Dr Potamianos entered into a “Shareholders Agreement” dated 1 August 2007 concerning their participation as shareholders in SEL (“the Shareholders Agreement”). Among other things, that Agreement contained (at Clause 4.2) a provision which entitled each of the two men to appoint one director for each part of his shareholding which represented at least 20% in the nominal value of the issued share capital of SEL and (at Clause 16) a procedure in the event of a deadlock between the two men arising from an equality of votes at a meeting of the Board of Directors or between the shareholders in SEL concerning any matter relating to the affairs of SEL.

32. There were tax advantages to these arrangements. On the one hand, Dr Potamianos could obtain Enterprise Investment Scheme rollover relief on his investment in the business that he was recorded as selling in accordance with the 2007 Assignment. On the other hand, SEL could obtain tax relief on the depreciation of the acquired assets.

33. On 2 March 2009, Mr Keen was appointed a director of SEL responsible for sales.

34. On 30 May 2012, SRL was incorporated and Mr Prescott and Dr Potamianos were appointed as directors. SRL was created to hold not only the entire shareholding in SEL but also the freehold of SEL’s business premises in Arundel (“Peregrine House”). Those premises had been purchased by SEL in 2010, and had been renovated by 2012. They provided accommodation that was surplus to the needs of SEL, and SRL was incorporated as a holding company for SEL and in order to run the business that arose from the decision to let out that surplus accommodation as serviced offices.

35. On 1 November 2012, Mr Prescott and Dr Potamianos transferred their shareholdings in SEL to SRL, and they became, respectively, 60% and 40% shareholders in SRL.

36. Dr Gardiner joined SEL in April 2013 as technical operations manager. Prior to his recruitment, by email to Dr Potamianos dated 26 February 2013, Mr Prescott explained: “The over-arching objective from my point of view for recruiting Mark is to start building the succession team”. Dr Gardiner was subsequently appointed a director of SEL in June 2014 and a director of SRL in 2017.

2014

37. By 4 February 2014, Mr Prescott and Dr Potamianos appear to have reached a consensus about reducing their day to day involvement and about succession planning. In an exchange of emails on that date, Mr Prescott set out a summary of a previous meeting between the two men, and Dr Potamianos replied “Nothing to add really, excellent summary”. Mr Prescott’s email of that date included the following:

“5) In order to achieve our reduced time at work we need to hand the day to day running of the business over to the younger generation.

How and if this is possible is the key topic for our up coming meetings.

6) we both agree that when this occurs we should take a back seat on the management side and dovout (sic) our work time to the technical side of our respective roles.”

38. On 6 February 2014, Mr Prescott recorded the following outline plan in an email to Dr Potamianos:

“We have a meeting with Gary and Mark. We explain to them that we are preparing for our eventual retirement and have considered all of our options. These boil down to 3 routes. 1) Find an acquirer for [SEL] 2) Bring in a new management team. 3) Form a management team from within [SEL]. We tell them our favoured option is number 3 and we want to try this first… Comments appreciated as usual.”

39. A further summary of the plan was provided by Mr Prescott to Dr Potamianos by email on 12 February 2014.

40. On 2 and 3 April 2014, Mr Prescott and Dr Potamianos held management succession meetings with Dr Gardiner and Mr Keen. Dr Gardiner’s notes (circulated by email on 3 April 2014) recorded:

“It was agreed that we need to start looking for an AP replacement NOW since it could be some time before we find an individual with the right technical and personality attributes.”

41. At a further meeting on 10 April 2014, there was a “Succession Planning” presentation (circulated by Dr Gardiner after the meeting by email dated 10 April 2014 to, among others, Dr Potamianos). This included:

“Actions Technical: AP replacement – embedded s/w specialist but with wider skill-set – start search process immediately…

Actions: Enabling Functions. Investigate getting additional resource from Martlets – short term requirement – Requires SM to acknowledge difficulties …”

42. At a “Succession Planning” meeting of SEL on 23 May 2014 it was recorded that:

“Day-to-day running will be handed over to Gary and Mark but as sole shareholders Aris and Edwin will continue to have a strategic interest. What happens in the longer term depends mainly on how successful Gary and Mark are in running the business. If Sprint continues to thrive then the arrangement will continue.

…Both Edwin and Aris will be in Sprint Electric three days a week after handover. They will be engaged purely in technical tasks but, if required, they will be available for consulting on management matters.”

43. At the same meeting, the following timetable was agreed:

“Handover: Wednesday 11-Jun-2104 (internal announcement)

End of transition period: Monday 01-Sep-2014.”

44. On 24 June 2014, SEL issued a press release announcing that Mr Keen and Dr Gardiner had been appointed joint managing directors (“JMDs”) of SEL and “will run the company from 11^th June on” and that Mr Prescott and Dr Potamianos “will remain at Sprint Electric on a part time basis as technical advisers”.

45. The minutes of a meeting between Mr Prescott, Dr Potamianos, Mr Keen and Dr Gardiner on 15 July 2014 record that “There was a consensus that being single sourced with Aris on the software was a risk”. Mr Keen and Mr Prescott said it was a “major concern for them in case anything happened to make Aris unavailable”. In response, Dr Potamianos said that “all source code files are on the system but maybe the server was not the appropriate environment to set up a system capable of generating a HEX file”. Later on in the meeting, Mr Prescott said that “he wasn’t impressed with the timing and content of the June press release about the Management change”, and Dr Potamianos said that he “shared this view”. Mr Keen said that he had forgotten that a transitional period had been minuted with a target date of 1 September 2014 for general release, and “apologised for the omission and reassured the meeting that the content of the release was not intended to imply anything unflattering towards the previous management regime”. Dr Gardiner also apologised “for missing the chance to correct the relevant content during his proof-reading of the press release”.

46. Later on 15 July 2014, Dr Potamianos sent an email to Mr Prescott stating:

“Weakness on Mark’s part for spotting things and being thorough, staggering ignorance/bad judgement on Gary’s part, totally unacceptable”.

47. It appears that Dr Potamianos and Mrs Macdonald had always seen eye to eye, and had shared disparaging opinions about other personnel at SEL, including Mr Van Der Wee. Following the events of June and July 2014, relations between Dr Potamianos and Mrs Macdonald on the one hand and the JMDs on the other appear to have deteriorated, with Mr Prescott broadly, although not universally, allied to the latter camp.

48. For example, in email exchanges between Mrs Macdonald and Dr Potamianos on 19 September 2014, Dr Potamianos wrote on one occasion: “I’m going to say to you what you said to me in the earlier email, please switch off, they’ll get the comeuppance soon”, and on another occasion (referring to Mr Prescott) “ … how sad (in capitals) is he? …I don’t really give a damn because there would hardly have been any benefit in talking to him in the first place. Which is where we have been for a long long time”.

49. By way of one further example, in a memorandum dated 25 September 2014, Mr Keen wrote that on 19 September 2014 Mrs Macdonald had accused him of “being a liar” and continued:

“Totally unacceptable angry bad tempered aggressive rant to me about me in front of others (MG). I personally would have removed her from the business at that point. No question. However, the special circumstances surrounding SM meant I was not able to act. No apology has ever been made. This just highlights the total lack of respect given to me (and everyone except AP).”

50. Mr Prescott sought to resolve matters, and wrote in an email to Dr Potamianos dated 30 September 2014: “providing Stephanie wishes to stay, we will have another 5 way meeting to see if Mark, Gary and Stephanie can be reconciled”. Dr Potamianos replied:

“if we manage to effect a “reconciliation” of Stephanie with the managing directors, we can stay on the present course until either of us reconsiders his options.

2. In the event that we cannot secure a satisfactory agreement on reconciliation, I still intend to monitor day to day the business operations and intervene when necessary…

3. If we end up in scenario 2, then it is obvious that this situation would not be viable for very long, so we should immediately start taking soundings from the market for possible sale. This can happen either with both of us going together to achieve maximum value or just myself (in case yourself sees no reason to exit) trying to sell my minority state with the technical support/commitment attached to the sale.”

51. Mr Prescott replied by email to Dr Potamianos dated 1 October 2014, stating “it would be good if you could attempt a “reconciliation” with the Managing Directors also. Be assured I will do my best to keep Stephanie on board when I speak to her”. Dr Potamianos responded: “As I said to you in the meeting, we have now, individually & collectively, reached the point of “no-return” and (among other things) “your task to keep Stephanie on board will be fraught due to your lack of strong leadership qualities”. However, while the overall tone of that email was negative, Dr Potamianos said that it would be remiss of him “not to try to formulate some sort of working relationship with Gary”, and while he also said “I do feel we are done with meetings just the 2 of us, and I do mean that”, he left the door open to having a chat if Mr Prescott had “something new and important to say concerning my scenarios 1/2/3”.

52. On 3 October 2014, Mr Prescott, Dr Potamianos, and the JMDs met to discuss “Resolution of current problems”. The minutes record that Mr Prescott and Dr Potamianos, having had their differences, had agreed a new management framework to govern the future operation of SEL, and that this was approved unanimously (the “Management Framework”). They record that the Management Framework included:

“(1) budgets for each element of the business are to be agreed by the Board;

(2) the Managing Directors will apply the budgets as they see fit in the running of the business and will not exceed the budgets without further Board approval

…..

(6) All Board Directors will abide by the resolutions of the Board. In the event of a breach then any Director will inform the other Directors as quickly as possible so that the Board can be re-convened to come to a resolution on the matter.

(7) the MDs will be left to run the business within the framework outlined without day to day interference from the owners” (emphasis added).

53. By December 2014, differences involving Mrs Macdonald were persisting. On one occasion, according to her own evidence, she “snapped and said to Mr Prescott “And you can tell him [i.e. Mr Van Der Wee] to piss off””.

2015

54. January 2015 was an eventful month. By email dated 6 January, Mr Prescott informed Dr Potamianos that “my working relationship with Stephanie [Mrs Macdonald] has finally broken down (on my part) … In addition you and me have a dysfunctional business relationship”. Mr Prescott and Dr Potamianos met later that day. Following that meeting, by email of the same day, Dr Potamianos stated “I totally oppose the removal of the most qualified, capable and trustworthy accountant we have ever had here” and that “I do not trust your commitment to re-starting day-to-day running of the company” and “I expressed my deep disappointment at your rejection of the validity of the shareholder’s agreement”. On 9 January, Mr Prescott terminated Mrs Macdonald’s contract with SEL. On 10 January 2015 (a Saturday) Dr Potamianos and Mrs Macdonald were captured on CCTV removing documents from SEL’s offices. On 12 January, the board of directors of SEL ratified the decision to terminate Mrs Macdonald’s contract by a majority (Dr Potamianos dissenting).

55. Also on 12 January, Mrs Macdonald sent an email to Dr Potamianos stating that given the manner of Mr Prescott’s dismissal of her his termination “could only imply that he was referring to both companies” (an interpretation with which Mr Prescott disagrees), stating “I have experienced some very poor practices in other establishments but never anything as shabby as the conduct of the directors of Sprint Electric” and asking Dr Potamianos to pass on a copy of that email to Mr Prescott. On 13 January, Dr Potamianos replied to Mrs Macdonald saying he was “very sad and very angry for the unjust and disgusting treatment you have received from Edwin Prescott and the rest of the directors”.

56. On 15 January, Mr Prescott sent Mrs Macdonald an email entitled “Reason” which he appears to have run past Dr Potamianos in draft, in which he explained, in summary, that left with a choice between retaining Mrs Macdonald and retaining the JMDs, in light of the failure of his attempt to facilitate a reconciliation “involving all 5 of us”, he felt that he had no option from a business perspective other than to terminate Mrs Macdonald’s contract. He ended that email as follows:

“I must stress that there was no question about your work effort, your innovative ideas, your desire to protect my interests. I consider you to be extremely proficient. This made my decision all the more agonising for me. I am sorry for the pain it has brought you.”

57. On 16 January 2015, however, SEL agreed a compromise with Martlet whereby Mrs Macdonald would be reinstated on the basis that she worked remotely. Mr Prescott’s draft minutes of a meeting with Martlet on 19 January record that “Sprint Electric Accounting function to be handled remotely by Martlet. Stephanie will be undertaking this task on behalf of Martlet and the purpose of the meeting was to discuss the detail of how this arrangement could operate effectively”. At item (i), the minutes further record that: “If the contract was terminated by either party then Martlet would provide a handover service to SE”.

58. Notwithstanding this compromise, on 20 January 2015, Dr Potamianos served a notice on Mr Prescott stating that the issue of Mrs Macdonald’s employment had not been resolved by reason of Mr Prescott proposing her dismissal and Dr Potamianos opposing it, and invoking the deadlock procedure contained in the Shareholder’s Agreement. This was followed on 26 January 2015 by a “Deadlock Memorandum” in which Dr Potamianos expressed his disagreement with the dismissal of Mrs Macdonald from her posts as accountant at SEL and accountant and house manager at SRL, stated that action to rectify tensions “should have been directed at the perpetrators of the disputes rather than SM herself” and expressed the view that Mr Prescott “has acted in an irresponsible and unfair manner which has exposed both SRL & SEL to upheaval and danger of undermining their smooth operation”.

59. At a meeting on 28 January 2015 (the minutes of which were later recorded as agreed on 3 February 2015) Mr Prescott and Dr Potamianos discussed their options. Option 1 was “Ed buys out Aris’ share in the whole business, or Aris buys out Ed’s share in the whole business”. Option 2 was “Ownership change of SE”. This had a number of permutations, including “Ed buys SE, or Aris buys SE”, but obstacles to this were identified including that “If the buyer is [Mr Prescott] or a third party there is no existing security for the future software support”. The minutes record that “the arrangement in place since June clearly is not workable going forward and so something has to change. Aris has an extremely low opinion of Gary and Mark and this is reciprocated. It is very difficult to envisage any improvement at this time. Ed has a good relationship with them both”. Under the heading “Share agreement” is it recorded that “Creating a new share agreement was discussed and this was not ruled out by Ed or Aris”. Under the heading “Sprint Electric Board of Directors” it is recorded that Dr Potamianos “believes that Gary and Mark are “stooges” of Ed’s”. Under the heading “Software” it is recorded that Dr Potamianos “does not trust Mark with having access to a compatible version of the software. He thinks that Mark will be a security risk” and that “the software needs de-bugging before it can be put in a form suitable for compilation”.

60. At a meeting on 3 February 2015, which was noted by Mr Prescott, Mr Prescott and Dr Potamianos had further discussions about the approach towards sale to a third party. A number of topics were discussed, and a number of “important principles” are recorded as having been agreed. Under the topic “Ed wants a route map to software security” the minute records:

“The route discussed is work to remove known bug. Edit commentary. Place compileable code in secure place. Then recruit engineer for transfer. I am not clear whether this is agreed.”

61. It is SEL’s case that from about this time Dr Potamianos more or less stopped doing any development work. In support of this case, SEL relies, in particular, on the minutes of a series of Cobra2 meetings. It is sufficient to quote only a few examples. The minutes of the meetings that were held on 13 May 2015 and 8 July 2015 both record “There has been no progress on resolving the bugs in the PL/X and JL/X software”. The minutes for 10 May 2016 record “There has been no progress with either the PL/X or the JL/X firmware”. These entries were followed by further details. For example, the minutes of 13 May 2015 add:

“The problems these bugs create are being managed by Jim [Lock] but this will become increasingly difficult as time goes on. This is particularly true of JL/X; once we have exhausted our stock of v1 control boards the product will no longer have the correct MM1 strings.”

62. Throughout the Spring and Summer of 2015, Mr Prescott and Dr Potamianos made efforts to explore a sale to a third party. An email from Dr Potamianos to Mr Prescott dated 23 September 2015 records that Dr Potamianos had told an adviser at Baker Tilly that “our business is being affected by 10 to 15% down (being conservative)” and that the adviser had immediately replied that this would affect the selling price. Mr Prescott’s evidence is that in a telephone call that they had with Baker Tilly not long after this, Baker Tilly advised that they would struggle to sell the business at all, and that if they did manage to do so, it would be for no more than £2.5m.

63. On 30 September 2015 Mr Prescott and the Petitioner had a meeting at which they agreed they “would explore three possible changes to group structure a) EP purchase AP shares in SR b) EP purchase SE off SR c) EP purchase SE off SR and AP purchase EP share in Peregrine House”. They also agreed to:

“do their best to agree a fair value for whatever solution is deemed appropriate. In general for SE this means considering:

a) An element of multiplier on profit (AP suggested 4, EP thought this seemed right)

b) spare cash to be a separate element

c) Excess stock to be considered

d) Taking account of previous higher performing years to provide a fair value not only based on the current low year.”

64. On 16 October 2015, Mr Prescott offered to purchase Dr Potamianos’ shares by way of share buyback for £1.34m using a methodology “guided by our previous discussions”. On 19 October 2015, Dr Potamianos replied “I would like to inform you that your offer has not been successful”. Later that day, Dr Potamianos rejected the suggestion that it was now his turn to come up with a value acceptable to Mr Prescott, and stated that it was up to Mr Prescott to make his best offer and then in response he would “tell you if it is acceptable”.

65. In November 2015, Mr Prescott produced a memorandum on “Problems that need a solution”, which he sent to Mr Macdonald as an attachment to an email dated 13 November 2015. In that email Mr Prescott sought Mr Macdonald’s help and advice, in essence as to how he could buy out Dr Potamianos and end “the management paralysis we have at the moment”.

66. The topics covered in the memorandum included the following:

“We are vulnerable to any chronic technical problem with our products due to our resources. For example a recall on a PLX would have very serious consequences. I have been very cautious over the years to ensure the designs are resilient. We have had a few instances over time and the impact is far reaching. So far we have survived them. The Company relies on a lot of goodwill from the workforce and I have always tried to foster a happy workplace…

Product

Elephant in the room is software and the PLX product range which is the main earner…

Source code for the PLX that belongs to SE is not available to it and no one apart from Aris knows where it is.

This to me is the single biggest threat. Aris is refusing to hand over the source code because there is no shareholder agreement. There is no shareholder agreement because Aris does not agree that my 60% should allow me to appoint 3 directors and his 40% only 2. (This was intrinsic in the original agreement). So now we have to rely on the articles …

Without Aris available for whatever reason to further develop the software then the PLX is not a product we can build our future on as the software platform is not stable. This makes debugging and development difficult, if not impossible. Without knowing the status of the source code and documentation it is hard to assess the development effort required to create a robust and reliable platform but in the worst case it is likely to mean a complete code re-write. This is a formidable task (multiple man years) …

In conjunction with Mark I have assessed what resource would be needed to replace Aris. It requires 2 high level engineers with complimentary (sic) skills …

The 2 engineers would have to be under the direction of Mark. However, Aris has told me that he would refuse to train Mark. This presents a further difficulty.

I was lucky to find Aris in 1998 in that he had the skills of E1 plus E2 plus the experience of designing the 590 series.

It was for this reason that when the opportunity arose with DVDW buyback I facilitated Aris becoming a significant shareholder in 2007 because I wanted ongoing security of software”.

67. By email to Mr Prescott dated 24 November 2015, Mr Macdonald gave his reasons for thinking that Mr Prescott’s offer was “a Wee bit too low”.

68. Mr Prescott made an improved offer to include a post-sale 4 year contract for BDL at £60,000 pa on top of his initial offer. This was rejected by Dr Potamianos.

2016

69. An email from Mr Prescott to Dr Potamianos dated 16 January 2016 stated:

“1) Recent buyout offer

The offer was insufficient because it was based on an investment profits multiple plus assets formula. You now indicate that you would only consider selling at a price that reflects the higher multiples typical of a strategic sale.

2) Source code

I asked you where the PLX source code was and you told me it was hidden in your personal domain on your Sprint machine.

3) Re Shareholder Agreement/source code

From earlier discussions I understood that the reason you would not reveal the source code location was because the original shareholder agreement had been obsoleted by the formation of the holding company and If (sic) a new agreement were to be reached then the source code problem would disappear.

In our latest meetings I offered to try and negotiate a new shareholder agreement but your opinion was that this was not worth pursuing.

4) Re Other Directors

You told me that you would be willing to converse with Mark and Gary on Company matters but under no circumstances would you work with either of them on any project...

8) Software and source code

… You said that you alone would decide if and when it was made available to Sprint and that might be one or even two years. You did acknowledge that the source code was the property of Sprint.”

70. By email dated 18 January 2016, Dr Potamianos replied:

“ … only Item 5 (out of 9) represents an accurate account of our conversation.

Also Item 1, whilst correct in the information it conveys, it is incorrect as to how it is contextually phrased regarding the words “now” and “only” in the second sentence of the paragraph …”

71. On 6 February 2016, Mr Prescott sent an email to Dr Potamianos stating that Dr Potamianos had been wrong to serve a deadlock notice, on the grounds (among others) that the Shareholders Agreement did not apply and that a solution to Mrs Macdonald’s dismissal had been found before the notice was served. The email continued:

“[SEL] is at risk because you are the only person who can support the software. Although you say the current source code is on your works machine, you have placed it in your personal domain and it is unavailable to anybody else. Furthermore you are the sole depository in [SEL] of the knowledge of how it works. I think it is your duty as a director of [SEL] to co-operate fully in rectifying this immediately. Surely you can see that this is best for [SEL]? …Also can you assist in the transfer of your knowledge to the [SEL] technical team… Surely you can see that at the moment [SEL] is at risk… Obviously we need to do sensible things to limit the risk of employees damaging the software. But if you went under a bus tomorrow then we would be in very vulnerable position. Please indicate if you agree to this program. Happy to include appropriate protections against accidental damage by other employees. If you don’t agree, can you let me know why…”

72. On 12 February 2016, Dr Gardiner circulated a draft Business Plan for the growth of SEL.

73. By an email on 19 February 2016 Mr Prescott asked Dr Potamianos to respond to his email dated 6 February 2016:

“My pressing concern is the 2^nd subject of my email of 6^th Feb i.e. the software. I need to know what your position is on this. I want [SEL] to be able to independently support and develop the existing platform. This will require you/BDL to assist in the training of a new engineering resource. I want this to be in place before commencing on any other software project…”

74. Dr Potamianos responded on 19 February 2016, but did not agree. He stated that, from his perspective, the No 1 priority was the Business Plan. After addressing other matters, he stated that “contrary to the commentary in your response on the Business Plan, I can still be fully relied upon for technical support and I have no intention of retiring in the short to medium term”. He did not address issues concerning the location and accessibility of the source code.

75. By email to Dr Potamianos dated 23 February 2016, Mr Prescott made clear that he was in favour of the Business Plan, that he had full confidence in the JMDs, and that he considered that the Business Plan was in the best interests of SRL. Further, he stated that “The present software has been neglected for over a year. There are known bugs and deficiencies in it” and that it was prerequisite of his that “handover of software and training of a new engineer” should happen immediately. He also stated that he had no wish to undermine the authority of Dr Potamianos and that “it seems to me that any authority you might have had has been diminished by yourself without any help from me. You can’t treat people in the way you do and expect them to respect you”.

76. On 3 March 2016, Mr Prescott set out his thoughts on the proposed Business Plan in an email to Dr Potamianos and the JMDs. Dr Potamianos replied the same day setting out his detailed reasons for his conclusion that:

“I am not in agreement to proceed with implementation of this plan in its present form. I am very concerned that it will place the company in a precarious position for very dubious returns”.

77. On 9 March 2016, Mr Levine, who had expressed an interest in buying SEL, sent an email to Dr Potamianos reporting on a meeting that Mr Levine had had with the bank to “discuss financials”. Mr Levine rehearsed that he had originally thought that adjusted EBITDA would be in the consistent range of £750k, but that in light of the fall in net profits for 2015 to £41k it would fall into the range of £100k-£200k, and that a multiplier for a contracting business would be in the range of 2-3. Accordingly, he stated:

“If I were to be considering a private valuation, then we would be in the £500k-£700k range … As a business sale, to obtain the higher values that you may have in mind will need some strong growth and a return to the strong net profits over a 3-5 year period.”

78. Dr Potamianos replied on 10 March 2016, saying that he agreed broadly with a lot of the points that Mr Levine was making regarding the present performance of SEL and the market place, but:

“I can’t get away from the fact that you have seriously understated the adjusted EBITDA for 2015 which is actually around £400k, not £100-200k”.

79. On 11 March 2016, in response to a further email from Dr Potamianos, Mr Levine sent him further calculations. These showed cash at hand and in the bank of £1,070,443 and net assets less cash of £1,228,011. They also showed 3 year average adjusted EBITDA of £432,716, £453,330, £421,388 and £296,166 for the years ending on 31 October in 2012, 2013, 2014 and 2015 respectively. The body of Mr Levine’s email stated “This year’s financial performance would seem to suggest 2015-16 will be similar to 2014-15” and that “A buyer will pay more for a business that is on a growth trajectory as opposed to contraction”.

80. On 18 March 2016 the Business Plan was updated, and a board meeting was called to seek approval for it. After drafts of the Business Plan had been circulated to all directors, including Dr Potamianos, on 12 February 2016, Dr Potamianos had responded with comments by his emails dated 16 February 2016 and 3 March 2016, which Mr Prescott in turn had considered and replied to by email dated 18 March 2016.

81. On 22 March 2016 the SEL board approved the Business Plan by a majority of 3 to 1. The minutes of the board meeting rehearse a statement of Dr Potamianos’ position, in which he stated that Mr Prescott “was the only member of the board that subsequently engaged with me in email communication regarding this business plan”; explained the detailed reasons why he opposed the Business Plan; required that a substantial dividend be paid to SRL such that constraints would be put on the expenditure available to be made by the JMDs; and stated that, in the absence of compliance with his demands, he reserved the right to invoke the deadlock procedure and “cause the abandonment of the plan at any time” which he said “would be potentially fatal to the company as the likely outcome would be for the company to be wound up”. Later in the meeting Dr Potamianos confirmed that he was agreeable to the need for a firmware engineer, but the time-scale would need to be considered.

82. The Business Plan included budgets for 3 years (2015-2018) and included provision for: (a) a marketing budget of £140k (plus £48k for lead generation); (b) the replacement of Mr Van Der Wee at £40,000 pa; (c) a “Control [i.e. as clarified at the board meeting, firmware] Engineer” at £50,000 pa; and (d) an increase in headcount from 19 to 23 between 2015/2016 and 2017/2018, which Dr Gardiner explained at the board meeting as relating solely to indirect labour.

83. On 7 April 2016, a general meeting of SRL was held pursuant to the request of Dr Potamianos at which he proposed resolutions that: (a) the Business Plan should not be implemented; (b) £700k should be transferred from SEL to SRL; and (c) the Business Plan should be reviewed by an independent professional. Mr Prescott (holding 60% of the votes) voted against, and Dr Potamianos (holding 40% of the votes) voted in favour, so the resolutions were not passed.

84. On 13 April 2016, Mr Pearson was contracted, on SRL’s case, as a replacement for Mr Van Der Wee to undertake the costs accountancy and business systems roles. On Dr Potamianos’ case, however, Mr Pearson was engaged to replace or otherwise needlessly to duplicate at least part of Mrs Macdonald’s function.

85. On 25 April 2016, on a date when he knew that Mr Prescott would be away, Dr Potamianos called a board meeting of SEL at which: (a) he contended that “Edwin and I are in deadlock”; (b) he threatened “possibly catastrophic effects to the welfare of the company to the extent that the company could be wound up, and with also possible consequences personally for directors”; and (c) he reserved “the right to take action against my fellow directors personally, jointly and severally, in respect of any financial losses that I may suffer (or might have already suffered) until the deadlock is resolved”. Dr Potamianos further stated that he thought it was “the wrong policy” to replace Mrs Macdonald, and that it was “pretty obvious that getting [Mr Pearson] to do everything was on the cards” and that if that was the intention then he could see no alternative “other than exit at a fair price or a nuclear option (for clarification the nuclear option is going to the arbitrator and seeing whatever comes out of it)”.

86. With regard to the first of these points, Mr Prescott contends that (i) there was no deadlock in any practical sense: there was a majority shareholder and thus resolutions could be passed on a poll; and (ii) there was no deadlock under Clause 16 of the Shareholders Agreement for at least four reasons: first, the Shareholders Agreement did not apply to SRL; second, the business plan was not “a matter relating to the affairs of the Company” (within Clause 6.1) (but rather to SEL), and Clause 6 was not engaged, as this only related to spending by SRL (not SEL); and, third, the matter had not been considered “by [both] a meeting of the Board and the Shareholders” (as required by Clause 16.1); and, fourth, Dr Potamianos did not pursue the deadlock procedure within 21 days (see Clauses 16.1.3 and 16.2), but instead, on 27 April 2016, he said that he was willing to “seek a solution without resorting to clause 16 of the Shareholders’ Agreement” and “put my judgement on this business plan to the test under an independent and suitably qualified third party”.

87. In light of Dr Potamianos’ stance, on 25 May 2016 Mr Prescott commissioned Mr Levine to undertake a critical review of the Business Plan, a decision with which the JMDs agreed. Mr Prescott informed Dr Potamianos of this by email dated 8 June 2016, to which Dr Potamianos responded on 13 June 2016:

“What is the point of this now other than to incur more ridiculous costs as I assume Justin has not agreed to do this for nothing”.

88. On 5 May 2016, in response to an email that Mr Pearson had sent to Mrs Macdonald concerning their requirements for a monthly management accounting package, Mr Macdonald sent an email to the directors of SEL criticising their management of SEL and the decision to appoint Mr Pearson:

“To say that I’m disappointed about your lack of communication and your appointment of a third party to provide information that is readily available from your system is an understatement of Gargantuan proportions”.

89. Mr Prescott replied by email dated 6 May 2016, giving reasons why Dr Gardiner and Mr Keen had not given Mr Macdonald a “heads up” about the recruitment of Mr Pearson:

“If it was not for the fact of the dispute with Aris then I believe Mark and Gary would have no issues in being open and frank with you on any topic related to the accounts as would normally be expected. However, when operating under the cloud of legal action by Aris with his avowed intention to reverse their business plan, and with Stephanie invariably copying him in on everything then I for one understand their reticence. I also understand that Will offered to have an introductory meet and greet and discussion on how to work together with Stephanie, but she wanted Aris and me in attendance. You may say what is wrong with that. My experience is a lot could be wrong with that. Although I am not saying she was wrong to ask given her difficult position.”

90. By email dated 10 May 2016, Mr Macdonald stated in response to an email of 6 May 2016 from Dr Gardiner:

“It is highly acceptable and appropriate for me to send an email with such tone and content to a client of long standing … The atmosphere at Sprint Electric is like a festering open wound which grows more and more gangrenous by the day ... There is no point in trading insults but some of your remarks are so extraordinary and ill-informed from somebody in your position that I will make some further comment … Sprint Electric is a failing, ailing company. Its results have taken a turn for the worse since you have been at the helm. You will not cure that problem by asking for a wealth of statistics … I have no doubt that Will will unearth plenty of defects and useful changes to the system, which is antiquated and should have been replaced years ago”.

91. By an email dated 11 May 2016, Mr Macdonald replied to Mr Prescott, expressing disagreement with much of what Mr Prescott had written and making further criticisms of Mr Prescott. In turn, Mr Prescott made comments on Mr Macdonald’s text and sent them back the same day:

(1) Mr Macdonald’s complaints included that “Your management style is characterised by procrastination”, to which Mr Prescott replied “That is a fair point”.

(2) Mr Macdonald also asserted that the reason why Mrs Macdonald found herself in the middle of two warring factions was because Mr Prescott had failed to address her grievances against Mr Van Der Wee, which included “a highly unsavoury incident when he made faces at her behind your back which eventually caused her to crack”. Mr Prescott denied these allegations, and said with regard to this particular incident that he had quizzed Mr Van Der Wee, who had denied the matter, and that “One or other party may have been untruthful or it was a mistaken perception. No other witnesses”.

(3) Mr Macdonald further stated “My life and Stephanie’s has been made an absolute misery by this appalling situation which has just got worse and worse over the past 18 months and which nobody has had the courage to take in hand”.

(4) When asked by Mr Macdonald’s email whether Mrs Macdonald was being dismissed with immediate effect, Mr Prescott replied “No, I made a suggestion for a possible solution, that’s all”.

(5) In response to Mr Macdonald’s claim that “All the company’s returns have always been filed in time”, Mr Prescott commented “Yes, but other things were late or delayed”.

92. On 12 May 2016, Mr Macdonald stated in an email to Mr Keen (and the other directors of SEL):

“We are where we are and the situation cannot/must not continue. If you wish to terminate Stephanie’s contract, as Mark has already intimated to Aris, to avoid duplication of work and the conflict and stress this is causing, please just say so in order that we can all move on”.

93. Mr Keen replied on 13 May 2016:

“I would much rather we have the chance to discuss mutually beneficial working rather than a strong word like termination. Let me know if you feel able to do this”.

94. On 16 May 2016, Mr Prescott sent an email to Mr Macdonald which was copied to all the directors of SEL, including Dr Potamainos, stating:

“I have spoken to the other Directors. We have decided to move the accounting function in house which means that Stephanie will no longer be required to perform that role and the contract for remote accounting with Sprint Electric will be terminated”.

95. On 17 May 2016, Mr Macdonald sent Mr Prescott and Dr Potamianos invoices in respect of the termination of Mrs Macdonald’s contract. Dr Potamianos replied by email of the same date, expressing his regret at Mrs Macdonald’s employment ending “in such disgraceful circumstances”, and stating “I am agreeable for [the] above invoices to be paid immediately so long as Edwin is also agreeable”.

96. On 20 May 2016, Mr Macdonald informed SEL that:

“It is no longer appropriate on a number of levels for Martlet Partnership to continue acting for Sprint and Sprintroom on a long term basis aside for completing ongoing assignments in hand…

Under the terms of our agreement for Sprintroom we will carry out the pure accounting function for a period of 3 months or less should you find somebody before then.”

97. Following these events, Dr Potamianos adhered to the stance that Mr Pearson was not up to his job, in which he was supported by Mr Macdonald. For example, on 29 June 2016, Dr Potamianos sent an email to Mr Pearson referring to some issues that he had previously raised with Mr Pearson, saying that he had sought Mr Macdonald’s advice on those issues, and enclosing Mr Macdonald’s response. In an email dated 1 July 2016, Mr Pearson objected to what Dr Potamianos had done. Dr Potamianos sent Mr Pearson’s response to Mr Macdonald, stating “Words fail me, I am embarrassed to have to forward to you this arrogant and ignorant response from Will Pearson which is totally symptomatic of the malaise engulfing poor old Sprint Electric. The responsibility lies wholly on the shoulders of Edwin Prescott for reducing this once vibrant company to an odious pile of apologists, ass coverers and deluded individuals”. Mr Macdonald replied saying with regard to Mr Pearson that “he has only shown himself up even more” and “I will continue to lobby the directors as to this person’s incompetence and ridiculous expense”.

98. This exchange took place against the background of Mr Macdonald’s email to the directors of SEL dated 17 June 2016 in which he suggested that Mr Pearson’s remuneration was set at a level that was so high as to be fraudulent:

“Will Pearson has advised us that his salary is £52,000 so I am concerned this may be another attempted fraud as this seems at least £15,000 per annum more than is appropriate”.

99. Further, by another email that he sent to Dr Potamianos on 1 July 2016 Mr Macdonald made clear that he intended to keep aspects of their communications to themselves. Mr Macdonald there stated:

“Ari, I will reply to your private email address. Please remind me what it is and delete this one and your reply”.

100. By this time, issues with regard to the source code were coming to the fore again. In an email dated 7 July 2016, Mr Prescott recorded that at a meeting on 16 June 2016 Dr Potamianos had made clear that he was not going to release the source code to SEL and that “he was too busy to do any work on software R&D”. Mr Prescott proposed that his solicitors, Moore Blatch, should be asked to advise on these matters.

101. Dr Potamianos responded by email dated 8 July 2016, saying that he had explained the position with regard to the PL/X software many times over the years, not least at the meeting on 16 June 2016, that he was very willing to work on the R&D software although in light of the state of affairs at SEL “a lot of my time is predominantly taken up with health & financial monitoring tasks”, that Moore Blatch were conflicted because they also advised Mr Prescott personally, and that an independent law firm should advise on the matters identified by Mr Prescott as well as a number of other matters where he believed “the directors were not acting in the best interests of the company and against my concerns and objections”, including, for example, the treatment of Mrs Macdonald.

102. By email dated 15 July 2016 Mr Prescott informed Dr Potamianos that BDL’s invoice No 251 would not be paid as no underlying schedule had been agreed, and added “I cannot see how any further schedules can be undertaken by BDL until the IPR issue has been resolved”. Mr Prescott further stated:

“for your information my service Company Sameaim Ltd is refraining from issuing invoices for the time being in the hope the IPR questions are settled quickly as the IPR clauses in the underlying agreement are similar to BDL’s. In any event Sameaim has not withheld any IPR from Sprint Electric and will not do so”.

103. On 20 July 2016, Mr Levine had a meeting with Dr Potamianos. According to an email that he sent Mr Prescott the same day, Mr Levine recorded notes “from memory, and taken in the context of a general discussion, so should not be taken as a definitive opinion nor a totally accurate set of his views – for guidance only”. These notes included the following:

“[Dr Potamianos] acknowledged that the IP was generally owned by SE. He repeated that the software was loaded onto the server and could be found if looked for”.

104. On 22 July 2016 Dr Potamianos created a “Reply to EJ Prescott’s emails of July 15, 2016” in which he contended that there was no dispute with BDL concerning intellectual property rights:

“… contracts are with BDL for delivery of specific projects. This has nothing to do with any dispute over IPR. If indeed there is such a dispute, it is with Aris Potamianos as an individual and hence a different entity to BDL.”

105. On 19 August 2016, Mr Prescott had a meeting with Dr Potamianos which was recorded by Mr Prescott. This was followed by an exchange of emails concerning the location of the source code. I consider these matters below.

106. On 26 September 2016, a meeting of the board of directors of SEL resolved by majority of 3 to 1 (Dr Potamianos dissenting) to establish a sub-committee (“Sub-Committee”) for the purpose of considering the dispute with Dr Potamianos and BDL in relation to the intellectual property rights of SEL in the software supplied by BDL, and the appointment of Moore Blatch as legal advisers to SEL. The minutes record:

“EJP went on to say there is another solution making the proposal unnecessary and that is for AP to confirm that the IPR is owned by Sprint Electric and to make available the latest 6.13 source code with an explanation together with all deliverables of previous contracts by BDL.

AP said it is not relevant to discuss this as it is part of an ongoing process.”

107. On 28 September 2016, ML Surveyors LLP produced a valuation of Peregrine House which valued it at £1.5m as at 31 October 2015, whether with vacant possession or subject to the existing letting schedule.

108. On 11 October 2016, Moore Blatch sent a letter on behalf of SEL to BDL requesting the source code and various classes of document, relying on the 2000 Contract (although SEL had been unable to locate a signed copy of the 2000 Contract at that time).

109. On 13 October 2016, Blake Morgan on behalf of Dr Potamianos sent a letter setting out the basis of the Unfair Prejudice claim.

110. By a letter to Moore Blatch dated 24 October 2016, Blake Morgan contended that the version of the 2000 Contract provided by Moore Blatch was “nothing more than a template. It has no defined parties. It is unsigned and undated”. The letter took many other points, including that the 2015 Contract had superseded any earlier contract, and that SEL had waived any rights to rely on the terms of Individual Service Contracts made pursuant to the 2000 Contract, as evidenced by “SEL making payment to Dr Potamianos of £400,000 in 2007 in order to obtain the IP rights pertaining to the development of the PL/X software at the time”. The letter concluded by saying that “Should [SEL] wish to obtain source code as part of deliverables under the Individual Service Contracts, BDL would be open to entertaining offers from SEL for that code”.

111. On 21 October 2016, an incident occurred between Dr Potamianos and Mr Pearson which resulted in Mr Pearson raising a formal grievance against Dr Potamianos which SEL and Mr Prescott had to deal with.

112. On 7 November 2016, a meeting of the board of directors of SEL resolved by majority of 3 to 1 (Dr Potamianos dissenting) to extend the appointment of the Sub-Committee for 12 weeks. The minutes record that, under the rubric of “any other business”, Dr Potamianos raised the issue of the appointment of Lewis Brownlee (“LB”) as external accountants, and stated that “the hiring of LB is another example of the board not running the business in a proper and professional manner”. The minutes also record that Mr Prescott explained that LB were being appointed to provide advice on current matters and to deal with enquiries concerning the previous year’s accounts, that Mr Keen stated that he would rather have Martlet deal with such matters, and that Dr Gardiner stated that he considered that Martlet was best placed to answer questions about accounts which they had prepared. When the matter was put to the vote, however, it was decided by a majority of 3 to 1 that LB should handle such possible enquiries. Dr Potamianos then queried why Mr Keen and Dr Gardiner had voted as they had, and they said, respectively, that at the end of the day it didn’t make much difference which of the two firms would be handling these matters and that although Martlet should be handling matters that occurred during their tenure advice should be sought from LB in connection with them. The meeting then turned to the appointment of Mr Levine’s company, Futurestech Branding and Marketing Limited, and a discussion followed which ended with Dr Potamianos expressing the view that this appointment was “yet another example of SEL’s business not being run in a proper and professional manner”.

113. By letter dated 16 November 2016, Moore Blatch set out Mr Prescott’s response to Dr Potamianos’ allegations of breach of the Shareholders Agreement and unfairly prejudicial conduct, and made a further offer on behalf of Mr Prescott to purchase Dr Potamianos’ shares at a price to be determined by an independent joint expert on the basis that (a) the report should cover the value of those shares with and without applying a minority shareholder discount; (b) the parties agreed to be bound by the valuations; (c) the parties or failing them the Court should decide whether the minority shareholder discount should be applied; (d) the parties agreed the contents of the instructions to the expert and shared the cost of the report. The letter identified four firms from which the expert might be appointed. On 16 January 2017, Moore Blatch chased for an answer in respect of the proposal that a joint share valuation expert should be instructed.

114. On 16 November 2016, Dr Potamianos reported LB to their professional body, the Institute of Chartered Accountants for England and Wales (“ICAEW”).

2017

115. This complaint was rejected by the ICAEW on 15 February 2017 and again (in response to an email from Dr Potamianos dated 24 February 2017) on 28 February 2017. In the meantime, by email to Mr Pearson dated 10 February 2017, Mr Macdonald had explained that, having consulted the ICAEW “the ethical guidelines prevent me from passing information to [LB]” because:

“… a decision such as this is not the remit of the board of directors, but, in accordance with the shareholders’ agreement, is a decision that can only be taken by the shareholders themselves.

I have been informed by one of the shareholders that he does not support the appointment of [LB] in any capacity and therefore I am not willing to risk legal action by failing to adhere to that information, unless and until I am notified to the contrary…

Please understand that this in no way should be interpreted by you as me being uncooperative but simply then I have to respect the rules and regulations of my professional body.”

116. On 26 January 2017, Blake Morgan sent a detailed reply to the letters from Moore Blatch dated 16 November 2016 and 16 January 2017. Among other things, Blake Morgan stated that Dr Potamianos “has never had a wish to sell his shares in SEL and he has made that clear to you client on many occasions. However, he has been forced to explore that possibility because of your client’s blatant abuse of [his] rights as a minority shareholder”. Their letter further stated that it was premature to commence instruction of an expert until Mr Prescott had made “a properly calculated offer” and “before our client’s legitimate concerns concerning Sameaim’s invoices totalling £135,000, as detailed above, are addressed”.

117. Moore Blatch provided a detailed response by letter dated 17 February 2017. That letter also included an offer from Mr Prescott to purchase the Petitioner’s shares for £1m on terms that Dr Potamianos provides “the usual warranties and indemnities” and that “Each party bear their own costs in relation to the dispute and the share sale” or, if that offer was not acceptable, to proceed with obtaining a valuation by a joint share valuation expert as proposed on 16 November 2016.

118. On 7 March 2017:

(1) At a board meeting of SEL, the Sub-Committee recommended the removal of Dr Potamianos as a director of SEL. The grounds on which this recommendation was based are set out in “Written Particulars of Concerns” which were later sent under cover of Moore Blatch’s letter dated 23 March 2017. They address the following issues: (a) software ownerships and litigation; (b) directors’ duties under section 172 of the CA; (c) bullying and harassment of colleagues; (d) inappropriate use of company property; (d) damaging relationships with suppliers; (e) damaging relationships with a customer; (f) publicly undermining an SEL consultant; (g) threats of litigation against the board; and (g) attendance at Peregrine House. Dr Potamianos left the meeting, saying that he would wait for Mr Prescott in reception for the board meeting of SRL. However, it is Mr Prescott’s case that when Mr Prescott went to find him, Dr Potamianos was not there.

(2) The decision was taken to exclude Dr Potamianos from Peregrine House, and he was in fact excluded in accordance with the contents of a document dated 7 March 2017 entitled “Notification [of] SEL action resulting from decision to exclude AP from its premises”, although he remained a director of SRL and the minutes of the board meeting of SRL record that Mr Prescott “positively considered that at this stage his view was not to instigate any process to remove AP as a director of [SRL]”.

(3) A board meeting of SRL resolved to request a general meeting of SEL and give special notice to SEL of SRL’s intention to propose a resolution to remove Dr Potamianos as a director of SEL. (Dr Gardiner was appointed a director of SRL via the written resolution procedure to make the meeting quorate in the absence of Dr Potamianos).

(4) Dr Potamianos took a computer belonging to SEL from Peregrine House without SEL’s consent, which he has retained in spite of requests for it to be returned. He justifies this on the grounds that this was the computer that he worked on in SEL’s offices, that it contains his privileged material, and that he has offered various solutions to this dispute which in substance involve returning the computer without the material that is stored on it (which SEL in turn is unhappy about, as it does not know what would be deleted, and believes that it may contain SEL’s information).

119. By letter dated 31 March 2017, Blake Morgan on behalf of Dr Potamianos set out his detailed response to each of the “Written Particulars of Concerns”.

120. On 10 April 2017, a general meeting of SEL resolved to remove Dr Potamianos as a director of SEL. Both the minutes of that general meeting and the minutes of the meeting of the board of directors of SEL that was held on the same day record the receipt of Blake Morgan’s response (described in those minutes as the “Written Representations”), and both sets of minutes record that the resolutions that were passed at them were passed after “due and careful consideration” or after “consideration”, but neither record what consideration was in fact given to the contents of the “Written Representations”, or the extent to which, if at all, the “Written Particulars of Concerns” were thought to prevail.

121. On 22 June 2017, SEL issued the Source Code Claim.

122. On 14 September 2017, Dr Potamianos commenced the Unfair Prejudice claim.

FISCAL FACTORS IN THE PRESENT CASE

Legal framework

123. The tax advantages of so-called “service companies” were summarised by Robert Walker LJ in Professional Contractors’ Group and Others v Commissioners of Inland Revenue [2002] 1 CMLR 46 at [2] as follows:

“Employees are liable to income tax on their earnings under Schedule E, and they and their employers have to pay National Insurance contributions (“NIC”) on the Class 1 (employed) basis. Taxation under Schedule E has several well-known disadvantages as compared with the taxation (under Schedule D Case I or II) of those who carry on a business or profession. These disadvantages include immediate taxation at source under PAYE, and a much more restricted scope for the deduction of expenses. Moreover, if an individual employee of a company became the controlling shareholder of a service company which (as an independent contractor) provided his services to the former employer as a client, he could achieve a double advantage. The service company would pay a low rate of corporation tax on its profits as assessed under Schedule D, and the individual could decide how much of the company’s revenue should be distributed either as remuneration or by way of dividend (free of NIC) to himself and other members of his family who might be employed by or shareholders in the service company.”

124. In 1999 the Government decided to enact legislation to counter the practice of individuals carrying out the same functions as employees but altering their status to that of a consultant providing services in order to reduce their liability to tax. On 9 March 1999 (a Budget Day) the Inland Revenue published a press release designated “IR 35”, which later came to be used as a shorthand identification for the measures which were subsequently enacted (comprising section 60 of, and Schedule 12 to, the Finance Act 2000, sections 75 and 76 of the Welfare Reform and Pensions Act 1999, and the Social Security Contributions (Intermediaries) Regulations 2000). The press release stated:

“The Chancellor announced today that changes are to be introduced to counter avoidance in the area of personal service provision. This move underlines the Government’s commitment to achieving a tax system under which everyone pays their fair share.

There has for some time been general concern about the hiring of individuals through their own service companies so that they can exploit the fiscal advantages offered by a corporate structure. It is possible for someone to leave work as an employee on a Friday, only to return the following Monday to do exactly the same job as an indirectly engaged “consultant” paying substantially reduced tax and national insurance.

The Government is going to bring forward legislation to tackle this sort of avoidance … The new rules will take effect from April 2000.”

125. In Professional Contractors’ Group and Others v Commissioners of Inland Revenue [2002] 1 CMLR 46 Robert Walker explained at [11]:

“The basic conditions for the application of the new regime are set out in section 4A of the Social Security Contributions and Benefits Act 1992 … as inserted by section 75 of the 1999 Act, in paragraph 6(1) of the Regulations and in paragraph 1(1) of Schedule 12 to the 2000 Act. These are in almost identical terms and it is sufficient to set out the provision in the 2000 Act:

This Schedule applies where—

(a) an individual (“the worker”) personally performs, or is under an obligation personally to perform, services for the purposes of a business carried on by another person (“the client”),

(b) the services are provided not under a contract directly between the client and the worker but under arrangements involving a third party (“the intermediary”), and

(c) the circumstances are such that, if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client.”

126. Robert Walker LJ stated at [14]-[15]:

“Where the intermediary is a company the IR 35 regime applies … only if the worker has a material interest in the company (in broad terms at least a five per cent interest, aggregating the interests of the worker himself and any associates of his) or receives what the judge called a “traceable dividend”. The application of the regime is triggered by the worker receiving, or becoming entitled to receive, directly or indirectly, a payment or benefit not chargeable to tax under Schedule E. The consequence of its application is that the worker is treated as receiving from the intermediary a “deemed Schedule E payment”. This is treated as made at the end of the tax year. Its amount … is determined by a fairly complicated code, but the general effect is to tax the worker under Schedule E on the full amount, less the deductions mentioned below, of all payments and other benefits received by the intermediary during the tax year in respect of the worker's “relevant engagements”… The only permissible deductions are five per cent of the gross amount and any actual expenses which would be deductible under the restrictive test applied for Schedule E purposes. There are special provisions for “multiple intermediaries” and for avoidance of double taxation …

The Regulations produce the same effects for the purposes of Class 1 NIC …”

127. Robert Walker LJ stated at [20]-[21]:

“…The judge rightly emphasised the point, which I have already noted, that the service contractors adversely affected would be those who provided the equivalent of employees services (and not the services of self-employed independent contractors). The extra tax paid by the companies would be Schedule E tax and NIC paid on account of the workers who were equivalent to employees …

Instead of certainty as to the impact of tax and NIC, service contractors as a result of IR 35 have uncertainty as to whether IR 35 will or will not apply to a particular engagement … Service companies did until 6 April 2000 shield those who used them from having to face up to the often difficult question of whether they would, on the terms and in the context of a particular engagement, be on the employed or the self-employed side of an elusive dividing-line. The immunity conferred by the service company had now gone, and the service contractor had to decide the question for himself, with such help as the Revenue could provide either in the way of informal advice or (once an engagement had been entered into) a formal ruling in the course of the tax year…”

128. At [49], Robert Walker LJ said:

“[The judge’s] conclusions were that IR 35 is a general measure (and not an exception to or a derogation from a general measure). Its aim is to ensure (so far as possible) that all those who supply employee-like services should pay income tax and NIC under the system appropriate to employees, and should not be able to avoid that system by the interposition of an intermediary.”

129. The fact that an individual is a director of a company, and even that virtually no control is exercised over the individual by any superior, are not matters that by themselves lead inexorably to the conclusion that the individual is not an employee of the company (see, for example, Parsons v Albert J. Parsons & Sons Ltd [1978] ICR 456).

130. As Lord Griffiths observed in Lee Ting Sang v Chung Chi-Keung [1990] 2 AC 374 at 382, in seeking to distinguish contracts of service from contracts for services “the courts have not been able to devise a single test that will conclusively point to the distinction in all cases”. In that case, the Privy Council endorsed the test of Cooke J in Market Investigations Ltd v Minister of Social Security [1969] 2 QB 173 at 184-185:

“The fundamental test to be applied is this: ‘Is the person who has engaged himself to perform these services performing them as a person in business on his own account?’ If the answer to that question is ‘yes’, then the contract is a contract for services. If the answer is ‘no’, then the contract is a contract of service. No exhaustive list has been compiled and perhaps no exhaustive list can be compiled of the considerations which are relevant in determining that question, nor can strict rules be laid down as to the relative weight which the various considerations should carry in particular cases. The most that can be said is that control will no doubt always have to be considered, although it can no longer be regarded as the sole determining factor; and that factors which may be of importance are such matters as whether the man performing the services provides his own equipment, whether he hires his own helpers, what degree of financial risk he takes, what degree of responsibility for investment and management he has, and whether and how far he has an opportunity of profiting from sound management in the performance of his task.”

131. In Hall (Inspector of Taxes) v Lorimer [1994] 1 WLR 209, the Court of Appeal agreed with the following views expressed by Mummery J at first instance at [1992] 1 WLR 939, 944:

“In order to decide whether a person carries on business on his own account it is necessary to consider many different aspects of that person’s work activity. This is not a mechanical exercise of running through items on a check list to see whether they are present in, or absent from, a given situation. The object of the exercise is to paint a picture from the accumulation of detail. The overall effect can only be appreciated by standing back from the detailed picture which has been painted, by viewing it from a distance and by making an informed, considered, qualitative appreciation of the whole. It is a matter of evaluation of the overall effect of the detail, which is not necessarily the same as the sum total of the individual details. Not all details are of equal weight or importance in any given situation. The details may also vary in importance from one situation to another. The process involves painting a picture in each individual case. As Vinelott J said in Walls v Sinnett (1986) 60 TC 150, 164: ‘It is, in my judgment, quite impossible in a field where a very large number of factors have to be weighed to gain any real assistance by looking at the facts of another case and comparing them one by one to see what facts are common, what are different and what particular weight is given by another tribunal to the common facts. The facts as a whole must be looked at, and what may be compelling in one case in the light of all the facts may not be compelling in the context of another case.’”

132. In other cases, the judgment of Mackenna J in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497 at 515 has been accepted as setting out essential necessary conditions for a contract of service:

“A contract of service exists if these three conditions are fulfilled. (i) The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master. (ii) He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other’s control in a sufficient degree to make that other master. (iii) The other provisions of the contract are consistent with its being a contract of service.”

133. The authors of Chitty on Contracts, 32^nd edn, state at [40-100] that the decided cases suggest that the following factors are relevant to the identification of whether a contract is one of employment; (1) the degree of control exercised by the employer; (2) whether the worker’s interest in the relationship involved any prospect of profit or risk of loss; (3) whether the worker was properly regarded as part of the employer’s organisation; (4) whether the worker was carrying on business on his own account or carrying on the business of the employer; (5) the provision of equipment; (6) the incidence of tax and national insurance; (7) the parties’ own view of their relationship; and (8) the structure of the trade or profession concerned and the arrangements within it.

134. In Ferguson v John Dawson & Partners (Contractors) Ltd [1976] 1 WLR 1213 there was an issue whether the plaintiff had been employed by the defendants or had been an independent contractor. Boreham J accepted the evidence of the defendants’ site agent that when the plaintiff was taken on by the defendants he had told him that “there were no cards, we were purely working as a lump labour force”. Further, the defendants did not make deductions in respect of income tax from their weekly payments to the plaintiff, nor any payments in respect of national insurance contributions. Boreham J held that “the plaintiff and the defendants regarded the plaintiff as ‘self-employed labour only subcontractor’ and in this there were advantages for each side”. In summary, those advantages, included, for the defendants, escaping liability for payment of selective employment tax in respect of the plaintiff, and, for the plaintiff, evading his liability for income tax. However, Boreham J held that this was not determinative of the plaintiff’s claim for breach of statutory duty owed to the plaintiff as an employee.

135. Boreham J rehearsed the argument of the plaintiff that “I must look at the realities of the situation and not to the form alone, and particularly not alone to the label that was put upon the plaintiff by both plaintiff and defendant, for it is contended that the form may be, and in this case is, a mere facade; whether or not the plaintiff regarded himself, whether or not the defendants regarded him, as ‘self-employed labour only contractor’ may be a matter, a serious matter, to be taken into consideration, but it is by no means conclusive, and the question remains whether in reality the relationship of master and servant existed.” He then considered various authorities including Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497, and, applying the tests and criteria suggested in those authorities to the realities of the plaintiff’s employment as he held them to be, he stated his conclusion as follows:

“I accept what the parties accept, namely, the label, as a guide and no more. I regard the concept of ‘the lump’ in the circumstances of the present case as no more than a device which each side regarded as being capable of being put to his own advantage in a manner that I have attempted to describe earlier in this judgment, but which in reality did not affect the relationship of the parties or the performance of the substance of the contract between them.”

136. The Court of Appeal (Megaw and Browne LJJ, Lawton LJ dissenting) held that Boreham J had been right in his approach and in his conclusion. Evidence of what occurred after the contract was made was not “merely evidence of what was done in performance of the contract” but was instead “evidence of what the contractual rights and obligations were throughout the plaintiff's work for the defendants”. Cases to the effect that, subject to certain exceptions, it is impermissible to look at what was done in pursuance of a contract in order to construe that contract were not relevant, not least because the Court was not concerned with construing the contract but with evidence as to what the terms of the contract were. Megaw LJ was inclined not to accept “that the parties, by a mere expression of intention as to what the legal relationship should be, can in any way influence the conclusion of law as to what the relationship is”. However, he did not base his decision on that view, but instead on the principle laid down by Jenkins LJ in Addiscombe Garden Estates Ltd v Crabbe [1958] 1 QB 513 that “the relationship is determined by the law, and not by the label which parties choose to put on it, and … it is not necessary to go so far as to find the document a sham. It is simply a matter of ascertaining the true relationship of the parties”. Megaw LJ also accepted that “the expression of the parties’ intention may be a relevant factor, though certainly not a conclusive factor, in deciding what is the true nature of the contract”.

137. That case was followed in Young & Woods Ltd v West [1980] IRLR 201, in which the members of the Employment Appeal Tribunal were divided as to the correct result. The majority were of the view that the industrial tribunal had correctly applied the principle that the Court should look at the realities of the situation, and that the label which the parties put upon the contract cannot alter those realities, whereas the minority view was that, where the parties have expressed their intention, and if it is sufficiently clear, it must be given a relatively important part in the decision as to what the relationship is.

138. Among other things, Stephenson LJ in Young & Woods cited the judgment of Lord Denning MR in Massey v Crown Life Insurance Co (1978) ICR 590 at 594E:

“… if the true relationship of the parties is that of master and servant under a contract of service, the parties cannot alter the truth of that relationship by putting a different label upon it. If they should put a different label upon it and use it as a dishonest device to deceive the Revenue, I should have thought that it was illegal and could not be enforced by either party and they could not get any advantage out of it – at any rate not in any case where they had to rely upon it as the basis of a claim: see Alexander v Rayson (1936) 1 KB 169. An arrangement between the two parties to put forward a dishonest description of their relationship so as to deceive the Revenue would clearly be illegal and unenforceable. On the other hand, if the parties’ relationship is ambiguous and is capable of being one or the other, then the parties can remove that ambiguity by the very agreement itself which they make with one another. The agreement itself then becomes the best material from which to gather the true legal relationship between them. This is clearly seen by referring back to Inland Revenue Commissioners v Duke of Westminster (1936) AC 1.”

139. Stephenson LJ held that the company’s appeal against the decision of the Employment Appeal Tribunal should be dismissed. He reasoned (among other things) as follows:

“Fairness and justice have throughout inclined me to accept the minority view in this case. If Mr West chooses to call himself self-employed for fiscal advantages which are denied to an employee, why should he claim the advantage of statutory rights which are available to an employee but denied to the self-employed? And why should the agreement of employers to treat him as self-employed make any difference to the injustice or unfairness of his having both advantages? But, in my judgment, the answer is that he and his work should be classified not by appearance but by reality. If he is really self-employed the Industrial Tribunal should refuse to consider his statutory rights as an employee. If he is really an employee or servant the Inland Revenue should reclaim tax deductions which have been granted to him as self-employed; and, if this court declares that the true legal position between him and his employers is not in accordance with the agreement deliberately chosen by the parties and put before them for their information, I do not suppose that the Inland Revenue would fail to discharge their statutory duty.

But I have come to the conclusion that the minority view cannot prevail. I have come to the conclusion that the decision of the Industrial Tribunal was right and that the true legal relationship of the parties was not that of a self-employed agent working independently for this company.

… I am satisfied that the parties can resile from the position which they have deliberately and openly chosen to take up …

It would, in my judgment, be impossible to regard Mr West - self-employed though he asked to be treated, self-employed though his employers agreed that he should be treated and the Inland Revenue agreed that he should be treated - as a person in business on his own account as Mr Massey, in very different circumstances, was clearly rightly regarded. Unjust as it may seem in this case that Mr West should be able to get away from the bed which he has made, or to eat his cake and still keep it, or to wear two hats according to which one happens to suit him at the time - whatever metaphor is used - nevertheless it is in my judgment the duty of an Industrial Tribunal, once a person goes to it and says, “Though I was self-employed, nevertheless I am an employee entitled to enforce my statutory rights”, to see whether the label of self-employed is a true description or a false description by looking beneath it to the reality of the facts, and it must be its duty to decide on all the evidence whether the true legal relationship accords with the label or is contradicted by it.”

140. Ackner LJ and Sir David Cairns agreed that the company’s appeal should be dismissed.

Application to the present case

141. The facts of the present case are different from any of these decided cases, in that none of the parties has called in question the description that they applied to the relationship pursuant to which SEL obtained the benefit of Dr Potamianos’ personal services. However, I consider that there is a clear public interest in everyone paying whatever taxes are properly due from them, and not escaping the payment of due taxes by devices including false descriptions of their contractual relationships. For this reason, I take the view that where, as I made clear to be the case during the course of the hearing, the Court has concerns that the labels that the parties have chosen to apply to their relationship are untrue or inaccurate, and have been applied as a device to avoid the payment of taxes that are properly due, the Court can and should consider the issue of its own motion. In the present case, that involves determining whether the true relationship between SEL on the one hand and Dr Potamianos on the other hand was that of employer and employee, applying the tests and guidance discussed above.

142. I am inclined not to go so far as to say that if the Court reaches the conclusion that the label that was applied to any particular contract in the circumstances of the present case was designed to deceive HMRC then the Court should treat the contract as illegal and unenforceable, as suggested by Lord Denning MR. I am of the opinion that the better view is that endorsed by Stephenson LJ, namely that the Court should declare the true legal position between the parties and leave it to HMRC to claim any taxes (and penalties) that may appear due if that determination differs from the label chosen by the parties and put before HMRC by them. In the present case, however, it seems to me that either approach would produce the same result, because the material issue concerns the ownership of copyright, and it is common ground that in accordance with section 11(2) of the Copyright, Designs and Patents Act 1988 (“CDPA”), where Dr Potamianos wrote code during the course of his employment then his employer became the owner of the copyright in that code. The result that SEL should be regarded as Dr Potamianos’ employer would be reached either by treating as illegal and unenforceable any contract between SEL and BDL which applied a false label to the relevant relationship for tax purposes, or by declaring that the true relationship was one of employer and employee.

143. As mentioned above, the 2007 Assignment was also influenced by tax considerations. In an email to Mr Prescott dated 16 May 2007, Mr Macdonald advised (among other things): “Ensure that there is clear evidence of cash being moved from [SEL] to [Dr Potamianos] for the [Intellectual Property Rights] and then back for the share subscription…At the time of the [Intellectual Property Rights] sale, [Dr Potamianos] should not have given any undertaking that he will subscribe for shares …” In an email to Barclays Bank (which was providing related lending to SEL) and Dr Potamianos dated 23 May 2017, Mr Prescott wrote (among other things):

“Purchase of [Dr Potamianos’] [Intellectual Property].

(1) If [Dr Potamianos] is not associated with [SEL] at the time of the purchase then [SEL] can amortise the cost of the [Intellectual Property].

(2) If [Dr Potamianos] were to use the proceeds of sale of his [Intellectual Property] for a qualifying investment then he would be able to obtain [Enterprise Initiative Scheme] relief on the [Capital Gains Tax]. Both of the above conditions can be fulfilled providing the process is in the correct sequence and certain other conditions are observed. Obviously we are keen to qualify for these reliefs as [SEL] could save approximately £80k and [Dr Potamianos] approximately £50k …

Summary of sequence of events to get optimum deal … [SEL] purchase [Dr Potamianos’] [Intellectual Property]. Next day [Dr Potamianos] makes investment in [SEL] and [Intellectual Property] loan repaid to Barclays …”

144. In my opinion, these matters are relevant in circumstances where Dr Potamianos now seeks to say in these proceedings that the 2007 Assignment, and, indeed, on the face of it, the most valuable aspect of it, concerned intellectual property that did not belong to him but belonged instead to BDL. On SEL’s case, that argument should be rejected on the proper interpretation of the 2007 Assignment alone. If that is right, that is an end of the matter, and the terms of the 2007 Assignment are consistent with the tax position as represented to HMRC. If that is wrong, however, two broad possibilities arise. The first is that the Court is obliged to look at the realities, rule in accordance with the true position, and leave it to HMRC to claim any taxes (and penalties) that may appear due if that determination differs from the position as represented to HMRC. I did not detect any enthusiasm on either side for that outcome. The second is to adopt the stance that fairness, justice, and I would venture to suggest public policy, dictate that, in the words of Stephenson LJ, Dr Potamianos should not be allowed to get away from the bed which he has made, or to have his cake and eat it, or to wear two hats according to which one happens to suit him at the time. This may be said to be a further or ancillary reason for accepting SEL’s arguments to the effect that the 2007 Assignment should be construed as extending only to intellectual property rights that Dr Potamianos owned.

THE SOURCE CODE CLAIM

The dispute in outline

145. Although the list of issues contained in the CMC order made by Snowden J is more detailed, the principal issues in the Source Code claim may be summarised as follows:

(1) Whether Dr Potamianos and BDL were obliged to provide SEL with access to the source code for the computer software which Dr Potamianos wrote for SEL’s motor controllers and related documents.

(2) Who owns (as legal or beneficial owners) the copyright which (as both parties accept) subsists in the software (both the source code and the object code)? If it is BDL rather than SEL, what, if any, rights does SEL have which would allow SEL to exploit the software (for example, by amending, enhancing or compiling it)? (On SEL’s case, not only does it need access to the source code, but also without ownership of the copyright or an appropriate licence it will be unable, without infringing copyright: (a) to continue in business, and (b) to protect its investment in the software written by Dr Potamianos and for which it has paid BDL).

(3) Issues relating to certain work done (or not done) by BDL and Dr Potamianos, and in respect of which an SEL cheque for £18,000 which was made out in BDL’s favour.

146. Although SEL also pursues claims under the 1997 Contract and the 2015 Contract, on the basis that neither side accepts that SEL does not need to succeed on those claims in order to enjoy the rights in respect of source code and documents that SEL contends it requires to enable it to carry on business effectively, SEL’s case at trial focused on the 2000 Contract. In order to understand these matters, it is necessary to consider when and how Dr Potamianos wrote the software that is in issue in the Source Code claim.

147. Dr Potamianos began writing code for DC motor controllers before he joined SEL in 1997. Some of this was written for his PhD thesis, and this work product would appear to be his personal intellectual property. Within this code, the “control algorithms” are important, because they control the flow of current. These algorithms have their origin in that PhD thesis. Dr Potamianos did further writing while he worked for GEC and SSD. On the face of it, in accordance with section 11(2) of the CDPA, his employers became the owners of the copyright in that code. Later still, Dr Potamianos was able to show Mr Prescott a prototype drive, which must have utilised some working code.

148. The precise boundaries of these various versions, and the extent to which they are separate or inter-dependent, was not clear from the evidence adduced at trial, and is probably known only to Dr Potamianos. At all events, none of this pre-1997 material belongs to BDL. First, it was created before BDL was incorporated. Second, no case of transfer or grant of tangible or intellectual property rights from Dr Potamianos to BDL was put forward by those persons. It can therefore form no part of BDL’s counterclaim.

149. Between the date of the 1997 Contract and the date of the 2000 Contract, Dr Potamianos wrote further code for the Intel platform. During this time there was an initial production release version 2.11.

150. Between the date of the 2000 Contract and the date of the 2015 Contract, the first “key” version of the software (v3.01) was released and that software continued to be developed until the last Intel platform version (v5.23) was released on 9 October 2012.

151. In the meantime, from about 2004, Dr Potamianos started work on the Microchip platform. This was a major task, which required the re-writing of the assembly language code and of much of the C code. The Microchip version was designated v6. Following a number of pre-release versions, the versions that were released were numbered 6.10, 6.11, 6.12 and 6.13.

152. Following the making of the 2000 Contract, Dr Potamianos also carried out some work on the JL/X software. This is a derivation of the PL/X software. A version was made available to SEL in about September 2014. However, it is SEL’s case that this is not saleable because it had incorrect menus.

153. Although Dr Potamianos claims to have done further work, including perhaps writing some code, after the 2015 Contract was made, SEL’s case is that no object or source code or documentation was made available to SEL under the 2015 Contract.

Issues 1, 2, 7 and 8

154. Issue 1 is whether Dr Potamianos and BDL have at all material times been obliged to provide SEL with “the Source Code and Documents” (as defined in paragraph 57 of the Particulars of Claim) pursuant to: (1) the 1997 Contract; (2) the 2000 Contract; (3) the 2015 Contract; (4) the 2007 Assignment; and (5) the duty which Dr Potamianos owed to SEL as a director of SEL.

155. In accordance with paragraphs 57 and 58 of the Particulars of Claim, “the Source Code and Documents” include: (a) the source code for versions 6.11, 6.12 and 6.13 of the software for the PL/X controllers, (b) the source code for any earlier versions of such software, (c) the source code for all versions of software developed by Dr Potamianos for SEL’s other controllers, (d) any compiled versions of the source code (i.e. object code), (e) the contents of all computer directories/folders used by Dr Potamianos to create and compile the source code, and (f) all documents created or obtained by Dr Potamianos relating to the source code, including compilation instructions, software requirements specifications, software design specifications, software acceptance specifications, and test results “whether formal or informal versions of such materials”.

156. Although SEL’s case is pleaded in these terms, SEL’s central commercial interest revolves around obtaining possession of, and the right to exploit:

(1) the Source Code for versions 6.10 to 6.13 of the PL/X software (i.e. the released versions for the Microchip Platform);

(2) the most recent runnable version of the Source Code for the JL/X platform;

(3) any associated documents which show the settings of the compiler and related materials created by Dr Potamianos when he compiled these versions of the Source Code into object code.

157. In addition, SEL would like to have for its records the Source Code (and related Documents) for version 5.23 (the last released version of the software for the Intel platform). This platform is obsolete for new production. However, there are still customers in the field using drives which incorporate the Intel platform, and SEL’s case is that it needs these materials to help it to provide support for those customers.

158. Issue 2 is whether BDL and Dr Potamianos have acted in breach of their obligations to SEL arising out of the agreements and duties set out in Issues 1(1) to 1(5) above such as to entitle SEL to delivery up of the Source Code and Documents or to damages.

159. Issue 7 is whether BDL is and at all material times has been the owner of the copyright in certain works (“the Works”). The Works are defined in paragraph 61 of the Defence, which in turn refers to “The files mentioned in paragraph 54 [of the Particulars of Claim] and those referred to in [SEL’s] solicitors’ letter dated 11 October 2016”. It is pleaded in the Defence that these are original literary works in which copyright subsists. However, what is carved out from that definition of “the Works” is “the libraries and header files in Annex 10 [to the Particulars of Claim] which have been solely authored by third parties”. In essence, based on the contents of the documents referred to in paragraph 61 of the Defence, the Works comprise (a) “the latest version of the source code for [SEL’s] PL/X controllers which could be located by [SEL] [namely] R&D version 6.12-S2” and (b) the documents listed in the above letter dated 11 October 2016 which SEL claims that BDL was under an obligation to deliver up to SEL at the end of the term of the 2000 Contract, and which SEL complains that BDL has not delivered up, namely, in summary, (i) the source code of version 6.13 (the version that is said in that letter to have been current when that letter was written), (ii) compilation instructions, (iii) the software requirements specification, (iv) the software design specification, (v) the software acceptance specification, (vi) test results, and (vii) “other documents relating to the Contract Works [as defined in the 2000 Contract]”.

160. Issue 8 is whether SEL has infringed the copyright of BDL in the Works contrary to section 16(2) and/or section 23 of the CDPA, and, if so, what relief BDL is entitled to.

161. SEL’s case on the 1997 Contract, the 2000 Contract, and the 2015 Contract is based on (a) express terms and the true interpretation of those contracts and (b) implied terms.

Legal framework

162. So far as concerns express terms, it was common ground that the applicable principles of construction are as restated by Lord Hodge JSC in Wood v Capita Insurance Services Ltd [2017] AC 1173 at [10] to [13]. They may be summarised as follows:

(1) In carrying out its central task of ascertaining the objective meaning of the language which the parties have chosen to express their agreement “the court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning.” [10]

(2) Interpretation is a unitary exercise. In this regard: (a) “where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense”; however, “in striking a balance between the indications given by the language and the implications of the competing constructions” the court must take into account (b) “the quality of drafting of the clause”, (c) “the possibility that one side may have agreed to something which with hindsight did not serve his interest”, and (d) “the possibility that a provision may be a negotiated compromise or that the negotiators were not able to agree more precise terms.” [11]

(3) “This unitary exercise involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated” and “once one has read the language in dispute and the relevant parts of the contract that provide its context, it does not matter whether the more detailed analysis commences with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract, so long as the court balances the indications given by each.” [12]

(4) Textualism and contextualism are both “tools to ascertain the objective meaning of the language which the parties have chosen to express their agreement”, and the extent to which each of them will assist the court in its task “will vary according to the circumstances of the particular agreement or agreements”. The iterative process “assists the lawyer or judge to ascertain the objective meaning of disputed provisions”. [13]

163. Further, and not least because this approach was endorsed by the Supreme Court in Wood v Capita Insurance Services Ltd [2017] AC 1173, I consider that it is helpful to refer to the summary provided by Lord Neuberger PSC in Arnold v Britton [2015] AC 1619, at [15]:

“When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”, … And it does so by focusing on the meaning of the relevant words … in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provision of [the contract], (iii) the overall purpose of the clause and the [contract], (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party’s intentions.”

164. So far as concerns implied terms, it was common ground that the correct approach to the implication of terms is as summarised by Lord Neuberger PSC in Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2016] AC 742 (“M&S”). In particular:

(1) At [18], Lord Neuberger restated the following requirements:

“for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that “it goes without saying”; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.”

(2) At [21], Lord Neuberger cited the judgment of Sir Thomas Bingham MR in Philips Electronique Grand Public SA v British Sky Broadcasting Ltd [1995] EMLR 472, including his observations at p482 that “[when] the court comes to the task of implication with the benefit of hindsight … it is tempting [but wrong] … to fashion a term which will reflect the merits of the situation as they then appear” and “it is not enough to show that had the parties foreseen the eventuality which in fact occurred they would have wished to make provision for it, unless it can also be shown either that there was only one contractual solution or that one of several possible solutions would without doubt have been preferred.”

(3) At [23], Lord Neuberger added six comments on the “clear, consistent and principled approach” to be found in the decided cases, which may be summarised as follows: (a) the correct approach towards determining what the parties would have agreed is to have regard not to the actual parties but instead to “notional reasonable people in the position of the parties at the time at which they were contracting”; (b) that a term appears fair or that the court considers that the parties would have agreed it if it had been suggested to them are necessary but not sufficient grounds for implying a term into a detailed commercial contract; (c) the requirement that a term should be reasonable and equitable will usually not add anything “if a term satisfies the other requirements, it is hard to think that it would not be reasonable and equitable”; (d) although business necessity and obviousness are alternatives in the sense that only one of them needs to be satisfied, “in practice it would be a rare case where only one of those two requirements would be satisfied”; (e) when approaching the issue by reference to the officious bystander, it is “vital to formulate the question to be posed by [him] with the utmost care”; and (f) the test of necessity for business efficacy involves a value judgment which reflects the proposition that “a term can only be implied if, without the term, the contract would lack commercial or practical coherence”.

(4) At [22], Lord Neuberger made clear that reasonableness is not a sufficient ground for implying a term, and, on the contrary, the correct approach is that the legal test for the implication of a term is “strict necessity”, which is a “stringent test”.

165. In support of its case that, if and in so far as there was no express assignment of copyright under the 1997 Contract, the 2000 Contract, and the 2015 Contract, such an assignment should be implied, SEL relied on the decision of Mr Peter Prescott QC sitting as a Deputy Judge of the High Court in R. Griggs Group Ltd v Evans [2003] EWHC 2914 (Ch) (“Griggs v Evans”) (which was upheld on appeal at [2005] EWCA Civ 11). In that case, the claimant commissioned an advertising agency to produce a logo, and paid for it. The drawing was done by the first defendant, who was a freelance designer. It was held that copyright in the drawing belonged to the claimant.

166. Mr Prescott QC said at [32]-[33] and [36]:

“Section 11 of the Copyright, Designs and Patents Act 1988 says:

“(1) The author of a work is the first owner of any copyright in it, subject to the following provisions.

(2) Where a literary, dramatic, musical or artistic work is made by an employee in the course of his employment, his employer is the first owner of any copyright in the work subject to any agreement to the contrary.”

However, it is well established that this refers to the legal title to the copyright. But it is possible for a person to own the legal title to property, not for his own benefit, but for the benefit of another person. That other person is said to be the owner in equity. It is well established that s.11 of the Copyright Act does not purport to legislate for equitable ownership, which is left to a well established body of rules that have been built up by the courts over many generations. For example, suppose a freelance designer orally agrees with a company that he shall create a website for use in its business, for payment, and on terms that the copyright shall belong to the company. Because the designer is not an employee of the company the legal title to the copyright belongs to him, because the Copyright Act says so; but the equitable title belongs to the company. This means that the designer can be called upon to assign the legal title to the copyright to the company; and, if he refuses, the law will compel him to do so …

It seems to me that when a freelance designer is commissioned to create a logo for a client, the designer will have an uphill task if he wishes to contend that he is free to assign the copyright to a competitor. This is because, in order to give business efficacy to the contract, it will rarely be enough to imply a term that the client shall enjoy a mere licence to use the logo, and nothing more. In most cases it will be obvious, it will “go without saying”, that the client will need further rights. He will surely need some right to prevent others from reproducing the logo.”

167. When Griggs v Evans reached the Court of Appeal, Jacob LJ considered the alternative to assignment, namely a limited licence to use the logo, and said at [19]:

“I find that conclusion fantastic. If an officious bystander had asked at the time of contract whether Mr Evans was going to retain rights in the combined logo which could be used against the client by Mr Evans (or anyone to whom he sold the rights) anywhere in the world, other than in respect of point of sale material in the UK, the answer would surely have been “of course not.” Mr Evans had no conceivable further interest in the work being created - indeed he surely would never have had the job at all if there had been a debate about this and he had asserted that that was to be the basis of his work.”

168. For their part, BDL and Dr Potamianos relied on the summary of the approach to the interpretation of contracts under which copyright works are created in the course of a contractor providing services to a principal that was provided by Lightman J in Robin Ray v Classic FM plc [1998] FSR 622 (“Robin Ray”) (cited by Mr Prescott QC at first instance and approved by the Court of Appeal in Griggs v Evans [2005] EWCA Civ 11 at [13]-[16] (Jacob LJ)). BDL and Dr Potamianos emphasised that consideration of implied terms only arises where there is no express term dealing with copyright ownership, and they submitted that in the present case there is little if any “lacuna” for the process of implication to fill, in light of the express terms of the Contracts.

169. In Robin Ray, Lightman J stated at 640:

“The general principles governing the respective rights of the contractor and client in the copyright in a work commissioned by the client appear to me to be as follows:

(1) the contractor is entitled to retain the copyright in default of some express or implied term to the contrary effect;

(2) the contract itself may expressly provide as to who shall be entitled to the copyright in work produced pursuant to the contract. Thus under a standard form Royal Institute of British Architects (‘RIBA’) contract between an architect and his client, there is an express provision that the copyright shall remain vested in the architect;

(3) the mere fact that the contractor has been commissioned is insufficient to entitle the client to the copyright. Where Parliament intended the act of commissioning alone to vest copyright in the client, e.g. in case of unregistered design rights and registered designs, the legislation expressly so provides … In all other cases the client has to establish the entitlement under some express or implied term of the contract;

(4) the law governing the implication of terms in a contract has been firmly established …;

(5) where … it is necessary to imply the grant of some right to fill a lacuna in the contract and the question arises how this lacuna is to be filled, … [t]he principle is clearly stated that in deciding which of various alternatives should constitute the contents of the term to be implied, the choice must be that which does not exceed what is necessary in the circumstances … In short a minimalist approach is called for. An implication may only be made if this is necessary, and then only of what is necessary and no more;

(6) accordingly if it is necessary to imply some grant of rights in respect of a copyright work, and the need could be satisfied by the grant of a licence or an assignment of the copyright, the implication will be of the grant of a licence only;

(7) circumstances may exist when the necessity for an assignment of copyright may be established. … [T]hese circumstances are, however, only likely to arise if the client needs in addition to the right to use the copyright works the right to exclude the contractor from using the work and the ability to enforce the copyright against third parties. Examples of when this situation may arise include: (a) where the purpose in commissioning the work is for the client to multiply and sell copies on the market for which the work was created free from the sale of copies in competition with the client by the contractor or third parties; (b) where the contractor creates a work which is derivative from a pre-existing work of the client, e.g. when a draughtsman is engaged to turn designs of an article in sketch form by the client into formal manufacturing drawings, and the draughtsman could not use the drawings himself without infringing the underlying rights of the client: (c) where the contractor is engaged as part of a team with employees of the client to produce a composite or joint work and he is unable, or cannot have been intended to be able, to exploit for his own benefit the joint work or indeed any distinct contribution of his own created in the course of his engagement …

(8) if necessity requires only the grant of a licence, the ambit of the licence must be the minimum which is required to secure to the client the entitlement which the parties to contract must have intended to confer upon him. …

(9) the licence accordingly is to be limited to what is in the joint contemplation of the parties at the date of the contract, and does not extend to enable the client to take advantage of a new unexpected profitable opportunity …”

The contracts in issue

170. With regard to the express terms of the 1997 Contract, SEL contends that the combined effects of Clauses 4.1 and 4.2 required BDL to make the Source Code and related Documents available to it. In the 1997 Contract, “Sprint’s Business” is defined as SEL’s “business of motion control”. Clause 4 of the 1997 Contract is entitled “DEVELOPMENT OF BUSINESS” and provides as follows:

“BDL undertakes that it shall:

4. 1 Use its best endeavours to develop Sprint’s Business to its full potential in the most economic efficient and profitable way with best business practice

4. 2 Disclose all material information concerning the running of Sprint’s Business.”

171. In the alternative, SEL contends that that it was an implied term of the 1997 Contract that BDL would make available to SEL all Source Code which Dr Potamianos created pursuant to the 1997 Contract and all Documents. SEL submits that this implied term satisfies each of the requirements discussed by Lord Neuberger PSC in M&S.

172. SEL further contends that if and in so far as any Source Code remains which pre-dates the inception of the 2000 Contract, the copyright in it belongs to SEL under the 1997 Contract. In essence, if my understanding is right, this submission was based upon applying the reasoning in Griggs v Evans to the present case.

173. With regard to the express terms of the 2000 Contract, these included the following:

(1) Clauses 1 and 3

These Clauses provide that the original duration of the Contract will be set out in Schedule A attached to the Contract, and that further Contracts for Services may be negotiated by agreement in writing between the parties. In fact, no Schedule A was attached to the Contract, but a series of Schedules were agreed subsequently.

(2) Clause 4 provides:

“[BDL] agrees to undertake technical services in motion control (the Services) to [sic] [SEL] (“the Contract Works”). How [BDL] fulfils its contractual obligations is a matter for [BDL].”

(3) Clause 5 provides:

“[BDL] agrees to undertake the Services in a professional manner at all times and undertakes the Services in the capacity of a specialist.”

(4) Clause 6 provides:

“[SEL] shall not control, nor have any right of control as to how [BDL] is to perform the Contract Works …”

(5) Clause 11 provides:

“[BDL] may, at its absolute discretion, send a substitute or delegate to perform the Contract Works …”

(6) Clause 13 provides:

“The whole or part of this Contract for Services may be assigned or subcontracted to any third party at the sole discretion of [BDL] and [SEL] may not object …”

(7) Clause 15 provides:

“The Contract Price for the Contract Works will be negotiated and agreed as between [SEL] and [BDL] from time to time and this will be detailed in Schedule A attached.”

(8) Clause 18 provides:

“Both [SEL] and [BDL] agree that this is a Contract for Services essentially in respect of specialist services only.”

(9) Clause 21 provides:

“Defective work by [BDL], its directors, employees, consultants, substitutes or hired assistance will be corrected by [BDL] at its own cost or in its own time.”

(10) Clause 25 provides:

“[BDL] is not entitled to partake in any grievance procedure and as an independent limited company is not entitled to any employment law rights.”

(11) Clause 33 provides:

“[BDL] is free to undertake other Contracts for Services for other parties at any time, either before, after, or concurrently with this Contract for Services.”

(12) Clause 38 provides:

“At the end of the term of this Contract for Services [BDL] undertakes to deliver to the [SEL] or as directed by the [SEL] all documents relating to the Contract Works.”

(13) Clause 39 provides:

“All copyright and other intellectual property rights in all work, including all work of a preparatory or design nature, or developed or created from such work in performing the Contract Works for [SEL] shall be deemed to be the undisputed property of the [SEL].”

(14) Clause 42 provides:

“[BDL] will prepare invoices for all Contract Works undertaken, on a frequency confirmed in Schedule A.”

(15) Clause 46 provides:

“Both parties agree and intend that this legal relationship is one of undertaking independent specialist services and specifically is not a relationship of master and servant or employer and employee.”

174. With regard to the express terms of the 2015 Contract, these included the following:

(1) The Recital provides:

“[BDL] agrees to supply and [SEL] agrees to engage [BDL’s] Services on the following terms.”

(2) Clause 1.1 provides:

“This is a Master Agreement, and defines the terms under which [BDL] will undertake such Services for [SEL] as may be agreed between the parties from time to time.”

(3) Clause 1.3 provides:

“Where it is agreed … that any Services are to be provided, a schedule in the form annexed to this Agreement setting out the nature of the Services, the charging basis, and any other material terms (a ‘Schedule’) will be produced by [BDL] and provided to [SEL].”

(4) Clause 4.1 provides:

“‘Deliverable’ means a work produced by [BDL] in the course of Services for delivery to [SEL].

4. 1.1 Where pre-existing works are within the knowledge and consent of the Client incorporated into any Deliverable, the Client has non-exclusive irrevocable world-wide royalty free licence to use modify and distribute such pre-existing works, but only as part of the Deliverable; all other rights in the pre-existing works are reserved.

4. 1.2 Subject thereto, all rights in any Deliverable pass to the [SEL] upon payment of all fees due to [BDL] which relate to that Deliverable; and [BDL] will execute a formal assignment thereof on request by [SEL].”

175. In the alternative to its case based on the express terms of the 2000 Contract and the 2015 Contract, SEL contends that that it was an implied term of each of those Contracts that BDL would make available to SEL all Source Code which Dr Potamianos created pursuant to the material Contract and all Documents. SEL submits that this implied term satisfies each of the requirements discussed by Lord Neuberger PSC in M&S. In particular, SEL submits that when each of these contracts was made it was obvious that SEL would need access to, and the right to edit, use and compile, the Source Code as well as access to any associated Documents, and that this is amply borne out by the circumstances which persist right up to the present time, for the following reasons:

(1) Without access to the Source Code, SEL would be unable to develop or enhance its products or to fix bugs or implement features which have been advertised but which do not work as described.

(2) The software continues to need further work. A list compiled by Jim Lock between 20 February 2015 and 29 April 2016 includes what SEL contends to be a number of bugs. According to the annotation that Dr Potamianos himself wrote at the top of that document, it listed “PL/X improvements”. However, Dr Potamianos accepted that there is at least one bug: when cross-examined about a minute of 13 May 2015 stating “There has been no progress on resolving the bugs in the PL/X and JL/X software”, he said “There are no bugs; there is just one”.

(3) A significant re-write was needed when the Intel product became obsolete. There is no guarantee that items in the current version of the hardware will not themselves become obsolete, again requiring further programming work.

(4) The Source Code is essential to enable SEL to continue in business should Dr Potamianos become unable or unavailable to work for any reason. For example, if he became ill, was injured, retired, or died. With regard to the latter possibility, Dr Potamianos asserted in cross-examination that “SEL would, through my estate, have access to whatever I put in the server … it would be in their interests to allow access in a common interest between me and Mr Prescott”. However, Dr Potamianos did not explain why his executors would adopt this stance when he himself, in his lifetime and in these proceedings, has adopted a directly contrary position, namely that, on the basis that he is entitled to deny SEL any access to the Source Code, it suits him to assert that entitlement up to the hilt.

(5) If Dr Potamianos decided to leave SEL and to work for another company which might be a competitor to SEL, or to set up in business as a competitor to SEL, it would be essential for SEL to have access to the Source Code. For example, it was put to Dr Potamianos in cross-examination that if he had decided to stop working for SEL and in 2004, or 2006 or 2007, then, on his case, SEL “would have been completely stuck”, and he accepted “It would be a problem”.

(6) Without the Source Code and Documents, SEL has no way of knowing how the software in its products works (unless Dr Potamianos is willing to provide that knowledge). Moreover, according to the case of BDL and Dr Potamianos, where he undertook investigatory work which did not result in the provision of work product, SEL is unable to see the results of that work or indeed any documents created as a result.

176. BDL and Dr Potamianos submit that these contentions are unsustainable, for three principal reasons. First, they are not supported by the language of the 1997 Contract, the 2000 Contract, and the 2015 Contract and the Schedules to those Contracts. Second, they would have the effect that the 2007 Assignment was wholly otiose (as all necessary rights would already have vested in SEL under the 1997 Contract and 2000 Contract). Third, BDL was only required to deliver Object Code, not Source Code, and SEL does not require Source Code in order for SEL to be successful and profitable.

The 1997 Contract

177. Dealing first with the 1997 Contract, by Clause 1 “BDL agrees to provide [SEL] with technical services in support of [SEL’s] business”. However, the nature and extent of these “technical services” is nowhere set out or defined in the 1997 Contract. On one view, this suggests that the 1997 Contract is no more than a device. At the very least, it suggests that the 1997 Contract does not set out the full agreement between the parties.

178. The 1997 Contract made no provision for the degree of control to be exercised by SEL. Given the nature of SEL’s need for the service of Dr Potamianos, and the fact that nobody else at SEL had any or any significant skill and knowledge in his area of expertise, this is unsurprising. I do not consider that the position would have been materially different if SEL and Dr Potamianos had entered into a contract that was, on the face of it, a contract of employment. The arrangement was based on trust, and its general tenor was that Dr Potamianos would, in the language of Clause 4.1, use “best endeavours” to develop digital drives for SEL. There was no express requirement in the 2007 Contract that he would work full time on SEL’s business, but that was the understanding which provided the basis for the level of payment that was to be made by SEL, and on the evidence before me that is what appears to have happened in practice.

179. Clause 1.2 provides: “Any personnel offered by BDL to fulfil its obligations under this agreement must be approved beforehand by [SEL]”. This does not reflect the true position. In fact, as is clear from the contemporary documents and the evidence of both sides, SEL’s offer was for the personal services of Dr Potamianos, and it was never in contemplation that anyone other than Dr Potamianos would provide services to SEL. Indeed, BDL had no other personnel, and nor was it in contemplation that it would ever do so. BDL was a service company, set up as a tool or device for providing the services of Dr Potamianos for the reasons proposed by Mr Prescott, which solely concerned tax.

180. Clause 2 of the 1997 Contract contains the payment provisions. These were broadly in line with the letter dated 20 September 1996 from Mr Prescott to Dr Potamianos, although the minimum payment was not set at £60,000 but was instead set at £66,000 with annual increases in line with the Retail Price Index, and the entitlement was set not at 10% of the dispersible profit of SEL but instead at 12% (pro-rated for each month of the first year), rising to 14% for the third year of the contract and 15% thereafter. In my judgment, as that letter reflects, although expressed as a share of dispersible profits, this payment was, or was akin to, a payment of salary (with any additional sum that might be payable in accordance with the profit share arrangements being a form of bonus).

181. Clause 3 of the 1997 Contract contains termination provisions. In accordance with Clause 3.1, one year’s notice of termination is required in the first and second years and two years’ notice is required thereafter. Clause 3.2 contains different termination provisions, which apply in the event of a change of shareholder control in SEL. These provisions are not inconsistent with a contract of employment for a senior employee whose services are of fundamental importance and who may be very difficult to replace, and although they may also be appropriate for inclusion in a contract for services, it seems to me that where it is envisaged that only one specific individual will provide the services their inclusion is more suggestive of an employment relationship.

182. Clause 4 is quoted above. In my view, these obligations, and especially the obligation to use “best endeavours” to develop the business of SEL, are commensurate with, and indeed are indicative of, an employment relationship. Someone performing services in business on their own account would not generally be expected to agree undertakings which are geared to the development and running of the business of a third party.

183. Clause 5 of the 1997 Contract contains detailed restrictive covenants, made jointly and severally between BDL and Dr Potamianos on the one hand and SEL on the other hand. In this regard, in addition to SEL and BDL, Dr Potamianos is a party to the 1997 Contract. These covenants are expressed to subsist for the duration of the 1997 Contract and for 12 months thereafter, and they include covenants against competition with SEL both generally and in respect of supplying goods or services to customers of SEL, and against solicitation of customers, suppliers and employees of SEL. These covenants take the same form as an employer would seek to include in a contract of employment.

184. In my opinion, Dr Potamianos was under an obligation personally to perform the “technical services” which formed the subject of the 1997 Contract for SEL (as in fact he did), and if he had provided those services under a contract made directly between him and SEL he would be regarded for income tax purposes as an employee of SEL. Moreover, when considering whether he performed those services as a person in business on his own account, he did not perform any material services for anyone other than SEL, and the services that he performed for SEL were provided in exchange for fixed levels of payment and involved him in neither a prospect of profit nor a risk of loss. In my view, he was as much regarded as part of SEL’s organisation as Mr Prescott and Mr Van Der Wee, who were the other key figures in the organisation; and that is how each of them viewed their relationships, both between themselves and with SEL. This accords with the location at which and the means by which he worked for SEL, and his use of SEL’s office space and equipment, including a desktop, supplied by SEL.

185. Dr Potamianos was not required to, and nor did he, hire any helpers, or engage in any significant investment, or management, or provision of his own equipment.

186. Pulling all these strands together, and having considered these matters for the reasons set out above and in spite of the fact that none of the parties argued that the 1997 Contract did not correctly describe the true relationship pursuant to which SEL obtained the benefit of his personal services, I have come to the conclusion that the true relationship between SEL and Dr Potamianos under the 1997 Contract was that of employer and employee.

187. In reaching that conclusion, I have paid careful regard to the submissions of BDL and Dr Potamianos to the effect that the only permissible approach for the Court is to construe the relevant terms of (among others) the 1997 Contract and identify its objective meaning, that the parties have to live with the contractual structures that they have chosen to adopt, that it is not legitimate for the Court to “look through” a structure or to infer that a contractor should simply be treated as if he were an employee, and that I should heed Lord Neuberger PSC’s precautionary observation that: “Concentrating on the perceived morality of the parties’ behaviour can lead to an unacceptable degree of uncertainty of outcome” (Thornton v Major [2009] 1 WLR 776, at [98]).

188. Those arguments do not, in my view, outweigh the considerations of policy and of the need to give recognition to the underlying realities upon which my reasoning is based.

189. On that basis, and as there was no agreement to the contrary, SEL was and is the owner of the copyright in the documents and the source code which were authored by Dr Potamianos under the 1997 Contract, in accordance with section 11(2) of the CDPA.

190. If that is wrong, I agree with BDL and Dr Potamianos that neither Clause 4.1 nor Clause 4.2 of the 1997 Contract are apt to confer on SEL an entitlement to be provided with the Source Code and Documents, let alone apt to assign any copyright to SEL.

191. With regard to implied terms, however, I prefer the arguments of SEL. Although the analogy between rights in a logo and rights in the Source Code and Documents is imperfect, I consider that the reasoning in Griggs v Evans applies to the present case. A contract under which SEL agreed not only that it should pay for the creation of the Source Code and Related Documents but also that it should be denied ownership of, or even any right of access to, those materials, and be confined instead to a right to exploit the Object Code, is one which no reasonable persons in the position of SEL and Dr Potamianos would have made, and which lacks commercial and practical coherence. So far as concerns the nature and extent of the appropriate implied grant of rights, I consider that this case falls within principle (7) identified by Lightman J in Robin Ray.

192. I am unpersuaded by the submissions to the contrary of BDL and Dr Potamianos.

193. First, BDL and Dr Potamianos submit that it would have been “madness to assign [his] life’s work to SEL from the outset”. However, I do not consider that this is the effect of an implied right to assignment of copyright pursuant to the 1997 Contract. Such a right applies only to the work done by Dr Potamianos pursuant to the 1997 Contract, and, further, because only the expression of a computer program is protected by copyright, it does not prevent Dr Potamianos from using and developing the ideas, principles, procedures, methods of operation and mathematical concepts which underlie any element(s) of the source code that he developed thereunder (see, for example, SAS v World Programming Case C-406/10 ECLI:EU:C:2012 259 at [31]-[33], [39]-[40]).

194. Second, BDL and Dr Potamianos place reliance on section 90(3) of the CDPA, which provides: “An assignment of copyright is not effective unless it is in writing signed by or on behalf of the assignor”. However, as explained by Mr Prescott QC in Griggs v Evans, this provision refers to the legal ownership of copyright: it does not affect the equitable ownership, or the right to call for an assignment of the legal title.

195. Third, BDL and Dr Potamianos argue that the result makes sense commercially. Indeed, their primary case is that the division of intellectual property rights and the intermingling of commercial interests produced by, in sum, allocating rights in the source code to them and rights in the object code to SEL was (a) “deliberate and beneficial” from their perspective and (b) “premised on the assumption that [BDL and SEL] would be working together” from SEL’s perspective. They further suggest that (leaving aside the transaction embodied in the 2007 Assignment) it “may well be” that the parties never reached agreement on the status of the source code, in which case, as they submit, the ownership of copyright is determined by section 11 of the CDPA. They point out that sections 50A-50C of the CDPA confer certain rights on SEL in respect of computer programs, including (under section 50C) the right to copy or adapt the same (in particular, where necessary for the purpose of correcting errors in the same), provided that the copying or adapting is necessary for SEL’s lawful use and is not prohibited under any term or condition of any agreement between them and SEL. At all events, they contend that SEL has no need to access the source code, as evidenced by the fact that it was able to conduct business for about 20 years after 1997 without access to the source code, and that there is no basis for implying a term simply because it would produce a result which is more commercially attractive for SEL.

196. In support of these contentions, BDL and Dr Potamianos relied on a number of features of the evidence, which, as they submitted, demonstrate that SEL’s desire to establish rights over the source code is more concerned with business strategy than day-to-day needs. Overall, they submitted that these features provide a strong indication that the 1997 Contract has business efficacy even if it is interpreted as leaving ownership of copyright in the source code with BDL and as conferring no right on SEL to have the source code (or related documents) delivered up to it or to have access to those materials. The specific features of the evidence that were relied on in this regard included the following (omitting references to the sources of that evidence):

(1) On a day-to-day basis, all SEL needed to ship the PL/X product was the object code. It did so very successfully for a long period, and indeed its sales have recently risen by 20%.

(2) SEL could install the firmware in object code form onto motor controllers, which it could sell and provide to customers, without any source code.

(3) The only conditions under which source code changes would be required when deploying a PL/X product at a customer site is if something “has gone wrong” and there was a bug.

(4) SEL’s customers did not require source code, either to configure any of the 1000-odd parameters for their needs or to install and use PL/X drives.

(5) SEL’s real business concern was its need to rely on one company and one person for its expertise. As a matter of business strategy, SEL wanted to minimise that risk by enlisting others (such as Dr Fells).

(6) The specific copy of the source code delivered under the 2007 Assignment was “in a filing cabinet” and not used.

(7) The market for motor controllers has reached maturity and “very little product development” has occurred at SEL since January 2015.

(8) With an assignment of the object code that was delivered to SEL: (a) SEL can continue to make and sell PL/X controllers incorporating that firmware indefinitely; and (b) BDL cannot provide that firmware to anyone else.

(9) The useable lifespan of digital controller architecture is measured in decades. The Intel platform was launched in the 1980s, and only ceased being used by SEL entirely in about 2014. The Microchip platform is also likely to be long-lived. SEL’s concerns about obsolescence are therefore contrived and overstated.

(10) Nothing would prevent SEL from developing new firmware for a new product without BDL, either based on the 2007 Assignment source code or from scratch.

197. In my view, none of the other points listed above meet the point that source code changes would be required if, for example, there was a bug that needed to be resolved. Further, without access to the source code, the rights set out in sections 50A-50C of the CDPA would be nugatory: for example, on the basis of access to the object code alone, SEL could not copy or adapt the source code even to the limited extent that this was necessary for the purpose of correcting errors in the source code.

198. I consider that reasonable persons in the position of SEL on the one hand and BDL on the other hand when the 1997 Contract was made would not have contemplated that SEL’s ability to correct bugs (both during the existence of that contract and thereafter) would be entirely dependent on whether and if so on what terms as to payment and otherwise BDL and Dr Potamianos chose to allow SEL to access and use the source code which Dr Potamianos created pursuant to that contract.

199. Indeed, I would go further and say that reasonable persons in that position would have contemplated that SEL’s rights in respect of the source code would enable it to exploit the source code more generally, for example by developing new and improved object code and new firmware for new products.

200. While Dr Potamianos continued working at and for SEL in the manner summarised above the need for SEL to ensure that its contractual rights were fully observed and preserved did not arise, because in practical terms SEL was able to access and exploit the source code by making requests of Dr Potamianos, who was, in practice, the only person who was able to deal with such matters. Accordingly, if and to the extent that it is permissible to have regard to the post-contract conduct of the parties for the purpose of determining the content of the 1997 Contract, I do not consider that any contrary inference can be drawn from the fact that SEL did not ask Dr Potamianos to formally deliver up copies of the source code during the existence of that contract.

201. Finally, some of the points relied on by BDL and Dr Potamianos, such as the 2007 Assignment (whatever its existence and effect may be) relate to matters that were not in contemplation when the 1997 Contract was made, and so cannot be relied upon when considering the true meaning and effect of the 1997 Contract.

202. For these reasons, I consider that the implied term of the 1997 Contract for which SEL contends, namely an implied term that BDL and Dr Potamianos have at all material times been obliged to provide SEL with “the Source Code and Documents” as defined in paragraph 57 of the Particulars of Claim to the extent that the same were created by Dr Potamianos during the existence of the 1997 Contract satisfies the conditions that (1) it is reasonable and equitable; (2) it is necessary to give business efficacy to the contract; (3) it is so obvious that “it goes without saying”; (4) it is capable of clear expression; and (5) it does not contradict any express term of the contract.

The 2000 Contract

203. Turning to the 2000 Contract, it is common ground that this was entered into in light of IR 35, and that it is based on a standard form promulgated by the Private Contractors Group which was designed to negate the risk that HMRC would treat the worker (in the present case, Dr Potamianos) as being, in effect, chargeable to tax under Schedule E.

204. It seems to me that the 2000 Contract envisaged that an attached Schedule A would set out the dates of commencement and termination of the contract (see Clauses 1 and 3) and the “Contract Price” for the “Contract Works” (see Clause 15), and the frequency with which invoices were to be prepared (see Clause 42), but not that it would define the “Contract Works” to be performed (because Clause 4, which defines the “Contract Works”, is self-contained and makes no reference to Schedule A).

205. In the event, however, no Schedule A was attached to the 2000 Contract, and the parties utilised a series of such Schedules which described the works which were being invoiced from time to time. Dr Potamianos was in sole charge of source code, he alone knew what work needed to be done on programming, and Mr Prescott relied on him. In practice, therefore, Dr Potamianos decided what to include in these Schedules.

206. Moreover, the value of the Schedules was dictated by considerations other than the work described in them. Between 2000 and July 2007, when Dr Potamianos became a shareholder in SEL, the Schedules were drawn up so as to enable invoices to be issued in such a way that the same amounts would be paid by SEL and received by BDL (and, I infer, wholly or substantially by Dr Potamianos through that medium) as would have occurred under the 1997 Contract. In sum, therefore, BDL received in this way regular monthly payments to a minimum of £66,000 pa (inflation linked) with an element of profit. After Dr Potamianos became a shareholder in SEL in July 2007, the arrangement changed to one whereby Mr Prescott and Dr Potamianos would meet and agree the fees that their respective service companies would charge SEL. Schedules would then be produced which would allow those service companies to issue invoices for amounts in the same ratio as the shareholdings of Mr Prescott and Dr Potamianos in SEL (and, later, SRL).

207. In these circumstances, I consider that these Schedules need to be treated with caution. However, they lie at the heart of the case of BDL and Dr Potamianos concerning the 2000 Contract, which is, in a nutshell, as follows: (a) the Schedules define the scope of the “Contract Works”, (b) the Schedules only extend to the delivery of object code, compiled in a format suitable for use as firmware, (c) accordingly, what was commissioned under the 2000 Contract was object code, and not source code, and (d) the source code does not fall within any of the classes of “work” covered by Clause 39 of the 2000 Contract, specifically because (i) it is not work carried out in performing the “Contract Works” and (ii) if “work of a preparatory or design nature, or developed or created from such work in performing the Contract Works” was construed as extending to source code vis-à-vis object code that would produce “surprising” and indeed “commercially absurd” results which the parties cannot have intended to agree.

208. I am unable to accept these submissions. I do not agree that the scope of the “Contract Works” is determined by the Schedules, for two principal reasons.

209. First, “Contract Works” is defined in Clause 4 of the 2000 Contract, which appears to me to be open ended, and is not confined to the contents of the Schedules, or even to what was physically delivered up to SEL during the existence of the 2000 Contract.

210. Second, the Schedules are not a reliable guide to the true contractual arrangements between the parties, because they were based, in effect, on Dr Potamianos’ choice of description of the work for which SEL was being charged. Moreover, they were drawn up so as to meet ulterior purposes, namely to support payments by SEL in particular amounts that made sense from an accountancy perspective for Mr Prescott, Dr Potamianos and SEL but had no necessary correlation with the value of the work done.

211. Further, I do not agree that the construction of Clause 39 for which SEL contends produces results which are surprising, let alone commercially absurd. On the contrary, for the reasons discussed above in respect of implied terms in the 1997 Contract, I consider that SEL’s construction fully accords with commercial common sense.

212. In support of their argument about commercial absurdity, BDL and Dr Potamianos suggested instances where reading Clause 39 as SEL contends would mean that the contractor would be unable to use any pre-existing materials to perform the “Contract Works” without assigning all copyright in those materials, such that the contractor could never use them again, in a manner that would make no sense – for example, design templates for an architect.

213. I do not regard this as persuasive. Although the 2000 Contract is based on a standard form, if and to the extent that Clause 39 is not considered to be appropriate in any particular case, it is open to the parties to amend it or to delete it altogether – just as Dr Potamianos deleted other Clauses in the present case. Indeed, in the case of architects, as Lightman J pointed out in Robin Ray, the standard form contract approved by their professional institute expressly provides that copyright in the delivered work product, let alone other materials, remains vested in the architect, and it seems to me unlikely that any architect would lightly depart from that.

214. BDL and Dr Potamianos further submitted that the functions and effect of the 1997 Contract formed the most important part of the factual matrix against which the 2000 Contract was made, and that it would be surprising if (in the absence of clear words) the parties’ arrangements as to ownership of source code were altered by a new contract the only commercial purpose of which was to comply with IR 35. In light of my holding as to the ownership of copyright in the source code in accordance with the 1997 Contract, this argument does not assist BDL and Dr Potamianos.

215. In addition, I consider that the wording of Clause 39 of the 2000 Contract is clear. The fact that IR 35 provided the genesis of the 2000 Contract does not mean that if and to the extent that the new terms which the parties agreed differed from the provisions of the 1997 Contract those terms should not be given full effect, even if they have nothing to do with IR 35 compliance.

216. In my opinion, the nature and effect of the 2000 Contract differed significantly from the 1997 Contract, as indeed they would have to do if compliance with IR 35 was to be achieved. Even if, contrary to my holding above, the 1997 Contract was effective to prevent a contract of service from coming into existence, it is clear that a number of the provisions that it contained were consistent with a contract of service, and at the very least took it close to what Robert Walker LJ described as the “elusive dividing line” between such a contract and a contract for services.

217. In this regard, where the two forms of contract contained inconsistent terms, I am unable to see that the terms of the 1997 Contract survived the making of the 2000 Contract. For example, the express provision in Clause 33 of the 2000 Contract that “[BDL] is free to undertake other Contracts for Services for other parties at any time, either before, after, or concurrently with this Contract for Services” does not limit those “other parties” in any way. That provision is inconsistent with the detailed restrictive covenants contained in Clause 5 of the 1997 Contract, and I cannot accept that Clause 5 continued to apply after the 2000 Contract was made.

218. Accordingly, to the extent that BDL and Dr Potamianos rely on provisions such as Clause 5 of the 1997 Contract in support of their case that the 2000 Contract worked perfectly well if the copyright in the source code remained with them – on the footing that, for example, such provisions prevented them from delivering the source code to a competitor of SEL or from exploiting the source code themselves in competition with SEL – I am unable to accept this aspect of their arguments.

219. In my view, this conclusion is not affected by the fact that the parties seem to have regarded the 1997 Contract as not having been “fully terminated” and so forth until 2007. I consider that the better view is that it is implicit that, when the parties entered into the 2000 Contract, the 1997 Contract was entirely replaced and superseded. If that is wrong, however, I nevertheless consider that the 1997 Contract can only have remained in force if and to the extent that it contained provisions that did not clash with those of the 2000 Contract. The parties cannot have agreed to be bound by two sets of provisions which were incompatible with one another, as that would make it impossible for them to know the nature and extent of their respective rights and liabilities.

220. Further, this would undermine their prospects of complying with IR 35. Indeed, in accordance with my findings in respect of the 1997 Contract, that would give rise to a risk that the true relationship between them continued as an employment relationship, with the consequence for purposes of the present dispute that SEL would be entitled on that ground to the copyright in the source code created under the 2000 Contract.

221. It should also be noted that if BDL and Dr Potamianos are right in saying that they retained ownership of copyright in the source code under the 2000 Contract, while at the same time they could not exploit it in a manner adverse to SEL, that would, in effect, render the source code sterilised or frozen. The fact that the source code was written for SEL’s platforms points to the same result.

222. The only qualification to this is that BDL and Dr Potamianos would be in a position to require SEL to pay for the right to access and use the source code. If that is the predicament in which SEL finds itself on the true interpretation of the 2000 Contract, then the fact that SEL may have made a bad bargain is not a ground for relieving SEL of that yoke.

223. At the same time, unless any desire by SEL to access and use the source code is far removed from necessity, there is a danger that any such outcome would come perilously close to allowing BDL and Dr Potamianos to hold SEL to ransom, which they disavow. On the other hand, if the source code was assigned to SEL, that would not prevent BDL and Dr Potamianos from recreating the algorithms for a different platform by rewriting the source code, as that would not infringe the copyright which, on this hypothesis, would belong to SEL.

224. All these considerations militate in favour of SEL’s case concerning the 2000 Contract.

225. At the end of the day, I consider that the wording of Clause 39 of the 2000 Contract is clear, and is apt to apply to the source code which was written pursuant to that contract, on the basis that this comprises either (i) work that was carried out in performing the “Contract Works” or (ii) “work of a preparatory or design nature, or developed or created from such work” that was carried out in performing the “Contract Works”. I see no reason to construe that wording differently or to cut down or alter the meaning that Clause 39 otherwise has on any of the grounds put forward by BDL and Dr Potamianos, and good reason to give it effect according to its plain terms. If that is wrong, and there are rival meanings, I would reach the same conclusion by giving effect to the principles of construction which are applicable in those circumstances. The same reasoning applies mutatis mutandis to “documents relating to the Contract Works” under Clause 38, and to the obligation of delivery up contained in Clause 38.

226. For these reasons, I consider that the interpretation of the 2000 Contract for which SEL contends, namely that BDL and Dr Potamianos have at all material times been obliged to provide SEL with “the Source Code and Documents” as defined in paragraph 57 of the Particulars of Claim to the extent that the same were created by Dr Potamianos during the existence of the 2000 Contract, is correct.

The 2007 Assignment

227. I have reached these conclusions without taking into account the 2007 Assignment, because it was made years after the 1997 Contract and the 2000 Contract were made, and their meaning cannot be affected by what happened years after they were made.

228. The 2007 Assignment is curious in any event:

(1) On the face of it, as touched on above, the 2007 Assignment was made between Dr Potamianos personally and SEL, and it had nothing to do with BDL, or any intellectual property rights belonging to BDL. Indeed, the “Trade Name” of the “Business” that Dr Potamianos is said to have been carrying on using the “Software” the intellectual property rights in which (among other things) is thereby being assigned is “DC Motor Control Algorithms” and not BDL.

(2) As against that, BDL and Dr Potamianos point out that what was assigned appears to include some (namely, according to the oral evidence of Dr Potamianos, about 15 out of a total of about 105 files) of v5.15 of the source code (the version that was current at the time). They argue that, in accordance with their case that v5.15 was owned by BDL, this is inconsistent with SEL’s case that what was sought and achieved by the 2007 Assignment was to assign pre-1997 rights belonging to Dr Potamianos personally in order to enable him to be paid the £400,000 that he needed in order to purchase a 40% shareholding in SEL.

(3) Conscious that this aspect of their case does not readily square with the fact that Dr Potamianos alone was made a party to the 2007 Assignment, BDL and Dr Potamianos suggested that, in respect of v5.15, he made it as agent for BDL.

(4) In response, SEL contends that there is no inconsistency, as the 2007 Assignment can be construed as meaning that, in so far as version v5.15 incorporated pre-1997 materials, then those pre-1997 materials were being assigned (along with other materials which plainly appear to belong to Dr Potamianos personally). This does not accord with the intellectual property rights which are described as being assigned in the Schedule to the 2007 Assignment – among other things, these are accompanied by a memory stick which includes date stamps on the Source Code files which are from July and August 2006. In my view, however, that is not fatal to SEL’s submission under this head. There are two possibilities, namely (a) that one should start with this identification of intellectual property, and then say that the owner of any of that property must be a party to the 2007 Assignment, and (b) that one should start with the parties to the 2007 Assignment, and then say that if and to the extent that the intellectual property that is described as being assigned does not belong to the assigning party or parties, then the 2007 Assignment is ineffective to assign the rights in that property, as nobody can give what they do not have. Of those two approaches, I consider that the latter is to be preferred.

(5) SEL further contends that the suggestion that SEL would have any interest in purchasing the rights to part only of the source code which Dr Potamianos had written since 1997 (such as, perhaps, some or all of the above 15 files) would make no commercial sense: it would leave BDL with ownership of the rest of the source code, and mean that SEL would be paying BDL to continue to develop the source code although most of what was being developed belonged to BDL.

(6) BDL and Dr Potamianos counter by arguing that what was deliberately intended, and made commercial sense, was an entwining or immersion of Dr Potamianos in the business of SEL, when he was about to become a shareholder, such that the fate of each of those parties would thereafter be inextricably linked to the other.

229. In my judgment, the contemporary documents, the 2007 Assignment itself, and indeed the evidence of the witnesses, provide little support for points (3) and (6) above.

230. In particular, in an email to Mr Prescott dated 22 June 2007 to which was attached a draft of the 2007 Assignment, the solicitor advising SEL about the transaction, Mr Hindle, specifically asked “we need to know what we are acquiring … Aris or his company?” By email dated 25 June 2007, Mr Prescott replied “Thanks for latest doc. Aris and I have had a look at it … The name of the File is “DC motor control algorithms” although this is trademarked”. Dr Potamianos created a document dated 17 July 2017 entitled “Corrections on documents related to IPR transactions” which includes a list of points under the heading “IPR sale contract” by reference to the numbers of Clauses in the travelling draft of the 2007 Assignment, and which ends by saying that the wording for his name needs to be corrected. The 2007 Assignment was not signed until 25 July 2007.

231. In any event, Dr Potamianos is an intelligent man, who is fully capable of understanding a document like the 2007 Assignment and, for example, the importance of answering questions like that raised by Mr Hindle and of correctly identifying the parties to a contract.

232. Dr Potamianos also appreciated, as he confirmed in his oral evidence, that in order for him to be able to claim Enterprise Initiative Scheme relief, as he did, it was necessary for him to be the party assigning rights.

233. In these circumstances, I have no doubt that Dr Potamianos fully appreciated that he was signing the 2007 Assignment himself and solely on his own behalf, and, indeed, that Mr Hindle had asked this specific question (among others). I therefore regard as disingenuous Dr Potamianos’ evidence that “I see now that I signed [the 2007 Assignment] myself, but I believe I was intending to act as an agent of BDL, who owned the rights in question … Mr Hindle … appears to have overlooked this point”.

234. Further, point (4) above provides an answer to the anomaly suggested in point (2) above (although it may be fair to say that point (4), also, is not reflected in the contemporary materials, and only emerged as part of SEL’s case during the trial).

235. Accordingly, choosing between these two rival sets of contentions, I prefer SEL’s case.

236. In fact, I consider that the better approach towards understanding the 2007 Assignment is to be found in the following considerations. First, the 2007 Assignment was only entered into in the context of the proposal that Dr Potamianos should become a shareholder in SEL. In particular, the price payable by SEL was exactly equal to the sum that Dr Potamianos was to pay to acquire a 40% shareholding in SEL, and the two transactions took place in close succession and as part of an overall scheme. Second, in the words of the closing submissions of BDL and Dr Potamianos: “All the parties were conscious that there [might] be tax implications (both for [Dr Potamianos] and possibly [for] SEL) if BDL assigned the rights but [Dr Potamianos] acquired the shares”. Third, both SEL and Dr Potamianos relied on these transactions to gain tax advantages: (a) Dr Potamianos claimed he had used the proceeds of sale of his intellectual property for a qualifying investment in order to able to obtain Enterprise Initiative Scheme relief on the Capital Gains Tax that would otherwise have been payable; and (b) for depreciation purposes, SEL characterised what had been acquired as having a useful economic life of 4 years.

237. In my view, and in contrast with what one would expect if the 2007 Assignment had been an ordinary commercial transaction, the parties were more concerned with these considerations than with the commercial terms of the 2007 Assignment, such as whether the value of what was being assigned truly matched the price that was being paid. Indeed, even with regard to the pre-1997 materials that were included in the 2007 Assignment it is clear that many of them were created or developed by Dr Potamianos in the course of his employment by his previous employers, such as GEC, and therefore he was not the owner of the copyright in the same and could not assign copyright in the same to SEL.

238. It is artificial to approach the construction of the 2007 Assignment without regard to these realities. However, once they are taken into account, it is difficult, if not impossible, to apply the principles of construction laid down in the decided cases, because those principles were formulated for ordinary commercial contracts negotiated at arm’s length, and are therefore based on quite different premises.

239. In fact, it was the evidence of Mr Macdonald that HMRC raised questions about the coincidence between the sum of £400,000 paid by SEL to Dr Potamianos pursuant to the 2007 Assignment and the fact that, very shortly afterwards, Dr Potamianos paid the same sum to acquire shares in SEL. That resulted in correspondence between Martlet and HMRC. In a letter from Martlet to HMRC dated 27 February 2009, Mr Macdonald rehearsed the events leading up to the 2007 Assignment and then stated:

“Accordingly, negotiations took place with Mr [sic] Potamianos and the price of £400,000 was reached independently and in accordance with the discount that Mr Van Der Wee took in respect of the sale of his shares”.

240. When asked in cross-examination whether this information was true, Mr Macdonald initially replied: “Any valuation of a company is contentious”, although he then said that the information was true to the best of his knowledge and belief. When it was suggested to him that it was therefore clear that Dr Potamianos acquired his shares at a discount, Mr Macdonald replied: “I said that any valuation of a share is contentious. The information that I provided to HMRC in connection with the sale price to Mr Van Der Wee’s shares is not necessarily connected with the price that Dr Potamianos paid”.

241. Mr Macdonald later said that the point of telling HMRC that the price of £400,000 was reached independently and in accordance with the discount that Mr Van Der Wee took was “So that they could verify that the sale price and the acquisition of the shares were in fact reached at independent cost”. When asked whether that meant that the price was fixed at a discount, Mr Macdonald said: “I think that the general principle is that the share price was aligned with the price that Mr Van Der Wee sold at the time”. Mr Macdonald later agreed that Dr Potamianos’ share price was aligned with the price at which Mr Van Der Wee had sold.

242. I was not impressed by this evidence of Mr Macdonald. The end position seems to be that he accepted that his representations to HMRC would only have been accurate if Dr Potamianos had acquired his shares at a discount. However, Mr Macdonald declined to agree with that proposition when it was first put to him. In the course of trying to avoid agreeing with that suggestion, Mr Macdonald gave a number of evasive answers, and he gave me the impression that he considered it legitimate to tell HMRC whatever was needed to see off their concerns, regardless of whether that information was accurate. This seemed to me to be in line with the approach of the parties to other structures that they had adopted with a view to reducing the payment of taxes, I infer on his advice.

243. As it happens, I doubt that the 2007 Assignment is of much significance, for two principal reasons. First, in light of my findings concerning the 1997 Contract and the 2000 Contract. Second, because I accept the case of BDL and Dr Potamianos (a) that, on any view, the 2007 Assignment was not prospective, and (b) that the pre-2007 source code is currently of limited relevance. In brief: all major versions of the firmware developed after 2007 have been designed for the Microchip platform, not the Intel platform; the development of the Microchip platform required the re-writing of every line of Assembler Source Code and of more than 60% of the C Source Code; accordingly, by 2014 (when the initial release of the Microchip platform firmware was delivered by BDL to SEL) very little of the pre-2007 Source Code remained in use; specifically, the earlier Intel platform firmware versions cannot be used with the current Microchip controllers; there is no suggestion that SEL is likely to want to release another product based on the Intel microarchitecture; and, in addition to all the above, I infer that any bugs that depend for their rectification upon access to and use of the pre-2007 source code are almost certain already to have emerged and been resolved.

244. It is no bad thing that the resolution of the current dispute does not depend, or depend significantly, on giving effect to the 2007 Assignment, for two principal reasons. First, because, taken alone, the 2007 Assignment would produce most unsatisfactory results as to the separation of rights to the Source Code and Documents, in accordance with the case of either side. Second, because I consider it was coloured by fiscal considerations of the kind discussed above, and they are, in my view, of at least doubtful propriety.

The 2015 Contract

245. Turning finally to the 2015 Contract, and leaving aside Schedule No 121115 dated 12 November 2015, on SEL’s case the only Schedule agreed under this contract was Schedule No 130116 dated 13 January 2016, in respect of which BDL issued three invoices Nos 248, 249 and 250 dated 31 January 2016, 29 February 2016 and 31 March 2016, in the sums of £13,000, £14,000 and £13,000, plus VAT.

246. There is a further Schedule, No 270416, dated 27 April 2016, in respect of which BDL issued invoices Nos 251 and 253 dated 30 April 2016 and 30 June 2016, but SEL’s case as to those matters is that invoice No 251 was not agreed and payment of it was not authorised by SEL, and that no payment is due in respect of invoice No 253. BDL also issued invoice No 252 under this Schedule, but BDL did not seek any additional payment in respect of invoice No 252 in light of the double payment that was made by SEL in respect of invoice No 251, in the circumstances which are explained below.

247. Schedule No 130116 describes the Services as “Investigation into alternative event structures in PL/X firmware to fix the problem with occasional dropping-out of Standby Field”. SEL contends that this investigation included work on the Source Code and, in any event, that the results of this investigation, including any Source Code which was developed and any associated documents should be delivered to SEL (a) pursuant to Clause 4.1 and (b) as a matter of obvious implication, because otherwise SEL would serve no purpose and get no value by having the investigation undertaken.

248. It is unclear to SEL whether, in fact, anything was done pursuant to Schedule No 130116. However, Dr Potamianos contends that the contract “was for investigatory work only and not implementation”. He further contends that “BDL duly undertook the relevant investigatory work between the end of January and the beginning of April 2016”, that he “tried a different operating field structure … to avoid this collision of events” and that “I did not achieve the full reliability I was looking for and as a result I concluded that this investigation could not furnish the desired solution”, although “I do at least now have a better appreciation of the mechanism causing the problem”.

249. BDL and Dr Potamianos submitted in closing that Dr Potamianos’ clear evidence in re-examination was that none of the work done under the 2015 Contract involved any changes to Source Code in any event. However, I did not understand his evidence in that way. It was certainly his evidence that neither any Source Code nor any Object Code was delivered to SEL under any Schedule made pursuant to the 2015 Contract. However, with regard to Schedule No 130116 he explained this non-delivery as follows “It was not, because at the end it was not proven a successful attempt, only a learning exercise, in the end. It was meant to be but it did not come with any code that was any use to be passed”. I agree with SEL that this, and indeed Dr Potamianos’ witness statement from which I have quoted above, suggests that he did work on the Source Code, although he did not find a solution to the particular bug that was in question.

250. SEL submits that the stance of BDL and Dr Potamianos concerning this Schedule neatly illustrates the validity of its claims concerning the Source Code: without sight of the experimental Source Code and associated Documents which would be the product of the work Dr Potamianos claims to have done, SEL knows nothing concrete or useful about the investigations that are said to have been conducted at SEL’s expense and it gains nothing of any value from the “Services” which form the subject of this Schedule.

251. BDL and Dr Potamianos contend that (a) the assignment produced by Clause 4.1.2 of the 2015 Contract is confined to the “Deliverable” itself, that is to say “a work produced by [BDL] in the course of Services [set out in Schedules] for delivery to [SEL]”, (b) the only three Schedules that were agreed under the 2015 Contract dealt with specific investigatory and bug-fixing work, and involved no delivery of Source Code, and therefore (c) no rights in Source Code were assigned to SEL by Clause 4.1.2.

252. I consider that these arguments are best tested by supposing that (contrary to his evidence) the investigations of Dr Potamianos had resulted in “code that was fit to be passed”. Leaving aside whether (as I think BDL and Dr Potamianos would contend) it would only have been Object Code that would fall to be delivered, as Schedule No 130116 only specified an activity and did not specify a work that was a “Deliverable”, on their construction of the 2015 Contract all that SEL would be entitled to in exchange for the payments it made is the completion of that activity and not delivery of any useable end product of that activity, including any code that solved the bug in question.

253. That result seems to me to be utterly inimical to business efficacy and common sense. In addition, I consider that an implied obligation to the effect for which SEL contends satisfies all the requirements identified or re-iterated in M&S. Among other things, it is right to note that the 2015 Contract does not contain an “entire agreement” provision.

254. Accordingly, while I prefer the arguments of BDL and Dr Potamianos as to the interpretation of Clause 4.1 of the 2015 Contract, I prefer the arguments of SEL with regard to the implied terms of the 2015 Contract. I consider that the effect of the 2015 Contract for which SEL contends, namely that BDL and Dr Potamianos have at all material times been obliged to provide SEL with “the Source Code and Documents” as defined in paragraph 57 of the Particulars of Claim to the extent that the same were created by Dr Potamianos during the existence of the 2015 Contract, is correct.

Directors’ Duties

255. SEL argued that the applicable law is correctly summarised in Copinger and Skone James on Copyright, 17^th edn, at 5-186, in which the authors state (among other things):

“a director or de facto director of a company who is not employed under a contract of service may nevertheless hold the copyright in works he makes for the company on trust and will have to assign the copyright to the company when called upon to do so. This will usually be so because the director will have created the work for the company’s business, using the company’s property and in the company’s time.”

256. SEL pointed out that the equivalent passage from an earlier edition of the same work was cited with approval by Mr Richard Arnold QC (as he then was) sitting as a Deputy Judge of the High Court in Vitof Limited v Altoft [2006] EWHC 1678 (Ch) at [144], and that in the same case Mr Arnold QC considered the decision of Laddie J in Ball v The Eden Project Ltd [2002] FSR 43. In both of those cases, in short, it was held that a director of a company held intellectual property rights arising as a result of actions undertaken by him during the time that he was a director on trust for the company.

258. In answer to these points, BDL and Dr Potamianos submit, in summary, as follows:

(1) In creating the Source Code in the present case Dr Potamianos was not acting in his capacity as a director of SEL but instead was acting in his capacity as an employee of BDL. The passage from Copinger at 5-186 and the authorities relied upon by SEL deal with different circumstances, and are therefore not in point.

(2) As no express trust is alleged, SEL’s case must be based on a constructive trust, which would require Dr Potamianos “to be treated as having acquired the benefit [ie the relevant property] on behalf of his principal, so that it is beneficially owned by the principal” (see FHR European Ventures LLP v Cedar Capital Partners LLC [2015] 1 AC 250, Lord Neuberger PSC at [7]; Snell’s Equity, 33^rd edn, 9-023, 26-006). However, this argument fails for the same reason, namely that the relevant copyright works were created by Dr Potamianos in his capacity as an employee of BDL and not in his capacity as a director of SEL.

(3) If the relevant Contracts do not require BDL to deliver up or assign copyright in the Source Code, Dr Potamianos cannot be in breach of duty by causing BDL to act in accordance with the terms of those Contracts, to which SEL’s board of directors had agreed, which were materially identical to the contracts with SEL’s other directors, and which had operated without any request for the Source Code for many years previously. In short, there can be no unauthorised profit or conflict of interests in respect of circumstances which SEL has agreed (i.e. authorised) in accordance with the Contracts.

(4) The like arguments apply if and to the extent that SEL seeks to place reliance on the directors’ duties described in the Companies Act 2006 under section 172 (“act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole”) and section 175 (“avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company”).

259. My conclusions in relation to SEL’s other arguments make it unnecessary to decide SEL’s alternative case based on directors’ duties, and in those circumstances I consider that it is preferable not to extend this judgment by seeking to arrive at a conclusive determination of all the points that are summarised above. The arrangements that SEL chose to enter into with Dr Potamianos and BDL (and with SEL’s other directors and their service companies) gave rise to a significant risk of conflict of interests. However, that conflict was not concealed from SEL, and I therefore broadly agree with BDL and Dr Potamianos that the claim based on directors’ duties adds nothing to the claim based on the Contracts: if the claim based on the Contracts succeeds, SEL has no need of the claim based on directors’ duties; whereas if the claim based on the Contracts fails it is not easy to see how claims of breach of duty could arise where Dr Potamianos has done no more than to cause BDL to act in accordance with the terms of those Contracts.

260. However, that does not mean that SEL’s invocation of directors’ duties is irrelevant to the issues I have to decide. On the contrary, the existence of the Contracts did not relieve Dr Potamianos of all duties towards SEL in respect of the Source Code.

261. When it became apparent that SEL on the one hand and BDL and Dr Potamianos on the other had a difference of understanding as to the rights to the Source Code, and when SEL asked where it was and how SEL could access it, I consider that Dr Potamianos was not entitled to act in a manner that was detrimental to SEL by being evasive or misleading, including by dissembling as to those matters. SEL was entitled to be provided with a candid statement of his position, so that it had an opportunity to decide how to respond to it, for example by working round his denial of rights and access.

262. Regrettably, Dr Potamianos saw things differently, and did not comply with this duty. A single illustration suffices:

(1) On 19 August 2016 there was a meeting between Mr Prescott and Dr Potamianos, which Mr Prescott taped.

(2) During the course of that meeting, Dr Potamianos said “Your position is I am withholding the IPR, mine is not”; Mr Prescott said “I think it’s more, more that you question it, you question the ownership of it”; Dr Potamianos said “Well, again, what is the IPR I’m saying? The, the ownership of it, I never questioned, I say it belongs to the company. That’s why it was in the company vaults … So I’m not looking to dispute it”; Mr Prescott said “But we can’t find it”; Dr Potamianos said “Yes, as I say, that is not, is what we call an untrue statement because you have already found it”; Mr Prescott said “Well we have only found 6.11”.

(3) By reference to later parts of the transcript, in one of which Dr Potamianos referred to “the IP” as “specific pieces of work which I have delivered in the way of deliverables”, Dr Potamianos contended that what he was referring to, and what he believed was being discussed, in this earlier section was not the source code. I reject that contention. It must have been clear to Dr Potamianos that Mr Prescott was referring the source code, both from the language used by Mr Prescott and the history, in which many antecedent references had been made to SEL’s concerns regarding ownership and accessibility of source code and none to any like concerns in relation to object code. That is confirmed by the emails that were exchanged between Mr Prescott and Dr Potamianos a few days later, in which Mr Prescott made clear that in referring to v6.13 (and by the same token in referring at the meeting to v6.11) he was referring to source code, and yet Dr Potamianos steadfastly declined to answer straightforward questions about it.

(4) On 25 August 2016, Mr Prescott sent Dr Potamianos the following email:

“At our last meeting you told me we should be able to find 6.13 on the system. We have searched for it but couldn’t find it. Please could you tell me the location.”

(5) Dr Potamianos replied as follows by email of the same day:

“I am pretty certain we did not discuss software issues in our last meeting of August 19, is that what you mean by 6.13?

I have full notes myself of what we discussed, would you like me to sit down with you to produce such notes as accurately as we possibly can?

In order to help further with my understanding of what you are trying to do, can you tell me who you are referring to as “we” (“we have searched for it”), and what is the reason for searching in the first place, please?”

(6) Mr Prescott replied by email dated 26 August 2016 as follows:

“No need to go over notes as there must be some misunderstanding. I am referring to the latest version of the source code. We is Mark [Gardiner] and myself on behalf of the Company which I believe owns it and should be in possession of it. So I would appreciate you letting me know where it is located.”

(7) This reflects, and I so find, that right up to August 2016, while Mr Prescott was being open and clear about SEL’s position both as to ownership of the Source Code and as to the right to access it, Dr Potamianos was not being direct, frank or remotely helpful about those matters. On the contrary, Dr Potamianos was professing a standpoint which contradicts the stance that he has adopted in these proceedings, and was then avoiding answering a direct and simple question by professing a lack of understanding of what was being asked of him that I am certain he did not have, and by asking questions which he knew to be irrelevant.

(8) There was nothing unclear about Mr Prescott’s email dated 25 August 2016, but even if there had been, any lack of clarity was resolved by his email dated 26 August 2016. However, Dr Potamianos did not reply to that second email.

(9) Moreover, his suggestion that software issues had not been discussed at the meeting was disingenuous, especially as he suggested (at a time when he did not know the meeting had been taped) that he could back this is up with “full notes”. Any such notes would either have shown that the claim that software issues had not been discussed was untrue, or would themselves have been inaccurate.

(10) In my opinion, Dr Potamianos is unable to justify acting in this way by relying either on the terms of the Contracts or on any genuine disagreement that he may have had with SEL’s stance as to ownership of, and rights of access, to the Source Code. He was in a position to behave as he did because he alone knew what Source Code had been created and where it was stored, and he alone had that knowledge because of the trust that had been placed in him by SEL with regard to those matters. He was using that knowledge, obtained by him in that way, for his own ends, seeking to gain an advantage for himself in his wrangling with Mr Prescott and other SEL personnel. All this was contrary to the duties that he owed to SEL, and was detrimental to SEL for the reasons that I have identified above.

BDL’s claim for infringement of copyright

263. It is not in issue that the Source Code written by Dr Potamianos is a copyright work, and that copyright in that work would be infringed by anyone who without the licence of the copyright owner reproduces the whole or a substantial part of that work, for example by editing it or compiling it (see sections 3(1)(b), 16, and 17 of the CDPA).

264. Accordingly, SEL accepts that unless it owns or is licensed to exploit the copyright in the Source Code, the use that it has made of v6.11 (which it has located and worked on pending the resolution of the current dispute) was an infringement of copyright, and that it will generally be an infringement for SEL to edit and compile v6.11 in the future.

265. It is also not in issue that an assignment of copyright must be in writing, and be signed by or on behalf of the assignor (see section 90 of the CDPA).

266. However, SEL relies on the proposition that assignments which do not meet this formality may take effect in equity (see Copinger, at 5-190) and that it is one of the incidents of equitable ownership of copyright that an equitable owner has a defence to an infringement claim except one brought by a bona fide purchaser of the legal title for value without notice (see Copinger, at 5-196 to 5-199). Further, SEL submits that for the same reasons as it relies upon in support of its claim to access to Source Code, SEL owned the copyright in the Source Code and that this is what must have been intended.

267. BDL and Dr Potamianos disputed SEL’s claims of ownership of copyright on all the grounds that they relied on concerning the meaning and effect of the Contracts. BDL’s claim for infringement of copyright is, therefore, simply the other side of the same coin: if those arguments prevail, SEL’s claim will fail and their claims will succeed.

268. I have rejected this part of the case of BDL and Dr Potamianos. It follows that BDL’s counterclaim for infringement of copyright must fail for the reasons given by SEL.

The claim for relief

269. SEL contends as follows. SEL is entitled to an order for delivery to it of all the Source Code and Documents as listed in paragraphs 57 and 58 and paragraph 1 of the prayer for relief in the Particulars of Claim. By failing to provide such Source Code and Documents, BDL is in breach of the Contracts, entitling SEL to damages. By causing BDL to withhold such materials, Dr Potamianos is in breach of his duties to SEL as a director, and SEL therefore claims as against him delivery up of the Source Code and Documents (insofar as he rather than BDL has them) and damages for his failure to provide them, and causing BDL to withhold those materials. All these claims are pleaded in the Particulars of Claim, and, liability for them falls to be determined at the present trial, although quantum will be left over to be determined at a later date.

270. BDL and Dr Potamianos contend that SEL’s claims for delivery up are based solely on the terms of the 1997 Contract, 2000 Contract, and 2015 Contract, and suggest that these claims are properly regarded as claims for specific performance of those Contracts. They submit that any claim for specific performance of the earlier Contracts must fail, on two grounds. First, there can be no order for specific performance of an obligation in any Contract that SEL elected to terminate and replace with a different contract (reliance was placed on Chitty on Contracts (32^nd edn, 2016) at 22-028, 24-050 and Johnson v Agnew [1980] AC 367, Lord Wilberforce at 392). Second, an order for specific performance of an obligation to deliver Source Code is a discretionary remedy. SEL is guilty of extreme delay, having not once requested delivery in the almost 19 years in which these Contracts were collectively in operation, aside from the 2007 Assignment, which was separately negotiated. As to the 2015 Contract, this is expressed to be revocable by either party immediately where there is no active Schedule, with the result that any order for specific performance of that Contract would be nugatory and should be refused (reliance was placed on Chitty, at 27-045). They submit that the claims against Dr Potamianos fail for those reasons mutatis mutandis.

271. BDL and Dr Potamianos also argued that any order needs to be carefully formulated. For example, they submitted that BDL could not be expected to deliver up documents merely “obtained” by Dr Potamianos relating to source code, which are wholly undefined, and may not be permitted by the third parties who created such documents.

272. I do not accept the substantive arguments of BDL and Dr Potamianos. In my judgment, the rights and obligations which SEL is seeking to enforce are rights which were acquired and obligations which fell due to be performed before the dates of discharge of each of those Contracts, and the correct legal analysis in accordance with the provisions of those Contracts and in the events which have happened is that the parties intended those rights and obligations to survive the termination of those Contracts. That conclusion can only be strengthened to the extent that what is sought to be enforced is or is akin to a right to property in respect of which rights have been acquired before the termination of the Contract, and where no question arises of SEL having accepted any breaches of contract as repudiatory and having then elected to pursue a remedy in damages instead of seeking further performance of the Contract.

273. I am equally unpersuaded by the argument based on discretion and alleged delay. The argument about non-delivery to SEL, and for that matter the argument about SEL not needing access to the Source Code in order to carry on in business, are quite unreal. These issues did not come to a head for many years because, in practical terms, the Source Code was delivered to SEL and SEL did have access to it – through the medium of someone who was trusted by SEL to deal with those matters, namely Dr Potamianos. BDL and Dr Potamianos have argued that SEL was prepared to take, and took, the risk that it would be deprived of the Source Code and of access to it in the event that SEL on the one hand and BDL and Dr Potamianos on the other hand went their separate ways, and that (whether or not this was a bad bargain from SEL’s perspective) this made commercial sense, and the Contracts should be interpreted accordingly. I have rejected that line of argument when considering the meaning and effect of the Contracts. When issues about ownership of, and rights of access to, the Source Code began to emerge, SEL made its position clear, but Dr Potamianos acted in a manner that was inconsistent, opaque and evasive. I have no hesitation in concluding that any discretion that falls to be exercised should be exercised in favour of granting SEL relief.

274. As to the precise form of order which should be made in favour of SEL, however, I will hear further submissions in the event that the parties are unable to reach agreement.

Issues 3, 4 and 6

275. Issue 3 is whether BDL is liable to pay any sum to SEL in respect of Schedule No 270416. It is common ground that two payments, each in the sum of £18,000, were made in respect of this Schedule, the first by cheque and the second by BACS. SEL contends that neither payment was authorised by SEL, that Dr Potamianos knew that this was so and that his knowledge in that regard should be imputed to BDL, and that both sums should be repaid to SEL.

276. Issue 4 is whether Dr Potamianos is liable to pay any sum to SEL in respect of his alleged act of procuring Mrs MacDonald to sign a cheque in favour of BDL in the sum of £18,000. The cheque in question is the same cheque as forms the subject of part of SEL’s claim in respect of Schedule No 270 416. SEL’s case is that, in breach of his duties as a director of SEL, Dr Potamianos (a) procured Mrs MacDonald to sign that cheque, and (b) further, signed that cheque himself and then caused BDL to pay it into BDL’s bank account. In light of Mrs Macdonald’s evidence, SEL does not pursue the claim that Dr Potamianos procured her to write the cheque, but SEL does maintain that Dr Potamianos otherwise acted in breach of his duties in his dealings with this cheque. On this basis, SEL contends that Dr Potamianos personally (as well as BDL) is liable to repay this sum of £18,000 to SEL, although SEL does not seek to recover it twice.

277. Issue 6 is whether SEL is liable to pay any sum to BDL pursuant to invoice No 253 dated 30 June 2016 (i.e. the third invoice raised by BDL under Schedule No 270416).

278. Schedule No 270416 states that it relates to “Resolving operation of the “Alter Password” function in PL/X firmware”, and the provision of these services is to commence on 28 April 2016 and be completed by 24 June 2018 for a fixed price of £45,000 which “may be invoiced in monthly instalments”. The Schedule contains signature boxes which make provision for it to be signed by Dr Potamianos on behalf of BDL and by Mr Prescott on behalf of SEL, but it is common ground that it was not signed by anyone.

279. Dr Potamianos’ evidence is that he produced the Schedule on 27 April 2016, and that he agreed it orally with Mr Prescott at a routine business meeting at SEL’s offices in or around mid-April 2016 at which “I mentioned the need to sign new schedules to which he agreed by nodding”. Mr Prescott’s evidence is that he did not agree this Schedule orally, and any suggestion to the contrary “is nonsense”.

280. Dr Potamianos did not give a precise date for this meeting, and there appear to be no documents which relate to it. Dr Potamianos kept the Schedule himself.

281. Dr Potamianos states that, having agreed Schedule No 270416 orally with Mr Prescott, BDL commenced work and duly issued invoice No 251 on 30 April 2016, for the first payment of £15,000 plus VAT that was due under the Schedule.

282. Mrs Macdonald’s evidence is that on Monday 17May 2016 she pre-signed a number of SEL cheques and left them with Dr Potamianos “for safekeeping”. She had been authorised to pay salaries by BACS, but not directors’ service companies. According to her evidence, she signed the cheques in the presence of Dr Potamianos, although he was not sure about this.

283. On the following day, Tuesday 18May 2016, Mrs Macdonald experienced a temporary difficulty in accessing the SEL accounts system remotely, but she was not disconnected from the Barclays online banking system. On the same day, in payment of BDL’s invoice No 251, Dr Potamianos filled in one of these blank cheques in favour of BDL in the sum of £18,000, and added his signature to that of Mrs Macdonald.

284. Due to the way in which part of the cheque had been written out by Dr Potamianos, Barclays called Mr Prescott to query it, and Mr Prescott told Barclays that it was bona fide. Mr Prescott’s evidence is that he thought that it related to an earlier Schedule.

285. On or about 27 May 2016, and on the authority of Dr Gardiner, Mr Pearson made a further payment of £18,000 by BACS to BDL in respect of the same invoice. Mr Prescott’s evidence is that this occurred because neither Dr Gardiner nor Mr Pearson were sure what had happened to the cheque because Mr Prescott had left both of them with the impression that the cheque might not clear and they “didn’t want to pour petrol on an already smouldering fire with BDL’s payments”. Mr Pearson subsequently asked Dr Potamianos to return the duplicate payment. In the meantime, SEL set this payment against invoice No 252, even though that invoice (as well as invoice No 251) had not been authorised by any director of SEL or posted in the accounts system.

286. SEL submitted that, viewed objectively, it is most unlikely that Mr Prescott would have agreed to a further Schedule in mid-April 2016, in circumstances where by that time relations with Dr Potamianos were poor. Among other things, in an email dated 19 February 2016 Mr Prescott had stated to Dr Potamianos: “I want the Company to be able to independently support and develop the existing platform. This will require you/BDL to assist in the training of a new engineering resource. I want this to be in place before commencing on any other software project.”

287. SEL argued that Dr Potamianos’ account was unreliable and showed signs of having been fabricated. For example, he claimed that he wrote the cheque because he knew that Mrs Macdonald had been disconnected from the Barclays system, whereas in fact she had not been disconnected. SEL suggested that the true position is as follows: (a) as the end of April 2016 approached, Dr Potamianos realised he would not be able to obtain BDL’s monthly payment for May unless he had an invoice issued by the end of the month; (b) he therefore made up the Schedule No 270416 on 27April 2016 and issued invoice No 251 at the end of the month; (c) when Mrs Macdonald’s services were dispensed with on 16May 2016, Dr Potamianos was left with the problem that Mr Pearson might raise the question of payment to BDL with Mr Prescott, and he would not be paid; and (d) Dr Potamianos therefore took matters into his own hands, and wrote a cheque to BDL knowing that the underlying schedule was not authorised.

288. SEL pointed out that although Dr Potamianos claims that he has done the work under this Schedule, so that BDL is entitled to payment in full, BDL has not to date provided anything to SEL.

289. SEL contends that it is not liable to pay invoice No 253 dated 30 June 2016 raised by BDL under Schedule No 270416, because the Schedule was not authorised by SEL.

290. BDL and Dr Potamianos contend that the reference to “software project” in the email dated 19 February 2016 from Mr Prescott to Dr Potamianos is not a reference to Schedules but is instead a reference to the “Bardac project”, which is referred to both later on in that email and also in emails which precede and follow it. In fact, Mr Prescott first notified Dr Potamianos that no further Schedules would be agreed by email dated 15 July 2016, in which Mr Prescott stated “I cannot see how any further schedules can be undertaken by BDL until the IPR issue has been resolved”. Dr Potamianos’ evidence is that he was first informed that Schedule No 270416 was disputed by a letter from SEL’s solicitors dated 16 November 2016. BDL and Dr Potamianos therefore contend that there was no obstacle to this Schedule being agreed, and that there was a surprising delay before SEL suggested that it had not been agreed.

291. BDL and Dr Potamianos suggest that it is implausible that, before authorising payment of the cheque, Mr Prescott would not have checked to find out what Schedule it related to, especially if it was unusual to pay BDL by cheque; and that it is also implausible that SEL would not have made similar checks before authorising the further payment.

292. BDL and Dr Potamianos further contend, in summary, as follows. First, although it is SEL’s pleaded case that a signature was required for a Schedule to form a binding contract, a signature was not the only valid form of acceptance of proposed “Services”, and in practice could be and was commissioned without a Schedule first being signed. Second, even if that was a requirement, it could be waived (see Chitty at [2-066]: “Even if the prescribed method of acceptance is not complied with, the offeror would no doubt be bound by, and apparently entitled to enforce, the contract if he had acquiesced in a different mode of acceptance and had so waived the stipulated mode”, and Oceanografia SA de CV v DSND Subsea AS (The Botnica) [2007] 1 All ER (Comm) 28 at [89]-[90]) or defeated by estopped by convention (see Chitty at [4-108] to [4-115]). Third , with regard to the claim for breach of duty against Dr Potamianos, and leaving entirely to one side other points such as that Dr Potamianos believed that payment was due, it is clear that Mr Prescott authorised payment of the cheque when enquiries were made by Barclays, and his suggestion that he would not have authorised payment if Dr Potamianos had asked him to do so lacks credibility and should be rejected.

293. BDL and Dr Potamianos submit that the counterclaim in respect of invoice No 253 stands or falls with their case on invoices Nos 251 and 252. If Schedule 270416 was authorised, invoice No 253 is payable in respect of the final instalment of £15,000 plus VAT that is due thereunder and on payment BDL will supply any material “Deliverable”. That aspect of their case does not appear to be disputed by SEL.

294. I prefer the case of BDL and Dr Potamianos on these points. In my opinion, it is significant to have regard to two matters in particular.

295. First, SEL’s case as summarised above does not simply allege an instance of charging for work for which there was no contractual entitlement, but instead alleges a concerted pattern of commercially unacceptable behaviour, involving or at least bordering on dishonesty. SEL has failed to make out its case with the cogency commensurate with proving such serious allegations, albeit only on the balance of probabilities. In fact, when the issue about the cheque arose, Dr Potamianos ascertained from Barclays that “the clearing people didn’t like it that I had gone over the “Y” … making it thicker than the other letters”, and reported this to Mr Prescott by email dated 20 May 2016. It is clear from this not only that Dr Potamianos was unabashed that payment was being made to BDL by cheque (although SEL’s case, and Mr Prescott’s evidence, is that BDL had never been paid by cheque before) but also that Dr Potamianos was happy to acknowledge that he had personally completed the cheque. This record of behaviour on the part of Dr Potamianos sits ill with SEL’s case asserting deviousness.

296. Second, I consider that it is important not to lose sight of the overall purpose for which Schedules were agreed, which was, as discussed above, to enable Mr Prescott and Dr Potamianos to making drawings in the ratio of 60:40. In my view, this goes to the plausibility of Dr Potamianos’ case that he obtained Mr Prescott’s assent to the need to agree further Schedules in mid-April 2016, to whether there were any material misunderstandings on the part of SEL’s personnel when payments were authorised, and to whether SEL has suffered any loss by paying the particular sums that are in question.

297. For these reasons, I determine Issues 3, 4 and 6 in favour of BDL and Dr Potamianos.

298. BDL and Dr Potamianos made submissions on the interest that would be payable in the event that they succeeded on Issue 6, and made reference to the Late Payment of Commercial Debts (Interest) Act 1998. I do not propose to rule on that further matter in this judgment, not least because it should be capable of agreement between the parties.

Issue 5

299. Issue 5 is whether BDL failed to perform contracts Nos. 200815 and 130116 or has otherwise acted in breach of such contracts as alleged in paragraph 76 of the Particulars of Claim (sic) (in my view, this should refer to paragraphs 72 to 76 of the Particulars of Claim), and if so whether SEL is entitled to repayment of any money or to damages as a result. If SEL succeeds on either claim, quantum will be determined at a later hearing in accordance with paragraph 2 of the Order of Snowden J dated 8 November 2017.

Schedule No 200815

300. Schedule No 200815 was issued under the 2015 Contract, and is in respect of “Migrating JL/X to the New Microchip Platform” for the sum of £42,000 plus VAT. It gave a commencement date of 24 August 2015 and an end date of 10 November 2015. It was authorised and signed by Mr Prescott. JL/X is the AC version of SEL’s PL/X product, which has already moved from the Intel platform to the Microchip platform.

301. BDL issued invoices Nos. 243, 244 and 245 in respect of this Schedule dated 31 August 2015, 30 September 2015 and 31 October 2015, all of which have been paid by SEL.

302. BDL and Dr Potamianos contend that this Schedule was in respect of stage 1 of a 3 stage process listed by Mr Lock at items (18) to (20) of the document which Dr Potamianos headed “PL/X Improvements”, namely “(18) Bare minimum implementation of JLX (partially complete”; (19) Full implementation of JLX to copy Intel platform; (20) Restructuring of JLX”. They contend that they delivered the object code required for stage 1 of “bare minimum implementation”, that is to say the minimum to make the code work on the new platform.

303. SEL disputes that the project was a 3 stage project as now suggested by BDL and Dr Potamianos: Mr Lock’s document merely comprises his handwritten notes concerning a number of outstanding issues. SEL accepts that some work was done pursuant to this Schedule, but contends that what was delivered was commercially unsatisfactory and could not be released to the market, as reflected in the minutes of the SEL Cobra meeting dated 9 September 2015: “A step forward has been made in moving the JL/X firmware to the Microchip platform although this only gives a bare minimum of functionality. For the time being Intel platform boards will continue to ship for JL/X applications”.

304. According to the evidence of Mr Prescott, what was required was a simple task of making changes to the customer menu for the JL/X to replicate features of the Intel platform in the Microchip platform, Dr Fells sorted out the issues in a couple of weeks, and as soon as SEL is ready to move from v6.13 to the next market release version this work product can be merged to create the new version of the JL/X source code.

305. SEL suggests that that the reality is that Dr Potamianos became so pre-occupied with his disputes with Mr Prescott that he hardly did any software development work during 2015 and 2016. Dr Gardiner confirms that the work was not completed, and that it has not been possible for SEL to ship the Microchip version.

306. BDL and Dr Potamianos further rely on the fact that SEL did not complain for 9 months, at which point it refused to pay any more invoices and so BDL stopped work. Mr Prescott’s answer to this is twofold. First, at the material time he was occupied in putting together an offer to buy Dr Potamianos’ shares and “maximum goodwill was the order of the day”. Second, everything that occurred from the beginning of the dispute between the parties has to be viewed in the context that Dr Potamianos was “holding SEL to ransom in respect of the source code”.

307. Finally, BDL and Dr Potamianos contend that because (as Mr Prescott accepts) Dr Potamianos would determine what work BDL should do under the Schedules, Mr Prescott and SEL “cannot pretend” to know more about that matter than Dr Potamianos. They contend that Mr Prescott is simply blaming BDL for stopping work after he refused to pay for any further work. Their case is that Mr Prescott accepted this in cross-examination. However, that is not my understanding of Mr Prescott’s evidence: what he accepted was that if there were further stages of work to be done under Schedule No 200815 after he had sent his email dated 15 July 2016 (in which he stated that he could not see how any further schedules could be undertaken by BDL “until the IPR issue has been resolved”) then BDL plainly had a reason for stopping work; but that begs the questions of what work that Schedule envisaged being done, and when.

308. I do not accept that the work described in Schedule No 200815, namely “Migrating JL/X to the New Microchip Platform”, equates to “bare minimum implementation of JL/X”. Accordingly, whether or not Mr Lock’s manuscript document is properly to be regarded as pure jottings or as setting out discrete stages of work, I consider that BDL agreed to do more than what was described in Mr Lock’s paragraph (18). The fact that, in practical terms, Dr Potamianos determined what work BDL would do under the Schedules does not provide grounds for upholding the interpretation that Dr Potamianos now seeks to place on the description of the work that was given in the Schedule. On the contrary, it provides grounds for holding him/BDL to the description that he used. Further, both the total sum charged and the period of time over which the work was to be undertaken accord with more work than “bare minimum implementation of JL/X”.

309. In addition, I do not accept the arguments of BDL and Dr Potamianos to the effect that BDL was excused from completing the work described in Schedule No 200815 on the grounds that SEL suspended further work or made clear that it would not pay for it. The Schedule related to work between 24 August 2015 and 10 November 2015, but Schedule No 130116 dated 13 January 2016 was agreed after those dates, in respect of which BDL issued and was paid invoices Nos 248, 249 and 250 dated 31 January 2016, 29 February 2016 and 31 March 2016, for £13,000, £14,000 and £13,000, plus VAT.

310. For these reasons, I hold that BDL failed to perform Schedule No 200815 or has otherwise acted in breach of that contract as alleged in paragraphs 72 to 74 of the Particulars of Claim, and that SEL is entitled to damages for breach of contract as a result.

311. I am not dissuaded from reaching that conclusion by a further point that was taken by BDL and Dr Potamianos, namely that SEL’s pleaded case, at paragraph 78 of the Particulars of Claim, quantifies the damages claimed as the price agreed under the Schedule, whereas damages should correspond to the loss (if any) resulting from the breach. Accordingly, BDL and Dr Potamianos submitted that SEL was in breach of its duty to plead a valid basis on which damages can be quantified, as a matter of fairness to them (see Perestrello E Companhia Limitada v United Paint Co Ltd [1969] 1 WLR 570, at 579-580), that in these circumstances only nominal damages should be awarded to SEL for any breach, and that there was no need for any subsequent trial on quantum.

312. In my view, SEL’s pleaded claim for damages notifies BDL and Dr Potamianos of the case that they have to meet. If they wanted to argue that this case is so misconceived that it could only properly result in an award of nominal damages even if SEL succeeds on the issue of liability, I consider that they could and should have raised that argument before the Order was made on the Case Management Conference on 8 November 2017. In that way, if the argument had been accepted, the time and costs that have been expended on the trial of liability under this heading could have been saved, on the footing that, generally speaking, a claimant does not come to court to obtain an award of only nominal damages, and it will not generally accord with the overriding objective to order a trial in which such an award is the best that the claimant can expect to achieve. Having not taken the point at that stage, I consider that, in accordance with the Order that was made by Snowden J, quantum falls to be determined at a further trial.

Schedule No 130116

313. Turning to Schedule No 130116, as already discussed above this describes the Services as “Investigation into alternative event structures in PL/X firmware to fix the problem with occasional dropping-out of Standby Field”. Dr Potamianos stated that this refers to a minor bug in v6.13 of the Source Code. The Schedule states at Clause 2.3 that “the presence of ‘bugs’ does not of itself indicate defective services; and the rectification of ‘bugs’ is part of the normal development process, and chargeable as such”.

314. SEL’s case is that nothing was provided and indeed nothing has been offered under this contract. SEL submits that it is probable that nothing was done because by January 2016 Dr Potamianos on the one hand and the other directors of SEL on the other hand were in dispute, and Dr Potamianos had become pre-occupied with this issue. SEL therefore claims to be entitled either to the return of money paid or to damages.

315. This is disputed by BDL and Dr Potamianos, whose evidence is summarised above. In short, Dr Potamianos contends (1) that the contract “was for investigatory work only and not implementation”, (2) that “BDL duly undertook the relevant investigatory work between the end of January and the beginning of April 2016”, and (3) that “[although] I did not achieve the full reliability I was looking for and … could not furnish the desired solution … [I] now have a better appreciation of the mechanism causing the problem”.

316. This is another instance in which SEL’s case essentially rests on an allegation that Dr Potamianos has put forward a concertedly dishonest account. I am not prepared to uphold that contention. On the contrary, I agree with BDL and Dr Potamianos that he has the requisite expertise to give evidence as to what required to be done, what he did, and what results he achieved, and that his explanation is plausible. An investigation into a problem will not necessarily yield a solution. Further, if and in so far as SEL’s case is based on the assertion that Dr Fells was able to fix the bug very quickly, that case is not assisted by the fact that SEL did not call Dr Fells to give evidence on the point.

317. There is also some tension between SEL’s claim that nothing was done pursuant to this Schedule, and SEL’s claims, which I have upheld, to be entitled to delivery up of the fruits of the labours which Dr Potamianos claims to have carried out pursuant to it.

318. For these reasons, to the extent that they go beyond the claims in respect of delivery up of materials which I have already upheld on the proper construction of the 2015 Contract, I reject SEL’s claims that BDL failed to perform Schedule No 130116 or has otherwise acted in breach of that contract as alleged in paragraph 76 of the Particulars of Claim, and that SEL is entitled to damages for breach of contract as a result.

THE UNFAIR PREJUDICE CLAIM

The relevant legal principles

319. Pursuant to section 994(1)(a) of the Companies Act 2006 (“CA”) a member of a company may petition the Court on the ground that “the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of… some part of its members (including at least himself)”. Pursuant to section 996(1) of the CA, the Court “may make such order as it thinks fit for giving relief in respect of the matters complained of” including (see section 996(2)(e) of the CA) an order requiring the other members of the company to purchase the petitioner’s shares (a “buy-out order”).

320. It follows, and it is common ground, that, to be eligible for relief, Dr Potamianos must establish that: (1) the acts or omissions of which he complains consist of the management of the “affairs of the company”; (2) the conduct of those affairs has caused prejudice to his interests as a member of the company; and (3) the prejudice is unfair.

321. It is also common ground that (1) the words “the affairs of the company” are extremely wide, and the Court will not adopt a technical approach but will look at the business realities; (2) the “affairs of the company” may include the affairs of a subsidiary; and (3) the affairs of a subsidiary can include the affairs of its holding company, and this is especially so where the directors of the holding company, which necessarily controls the subsidiary, also represent a majority of the directors of the subsidiary (see Rackind v Gross [2005] 1 WLR 3505, Sir Martin Nourse at [26]).

322. Mr Prescott submitted that what matters when considering whether the conduct of the affairs of one company also constitute conduct of the affairs of another is whether one company is controlled by or has control of the other in practical terms (see Nicholas v Soundcraft [1993] BCLC 360; Re Neath Rugby Club (No 2) [2008] BCC 390, Lewison J at [214] – in which Lewison J said that s994 of the CA “is not designed to deal with the situation where one company deals with another on an arm’s length basis”).

323. Prejudice may arise from a range of circumstances, including mismanagement, a failure to consult, and exclusion, and includes damage to the value of the shares.

324. There must be a causal link between the conduct complained of and the unfair prejudice suffered by the shareholder.

325. The CA does not contain guidance as to what is “unfair” in this context. However, in Southern Counties Foods [2008] EWHC 2810 (Ch) Warren J said at [41]:

“The principles can, in large part, be distilled from the well-known cases of Saul D Harrison & Son plc [1995] 1 BCLC 14 and O’Neill v Phillips [1999] 1 WLR 1092. A shareholder generally needs to establish one of the following: (a) A breach of the terms on which he agreed that the affairs of the company should be conducted; (b) That equitable considerations (those referred to by Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 at 379) arising at the time of the commencement of the relationship or subsequently, make it unfair for those conducting the affairs of the company to rely on their strict legal rights; (c) That the board of directors has exceeded the powers vested in them or have exercised their powers for an illegitimate or ulterior purpose; or (d) Some event putting an end to the basis on which the parties have entered into association with each other, making it unfair that one shareholder should insist on the continuance of the association.”

326. If the shareholder agreed to or acquiesced in or was complicit in the conduct complained of, or led those controlling the company to act in the manner complained of, that may affect whether that conduct is unfair, as may misconduct on the part of the shareholder, which may justify (for example) exclusion or removal as a director (see Hollington on Shareholders Rights, 8^th edn (“Hollington”) at [7-142] and [7-144]; Minority Shareholders – Law, Practice and Procedure, 5^th edn, ed Joffe (“Joffe”) at [6.158] and [6.161]).

327. The concept of being “unfairly prejudicial” was considered in O’Neill v Phillips [1999] 1 WLR 1092. Lord Hoffmann, speaking for the House of Lords, explained at 1098-1099 that on the one hand “a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted” whereas on the other hand “there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers” such that “unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith”. (The term “quasi-partnership” is often used to describe one category of relationship where such equitable considerations arise, and I take this to be the thinking behind the formulation of Issue 1 in the present case.)

328. At 1102, Lord Hoffmann endorsed and re-iterated the characteristics identified by Lord Wilberforce in In re Westbourne Galleries Ltd [1973] AC 360 as commonly giving rise to equitable restraints upon the exercise of powers under the articles, as follows: “(1) an association formed or continued on the basis of a personal relationship involving mutual confidence; (2) an understanding that all, or some, of the shareholders shall participate in the conduct of the business; and (3) restrictions on the transfer of shares, so that a member cannot take out his stake and go elsewhere”. It is common ground that this is not an exhaustive list of the factors which may give rise to equitable restraints.

329. Lord Hoffmann had earlier (also at 1102) cited as an example of circumstances in which a relationship between company members might mean that, on equitable principles, it would be regarded as unfair for a majority to exercise a power conferred upon them by the articles to the prejudice of another member:

“the standard case in which shareholders have entered into association upon the understanding that each of them who has ventured his capital will also participate in the management of the company. In such a case it will usually be considered unjust, inequitable or unfair for a majority to use their voting power to exclude a member from participation in the management without giving him the opportunity to remove his capital upon reasonable terms.”

330. At 1107-1108, Lord Hoffmann explained that a reasonable offer to buy out a minority shareholder may have the effect that an exclusion does not amount to unfairly prejudicial conduct, and provided guidance as to what is reasonable in that regard:

“In the present case, Mr Phillips fought the petition to the end and your Lordships have decided that he was justified in doing so. But I think that parties ought to be encouraged, where at all possible, to avoid the expense of money and spirit inevitably involved in such litigation by making an offer to purchase at an early stage. This was a somewhat unusual case in that Mr Phillips, despite his revised views about Mr O’Neill’s competence, was willing to go on working with him. This is a position which the majority shareholder is entitled to take, even if only because he may consider it less unattractive than having to raise the capital to buy out the minority. Usually, however, the majority shareholder will want to put an end to the association. In such a case, it will almost always be unfair for the minority shareholder to be excluded without an offer to buy his shares or make some other fair arrangement. The Law Commission Report on Shareholder Remedies, at pp. 30–37, paras. 3.26–56 has recommended that in a private company limited by shares in which substantially all the members are directors, there should be a statutory presumption that the removal of a shareholder as a director, or from substantially all his functions as a director, is unfairly prejudicial conduct. This does not seem to me very different in practice from the present law. But the unfairness does not lie in the exclusion alone but in exclusion without a reasonable offer. If the respondent to a petition has plainly made a reasonable offer, then the exclusion as such will not be unfairly prejudicial and he will be entitled to have the petition struck out. It is therefore very important that participants in such companies should be able to know what counts as a reasonable offer.

In the first place, the offer must be to purchase the shares at a fair value. This will ordinarily be a value representing an equivalent proportion of the total issued share capital, that is, without a discount for its being a minority holding. The Law Commission (paragraphs 3.57–62) has recommended a statutory presumption that in cases to which the presumption of unfairly prejudicial conduct applies, the fair value of the shares should be determined on a pro rata basis. This too reflects the existing practice. This is not to say that there may not be cases in which it will be fair to take a discounted value. But such cases will be based upon special circumstances and it will seldom be possible for the court to say that an offer to buy on a discounted basis is plainly reasonable, so that the petition should be struck out.

Secondly, the value, if not agreed, should be determined by a competent expert. The offer in this case to appoint an accountant agreed by the parties or in default nominated by the President of the Institute of Chartered Accountants satisfied this requirement. One would ordinarily expect the costs of the expert to be shared but he should have the power to decide that they should be borne in some different way.

Thirdly, the offer should be to have the value determined by the expert as an expert. I do not think that the offer should provide for the full machinery of arbitration or the half-way house of an expert who gives reasons. The objective should be economy and expedition, even if this carries the possibility of a rough edge for one side or the other (and both parties in this respect take the same risk) compared with a more elaborate procedure. This is in accordance with the terms of the draft Regulation 119: Exit Right recommended by the Law Commission: see Appendix C to the report, p. 133.

Fourthly, the offer should, as in this case, provide for equality of arms between the parties. Both should have the same right of access to information about the company which bears upon the value of the shares and both should have the right to make submissions to the expert, though the form (written or oral) which these submissions may take should be left to the discretion of the expert himself.

Fifthly, there is the question of costs. In the present case, when the offer was made after nearly three years of litigation, it could not serve as an independent ground for dismissing the petition, on the assumption that it was otherwise well founded, without an offer of costs. But this does not mean that payment of costs need always be offered. If there is a breakdown in relations between the parties, the majority shareholder should be given a reasonable opportunity to make an offer (which may include time to explore the question of how to raise finance) before he becomes obliged to pay costs. As I have said, the unfairness does not usually consist merely in the fact of the breakdown but in failure to make a suitable offer. And the majority shareholder should have a reasonable time to make the offer before his conduct is treated as unfair. The mere fact that the petitioner has presented his petition before the offer does not mean that the respondent must offer to pay the costs if he was not given a reasonable time.”

The dispute in outline

331. Mr Prescott disputes all the grounds which form the basis for the petition which Dr Potamianos has presented. In the event that Dr Potamianos is entitled to relief, however, he accepts that the appropriate order would be a buy-out order. Nevertheless, the basis upon which any such order should be made is hotly contested. Further, Mr Prescott suggests that any buy-out order should be made against SRL. For his part, Dr Potamianos is concerned that the order should be complied with, and that SRL may not have the means to comply with it. I suggested that, in the event that a buy-out order was to be made, a practical solution would be to make the order against SRL in the first instance, and to provide that Dr Potamianos should have liberty to apply in the event that SRL did not comply with it. I understood that solution to be acceptable to all parties. Accordingly, in the event that Dr Potamianos establishes that he is entitled to relief, no issue arises as to the form of order that would be appropriate.

332. Dr Potamianos’ petition makes the following principal points:

(1) SRL was and is a quasi-partnership, and in any event Dr Potamianos and Mr Prescott understood that Dr Potamianos would participate in the management of both SRL and SEL.

(2) Mr Prescott’s conduct unfairly prejudiced Dr Potamianos’ interests as a shareholder: Mr Prescott excluded Dr Potamianos from the management of SRL and SEL in a variety of ways (without making a reasonable offer for Dr Potamianos’ shares), and caused SEL to incur unnecessary or excessive expenditure.

(3) Mr Prescott’s conduct was also unfairly prejudicial because it amounted to breaches of his directors’ duties. In accordance with the Order of Barling J made at the Pre-Trial Review on 11 April 2018, Dr Potamianos has submitted a list identifying 12 matters which he relies on as amounting to various breaches of duty, mostly pursuant to sections 171 and 172 of the CA, but in some instances pursuant to sections 175 and 177 also.

333. In response, Mr Prescott contends:

(1) SRL was not or ceased to be a quasi-partnership, and there was no understanding that Dr Potamianos would participate in management except that he could act as a director until and unless he was removed.

(2) Mr Prescott made reasonable offers for Dr Potamianos’ shares in SRL.

(3) Mr Prescott’s conduct was not unfairly prejudicial (or in breach of his director’s duties) and Dr Potamianos’ conduct gave valid grounds for excluding him.

334. Dr Potamianos’ case, in summary, is as follows. The present dispute had its genesis in 2014. Mr Prescott wished to appoint Mr Keen and Dr Gardiner as a “succession team” of JMDs of SEL so that he could retire. Although Mr Prescott suggested that Dr Potamianos also wanted to retire, in fact Dr Potamianos had no immediate intention of retiring as he wanted to work on the firmware for the Microchip platform. In May and June 2014, Mr Keen and Dr Gardiner prematurely announced their appointment and Mr Keen announced Dr Potamianos’ retirement while Dr Potamianos was on holiday. Dr Potamianos objected to this, regarded the apology that he received as unsatisfactory, and thought that Mr Keen and Dr Gardiner should return to their previous roles temporarily for supervision, while retaining their job titles.

335. This triggered a chain of events from January 2015, ending in April 2017 with Dr Potamianos’ removal as a director of SEL, which he summarises as follows:

(1) The dismissal of Mrs Macdonald, her subsequent dismissal after reinstatement, and her replacement by Mr Pearson.

(2) Mr Prescott’s broken promise to pay for the cost of retaining Mr Van Der Wee if the latter stayed after June 2015.

(3) Mr Prescott’s secret recruitment of Dr Fells to reverse engineer and recreate the Source Code.

(4) The adoption of a business plan drawn up by Mr Keen and Dr Gardiner.

(5) The unauthorised copying of a recent version of the Source Code found on Dr Potamianos’ private partition on the SEL server, and attempts to modify that code.

(6) The termination of BDL’s services to SEL.

(7) Mr Prescott’s secret recording of a meeting with Dr Potamianos.

(8) The formation of the Sub-Committee.

(9) Mr Prescott’s appointment of Dr Gardiner to the board of SRL to vote to remove Dr Potamianos as a director of SEL.

(10) Dr Potamianos’ exclusion from Peregrine House while still a director of SEL.

336. Mr Prescott contends, in summary:

(1) There was no breach by Mr Prescott of the terms on which he and Dr Potamianos agreed that the affairs of either SRL or SEL should be conducted. As this was not a quasi-partnership, there are no equitable considerations which make it unfair for Mr Prescott to rely on his strict legal rights.

(2) Absent a quasi-partnership, a director has no right to remain in office, even if he is also a member of the company; and even in a quasi-partnership case, removal may be justified, so that it is not unfair: “a petitioner may behave in such a way as to deserve his exclusion or his removal as a director, or as to make it clear that his continued involvement in the company places the efficient conduct of its business in jeopardy” (Joffe at [6.158]).

(3) Dr Potamianos’ case is fundamentally at odds with the concept of a quasi-partnership because he contends that the benefit of his works on the source code was not a contribution to SEL at all, but inured for the benefit of BDL.

(4) Although there was no duty to consult, in fact it is clear from the documents and evidence that Dr Potamianos was appraised as to the issues about which he now complains.

(5) Mr Prescott has not acted other than in what he believed to be in the best interests of SRL and SEL; he was not dishonest; he did not exercise his powers as a director for an improper purpose; and far from being motivated by a desire to take control of SRL and SEL by excluding Dr Potamianos, it is plain that: (a) Mr Prescott repeatedly tried to include Dr Potamianos in SEL’s business, although Dr Potamianos did not co-operate in this and (b) Dr Potamianos was perfectly amenable in principle to a sale of his shares to Mr Prescott.

(6) The formation of the Sub-Committee in September 2016 and removal of Dr Potamianos as a director in April 2017 were necessary in both practical and legal terms. These steps were justified by Dr Potamianos’ misconduct, which was serious. SEL could not allow Dr Potamianos to continue to be authorised to act on its behalf or have access to its property, personnel, customers or suppliers in the circumstances which arose. Had the other directors permitted him to do so, they would themselves have been at risk of being in breach of their own duties to SEL.

337. In accordance with the Order of Snowden J dated 8 November 2017, there are 5 principal issues which are to be tried on the present occasion. In accordance with a proviso to the second of those issues, “any question concerning the reasonableness of Mr Prescott’s offer(s) for [Dr Potamianos’] shares shall, in so far as that question requires expert valuation evidence, be determined at any further trial; and all matters consequent on such questions … shall also be determined at any further trial”.

Issue 1

338. This issue is whether SRL is or at any time has been a quasi-partnership for the reasons set out in paragraphs 5 to 12 of the Petition.

The parties’ submissions

339. Dr Potamianos submits that each of the characteristics identified by Lord Wilberforce and endorsed by Lord Hoffmann exists and applies in the present case.

340. As to the “association formed or continued on the basis of a personal relationship involving mutual confidence”, Dr Potamianos submits:

(1) SRL was formed by Mr Prescott and Dr Potamianos, who were well known to each other, with a view to exploiting business opportunities involving SEL and Peregrine House. In fact, SEL allowed Mr Prescott and Dr Potamianos to share profits, pool their investments and combine their complementary skills. Mr Prescott confirmed in cross-examination that Dr Potamianos’ technical skills were complementary to his own and that the importance of Dr Potamianos’ skills was one reason for allowing him to become a shareholder. In essence, SEL was a quasi-partnership when Dr Potamianos became a shareholder, and that state of affairs continued with the formation of SRL.

(2) The present case has parallels with Strahan v Wilcock [2006] 2 BCLC 555, in which a quasi-partnership was held to exist, in that (a) Dr Potamianos acquired a significant shareholding in SEL from Mr Prescott (who previously held 100% of the shares); (b) the shareholding was a recognition of his contribution to the business (particularly in developing firmware) and an incentive to allow him to profit from further contributions (particularly because the Intel platform became obsolete); (c) he was a director at the time; (d) business was conducted informally and on the basis of mutual trust and confidence (both matters which Mr Prescott confirmed in cross-examination); and (e) Mr Prescott and Dr Potamianos had an understanding about how much they could receive from SEL through their respective service companies.

(3) SRL is a private company limited by shares in which the only members were directors, such that, in keeping with Lord Hoffmann’s observations, (and, on analysis, because this is a case of quasi-partnership), there is a presumption that the removal of Dr Potamianos as a director is unfairly prejudicial conduct.

341. As to the “understanding that all, or some, of the shareholders shall participate in the conduct of the business”, Dr Potamianos submits:

(1) There was an agreement or understanding that Dr Potamianos would participate in management. SRL was formed to develop Mr Prescott’s and Dr Potamianos’ business together, particularly concerning SEL. Mr Prescott saw the importance of Dr Potamianos’ expertise from the outset, and gave him (via BDL) a share of profits from the outset.

(2) Dr Potamianos was involved in management. As well as being a director of SEL and SRL, he had regular meetings with Mr Prescott to decide on business matters. Further, both Mr Prescott and Dr Potamianos carried out the function of instructing their service companies to carry out vital tasks for SEL. Dr Potamianos’ contribution was critical to the success of SEL and hence SRL.

(3) Dr Potamianos also helped with day-to-day management tasks, invoice discounting, negotiations with sub-contractors, dealing with staff (involving staff salary reviews, and managing disciplinary hearings), suppliers and the purchase of and the move to Peregrine House, and finding tenants for Peregrine House. Mr Prescott was wrong to describe this as an “extremely small contribution”.

(4) Although the Shareholders Agreement which related to SEL was never replaced by an equivalent which applied to SRL, it was always the understanding of Mr Prescott and Dr Potamianos that they would enter a new agreement on substantially the same terms. Even on Mr Prescott’s case, the lack of resolution on the point would suggest a continuation of the previous arrangement (in which Dr Potamianos would be entitled at least to a seat on the board: see Clause 4.2 of the Shareholders Agreement relating to SEL). Furthermore, that understanding between the shareholders of SRL was not displaced by the later arrangements for Mr Keen and Dr Gardiner to take over day-to-day running of SEL’s business.

342. As to the “restrictions on the transfer of shares, so that a member cannot take out his stake and go elsewhere”, Dr Potamianos submits that:

(1) There were and are restrictions on the transferability of shares in SRL: Article 37(2) of SRL’s articles of association provides: “The directors may, in their absolute discretion, decline to register the transfer of a share whether or not it is a fully paid share.” Further, Mr Prescott confirmed in cross-examination that he would not allow a transfer of shares which he regarded as being “destructive”.

(2) If and in so far as the effect of this Article is to create a pre-emption right, that is still a restriction on transferability. In practice, no buyer would pay a full price for Dr Potamianos’ shares without the approval of Mr Prescott as the controlling shareholder, because the buyer in that situation would become a vulnerable minority shareholder. The buyer would be unlikely to offer a discounted price, because the effect of a pre-emption right would be that Mr Prescott could buy the shares at that discounted price instead. On any view, the restrictions are such that Dr Potamianos is not able to “take out his stake [at full value] and go elsewhere”.

343. Mr Prescott submits that:

(1) The fact that the characteristics identified by Lord Wilberforce and endorsed by Lord Hoffmann exist does not necessarily introduce equitable considerations.

(2) Cases in which quasi-partnerships have been found typically involve (a) a pre-existing partnership between the shareholders which has been converted into a company; (b) a company which was formed by individuals who were well known to each other (such that they had a personal relationship of trust and confidence) with a view to them working together in the company to exploit some business concept (see Strahan v Wilcock [2006] 2 BCLC 555 [19] and Re Coroin Ltd (No 2) [2013] 2 BCLC 583 [635]) and (c) a family business (see Fisher v Cadman [2006] 1 BCLC 499 [89]).

(3) As a general rule, where parties have entered into detailed shareholder agreements or other written agreements governing their association, it will be difficult to establish that there was a quasi-partnership. Where the parties have spelled out the basis of their relationship in such agreements there is no room for the operation of extraneous agreements or understandings (see Re a Company (No 005685 of 1988) ex p. Schwarcz [1989] BCLC 427).

(4) In the present case, Mr Prescott’s relationship with Dr Potamianos was a purely commercial one: it was not, and is not, a quasi-partnership.

344. In support of this last point, Mr Prescott submits that:

(1) SRL was not a pre-existing partnership. Even SEL was founded by Mr Prescott and Mr Van Der Wee, and not Dr Potamianos and Mr Prescott.

(2) The relationship was purely commercial from the outset, being governed as it was by a number of written contracts detailing the terms on which Dr Potamianos (through the medium of BDL) would undertake work for SEL (including the 1997 Contract, 2000 Contract, and 2015 Contract) on which the parties had received professional legal and tax advice. These written agreements left no room for undocumented, non-legally binding promises or understandings.

(3) The agreement dated 25 July 2007 between SEL and BDL in which they agreed that the 1997 Contract should from that date “be considered fully terminated” also provided that the 2000 Contract “shall continue in force until terminated in accordance with its terms”. Thus the parties expressly agreed that Dr Potamianos becoming a shareholder in 2007 was not to change their commercial relationship. In fact, Dr Potamianos continued after that date to produce schedules and invoices pursuant to the 2000 Contract, and, later, the 2015 Contract.

(4) The relationship between Mr Prescott and Dr Potamianos was not one based on mutual trust and confidence, either in 2007 or 2012. Dr Potamianos did not trust Mr Prescott with the source code: it was either hidden or withheld from him (and the other directors). Further, Dr Potamianos desired a shareholders agreement in 2012 as he had concerns over aspects of management. He did not have full trust and confidence in Mr Prescott.

(5) On Dr Potamianos’ own case his expertise was not contributed for the benefit of SEL: he claims that the intellectual property rights inured for BDL’s benefit. This is entirely inconsistent with a quasi-partnership.

(6) The fact that there is a restriction on the transferability of the shares in SRL is not enough, in the absence of any further indications or oral assurances, to establish a quasi-partnership or that Dr Potamianos was not subject to removal. Reliance was placed on Tay Bok Choon v Tahasan SDN BHD [1987] WLR 413, Lord Templeman speaking for the Privy Council at 417D-E:

“In this company there were only four shareholders, they held an equal number of shares, they were all directors and no one shareholder could transfer his shares without the consent of at least two of the others. These facts may go some way to establish that the relationship between the shareholders share some of the attributes of a partnership. But in the absence of any further indications or oral assurances the petitioner would not discharge the burden of proving that the other shareholders were not entitled to use their voting powers in the company to oust the petitioner without due cause and in the interests of the company and were under an obligation to continue to appoint the petitioner as a director of the company.”

345. Mr Prescott further submits that the alleged understanding that the Shareholders Agreement would apply to SRL on the same (or substantially the same) terms, is not only factually unproven but also does not satisfy the applicable legal requirements. Although in the case of a quasi-partnership promises or understandings need not have contractual force to be relied on by a petitioner, nevertheless there are limits to whether an unenforceable agreement can found relief under section 994 of the CA, and “the members must have reached a sufficient degree of agreement that it can be said that there has been a breach of good faith in departing from it” (see Joffe [6.122]; Khoshkhou v Copper [2014] EWHC 1087, HH Judge Cook at [24]). Further, Dr Potamianos must establish that he relied on the agreement, promise or understanding either before entering into association with Mr Prescott, or if subsequently that Mr Prescott allowed him to act in reliance on the agreement, promise or understanding (see Joffe [6.123]; Re Guidezone Ltd [2002] 2 BCLC 312, Jonathan Parker J at [175]).

Discussion and conclusion

346. In Strahan v Wilcock [2006] 2 BCLC 555, Arden LJ said at [1]:

“This appeal concerns a situation that often arises in a closely-held company. The sole or principal shareholder of the company brings in a person (“the new participant”) to help him run the company. The new participant is given an executive role. The parties get on well, and the principal shareholder gives him or sells him an equity stake. Then, after some time, the parties fall out and the principal shareholder causes the dismissal of the new participant. He and the principal shareholder part company. In these circumstances, should the principal shareholder purchase the shares of the new participant and if so, should he do so on terms that the new participant receives the full value of the shares, i.e. their non-discounted value, or should those shares be valued on the basis that they represent a minority shareholding, i.e. on terms that their value is discounted to reflect their non-saleability in the open market? The general principle is well settled. Normally, in “quasi-partnership” companies the appropriate basis of valuation is on a non-discounted basis. This is established by the decision of this court in Re Bird Precision Bellows Ltd (1984) 1 B.C.C. 98,992; [1984] 1 Ch. 419 and the speech of Lord Hoffmann in O'Neill v Phillips [1999] BCC 600 at p.614; [1999] 1 WLR 1092, at p.1107 with which the other members of the House agreed. But Lord Hoffmann added:

“This is not to say that there may not be cases in which it will be fair to take a discounted value. But such cases will be based upon special circumstances …””

347. Arden LJ said at [19]:

“… It is also relatively easy to establish whether a relationship between shareholders constitutes a “quasi-partnership” when a company was formed by a group of persons who are well known to each other and the incorporation of the company was with a view to them all working together in the company to exploit some business concept which they have. It is much less easy to determine whether a company is a “quasi-partnership” in a case such as this. Mr Strahan did not know Mr Wilcock when the company was formed. He joined the company as an employee. It was only subsequently that he acquired some of its shares from Mr Wilcock and became a director. However, it is clear on the authorities that a relationship of “quasi-partnership” may be acquired after the formation of the company. Lord Wilberforce specifically refers to an association “formed or continued” on the basis of a personal relationship.”

348. At [21], Arden LJ said:

“Logically, the appropriate question is whether, if the company had been formed (viz. incorporated) at the time the company is alleged to have become a “quasi-partnership” (that is, in this case, at the time when Mr Strahan acquired his shares), the company would have qualified as a “quasi- partnership”, applying the guidance set out by Lord Wilberforce.”

349. At [23], Arden LJ identified five factors which (she said) supported the conclusion of the judge at first instance that the company in that case was a “quasi-partnership”:

“First, pursuant to the second option, Mr Strahan bought 5 per cent of the company’s shares, a not insignificant percentage. The only other shareholder was Mr Wilcock. Secondly, the evidence showed that Mr Wilcock agreed to the second option as a reward for Mr Strahan’s efforts in the company and as an incentive to him and this is confirmed by the fact that under the second option Mr Strahan had to pay for the shares he acquired out of his bonuses. Thirdly, at the relevant time Mr Strahan was participating in management decisions of the company. Indeed, as I have said, Mr Wilcock had in effect become a sleeping partner. Mr Strahan became a signatory and possibly the only signatory on the mandate for the company’s bank account. Fourthly, the terms of the option agreement were informally agreed between them. The terms were never committed to writing, and this reinforces the conclusion that there was a personal relationship involving mutual trust and confidence between the parties. Fifthly, while Mr Strahan was rewarded by the payment of remuneration, he also received a share of the profits in the form of his bonus. In addition, it was in effect agreed that Mr Wilcock should receive his return from the company in the form of dividends … The fact that Mr Wilcock and Mr Strahan came to an understanding or agreement as to the form of the return they were each to obtain from the company’s profits is indicative that their relationship was more a “quasi-partnership” relationship than a relationship between a majority shareholder and company executive…”

350. At [25]-[26], in the course of explaining why the judge had been entitled to conclude that the relationship between the protagonists in that case had developed into one of “quasi-partnership”, Arden LJ said:

“In truth, the relationship between Mr Wilcock and Mr Strahan was multi-layered and multi-faceted, involving aspects arising from Mr Strahan's employment, his right under the options and his participation in the management of the company's business. Moreover, the terms of the option agreements did not inevitably mean that the parties adopted the position of vendor and purchaser under a commercial contract. On the contrary, Mr Wilcock considered that, under the terms of the second option agreement, he was giving Mr Strahan the opportunity to acquire shares in the company at a price representing about half their value, something he was most unlikely to have done if the relationship was a purely commercial one. Moreover, the second option opened the door to Mr Strahan becoming a shareholder without acquiring all the shares under the first option. Again, this is something that Mr Wilcock is hardly like to have wanted to do under a purely commercial contract of purchase and sale. Mr Wilcock must have contemplated that in that half-way house Mr Strahan and he would run the company together. Seen overall the relationship between the parties met the description laid down by Lord Wilberforce in the Westbourne Galleries case.

In addition, like the judge … I do not accept the argument that Mr Strahan bore no risk by acquiring shares in the company. He bore the risk that the company might go into liquidation or that (as happened) Mr Wilcock might be unwilling to repurchase his shares at their full value if he caused the removal of Mr Strahan from the company or that he (Mr Strahan) might be unable to find a purchaser for his shares in the company because he held a minority shareholding or that if he did find a purchaser Mr Wilcock would cause the directors to refuse to register the share transfer.”

351. I consider that this case contains much guidance which is relevant and helpful in the present case. Applying that guidance, it seems to me that the essential question is whether viewed overall the relationship between Mr Prescott and Dr Potamianos fell within the guidelines laid down by Lord Wilberforce and endorsed by Lord Hoffmann.

352. I would answer that question in the affirmative. My principal reasons are as follows:

(1) First, Dr Potamianos bought 40% of the shares in SEL, which was a significant percentage, at a time when there was only one other shareholder, Mr Prescott.

(2) Second, Dr Potamianos bought those shares from Mr Prescott at a discount, and, moreover, on the balance of probabilities, and as represented to HMRC, at a discount which was comparable to the discount at which Mr Van Der Wee had disposed of his 50% shareholding in SEL. That suggests that the relationship between Mr Prescott and Dr Potamianos was not purely a commercial one. Indeed, it is consistent with Dr Potamianos substantially stepping into the shoes of Mr Van Der Wee, albeit on slightly less than equal terms with Mr Prescott in comparison to the equal terms that Mr Van Der Wee had previously enjoyed. I say “slightly” because the Shareholders Agreement gave Dr Potamianos significant rights, not least as set out in Clauses 4.2 and 16 (referred to above) and in Clause 6, which contained an extensive list of matters which required the consent of all of the shareholders including (for example) engaging any new employee at remuneration exceeding £20,000 per annum (Clause 6.7) and (as I read Clause 6.14, in conjunction with Clause 2) dismissing any director of SEL.

(3) Third, at the time that Dr Potamianos acquired his 40% shareholding in SEL he had been a director of SEL since 1999, SEL was substantially dependent on the programming services that he/BDL provided to SEL, and his skills were complimentary to the skills of other SEL personnel, in particular Mr Prescott. Indeed, Mr Prescott’s desire that Dr Potamianos should become a significant shareholder was such that he caused SEL to enter into the 2007 Assignment with Dr Potamianos as a mechanism for providing Dr Potamianos with the means of acquiring that shareholding and, as I find, without regard to whether a payment of £400,000 provided SEL with value for money for the rights it thereby acquired. These arrangements contained both an element of reward for Dr Potamianos’ contribution to SEL and a strong element of further incentive to Dr Potamianos - I say “further” because he/BDL already had an element of incentive under the 1997 Contract, in light of the provisions for sharing in SEL’s dispersible profit.

(4) Fourth, from the time that Dr Potamianos became a shareholder in SEL, Mr Prescott and Dr Potamianos reached agreement as to the form of return that they were each to obtain from the profits of SEL, namely that they would divide those profits in the same ratio as their respective shareholdings, and they implemented this agreement by the invoices raised by their respective service companies.

(5) Fifth, Dr Potamianos undoubtedly participated in the management of the business of SEL, and did so pursuant to an agreement or understanding that he would do so. I do not consider that it is necessary to make findings as to the precise extent of his participation. I suspect that it was less than he would like to claim and greater than Mr Prescott was inclined to accept. I consider that, in broad terms, their respective management roles and inputs were carried over into SRL when SRL was incorporated, and it is plain from the contemporary documents relating to succession management that they each played a significant part in the day to day running of the business of SRL (albeit that they were often not in harmony).

(6) Sixth, Dr Potamianos bore a risk in acquiring shares in SEL, in light of the considerations that (a) SEL might go into liquidation or (b) he might be unable to realise the full value of those shares because Mr Prescott might be unwilling to repurchase them at full value and he might be unable to find a purchaser for his shares in the company because he held a minority shareholding or because if he did find a purchaser Mr Prescott could prevent the transfer being registered.

(7) Seventh, as Mr Prescott accepted in evidence, and as was in any event clear from the evidence before the Court, including the contemporary documents, the business of SEL was conducted informally and on the basis of trust and confidence. A prominent feature of this was the way in which individual work contracts were agreed and performed. As set out above, these arrangements had an element of artifice, in that they were priced in a manner that was geared to transferring money from SEL to Mr Prescott and Dr Potamianos at a level which was fixed by them in whatever way they considered was most tax advantageous. However, that does not colour or affect the fact that, in substance, each of these men trusted the other to identify what work needed to be done in their respective spheres of technical expertise, to carry out that work, and to deliver the resulting work product to SEL, all in the interests of SEL, and therefore, in light of their respective stakes in SEL, in their joint interests. That mutual trust and reliance was vital and fundamental to the continuation and success of the business of SEL. Those matters are not affected by the interpolation of service companies, the fact that the two men had frequent disagreements and differences of opinion as to how the business should be run, or the fact that Dr Potamianos adopted a stance with regard to the source code and associated documents that, as I have found, placed him in breach his fiduciary duties as a director of SEL due to his unhelpful and evasive nature, and placed him/BDL in breach of the Contracts discussed above. Nor are they affected by Clause 18 of the Shareholders Agreement, which stipulates that none of the provisions of that agreement shall be deemed to constitute a partnership between Dr Potamianos and Mr Prescott. I agree with Dr Potamianos that this Clause does not preclude a “quasi-partnership” from arising.

(8) Eighth, viewed in the round, these features continued with the formation of SRL. In some respects, Dr Potamianos’ claim of “quasi-partnership” is stronger with regard to SRL, because at the time that SRL was formed and he and Mr Prescott became shareholders in the same proportions as they had held in SEL the above state of affairs had existed for several years. This situation therefore falls squarely within Arden LJ’s observation that it is “relatively easy” to establish that a relationship between shareholders constitutes a “quasi-partnership” when “a company was formed by a group of persons who are well known to each other and the incorporation of the company was with a view to them all working together in the company to exploit some business concept which they have”. Further, it is plain that there are restrictions on the transferability of Dr Potamianos’ shares in SRL, both in light of SRL’s Articles of Association and as a matter of practicality because that constitutes a minority shareholding. In other respects, that claim is, at least arguably, weaker, for example because no equivalent to the Shareholders Agreement was entered into in respect of SRL. That is a complicated topic, but, for the reasons explained below, I have concluded that, on proper analysis, this does not weaken Dr Potamianos’ claim.

353. It is hard to determine precisely why no Shareholders Agreement was made in relation to SRL, not least because Dr Potamianos adopted the stance of disputing Mr Prescott’s documented reasons while at the same time Dr Potamianos did not set out his own version of events (see the exchange of emails on 16 and 18 January 2016). However, having heard both men give evidence, and having considered the documents in detail, I consider that it is more likely than not that this was (a) because Dr Potamianos adopted inconsistent stances over time, used this issue as part of a raft of arguments in which he jockeyed for position over other matters, and (b) for the reasons documented by Mr Prescott the time (for example, that Dr Potamianos did not agree that the two men should be entitled to appoint one director for each 20% shareholding that they held – see Mr Prescott’s memorandum of November 2015; and that Dr Potamianos decided not to negotiate a new Shareholders Agreement – see Mr Prescott’s email to him dated 16 January 2016). I also accept Mr Prescott’s evidence that the Shareholders Agreement needed to be amended to be suitable for use in relation to SRL.

354. At the same time, Mr Prescott’s resistance to accepting that the Shareholders Agreement was applicable to SRL was not to do with issues which went to the nature of the protections that it contained for Dr Potamianos. On the contrary, as set out above, it was to do with objecting to the balance of rights and obligations being tipped further in favour of Dr Potamianos, and with practical matters concerning the differences between the business of SRL and that of SEL.

355. At the end of the day, I consider that Dr Potamianos is right in submitting that it was the implicit agreement or understanding of both Mr Prescott and Dr Potamianos at and after the formation of SRL that Dr Potamianos’ rights would not be materially eroded or affected by the formation of SRL, and, in particular, that (a) he would be entitled to a seat on the boards of both SEL and SRL and (b) the later arrangements involving Mr Keen and Dr Gardiner did nothing to affect this implicit agreement or understanding. I detected nothing in the evidence to suggest that it was intended by either of the two men that the formation of SRL would or should produce any fundamental or significant change in the nature of their relationship, and I consider that Mr Prescott’s stance as reflected in the contemporary documents positively supports the contrary view.

356. I therefore reject Mr Prescott’s contentions that the agreement or understanding that the Shareholders Agreement would apply to SRL on substantially the same terms is not made out on the evidence, or was not sufficiently clear to enable it to be said that there would be a breach of good faith in departing from it. I also reject the suggestion that Dr Potamianos did not rely on that agreement or understanding. On the contrary, I consider that it is plain that he did. Indeed, in fairness to Mr Prescott, I did not understand him to suggest at any stage that the formation of SRL was understood by him, or was intended by either man, to bring about any significant change in the fundamental nature of their relationship. On the contrary, all that Mr Prescott said, perfectly properly, was, in essence: (a) that no Shareholders Agreement was ever made in respect of SRL; (b) that the Shareholders Agreement could not be applied without any alteration to SRL; and (c) that he resisted the balance of rights and obligations being tipped in favour of Dr Potamianos by a departure from those aspects of the Shareholders Agreement.

357. I have no difficulty in concluding that, for purposes of section 994 of the CA, the affairs of SRL included the affairs of SEL, not least because, as he frankly and inevitably accepted in cross-examination, Mr Prescott had and has control over both companies in practical terms and their dealings with one another were plainly not on an arm’s length basis. Indeed, as a matter of substance and practicality, the business of SEL was the key business for both Mr Prescott and Dr Potamianos, as that was the business to which they were able to contribute their technical skills and which took up most of their time and effort as regards development, sales, marketing and so forth.

358. For these reasons, and in accordance with Lord Hoffmann’s observations, it seems to me that the starting point in the present case is that it was inequitable for Mr Prescott to use his voting power to exclude Dr Potamianos from participation in the management of SEL without giving him the opportunity to remove his capital on reasonable terms.

Issue 2

359. This issue is whether Mr Prescott has conducted the affairs of SRL in a manner that is unfairly prejudicial to Dr Potamianos by reason of 6 sets of matters.

The significance of Mr Prescott’s offers

360. Before considering those matters, there is a logically antecedent question which needs to be addressed, namely whether Mr Prescott made a reasonable offer to buy Dr Potamianos’ shares. As Lord Hoffmann explained, the unfairly prejudicial conduct does not lie in the conduct alone but in the conduct without a reasonable offer.

361. Dr Potamianos submitted that: “logically, a reasonable offer can only cure unfair prejudice that has already been suffered. It cannot cure unfair prejudice that has yet to occur”. These propositions did not loom large in the arguments that were presented to me, and were only made by him by way of a brief addition to his closing submissions.

362. It is unclear whether these propositions were accepted without qualification by Mr Prescott. On the one hand, that would have the effect in the present case that, for an example, only an offer made after April 2017 would cure any unfair prejudice occasioned to Dr Potamianos by his removal as a director of SEL. On the other hand, in his closing submissions Mr Prescott referred without elaboration to Re Woven Rugs Ltd [2010] EWHC 230 (Ch), David Richards J (as he then was) at [166]:

“This offer pre-dates by some years the unfairly prejudicial conduct which I have held to be established. It cannot be relied on as a remedy for conduct yet to occur.”

363. In the case of a quasi-partnership, and in the absence of special circumstances, such an offer must be to purchase the shares on a pro rata basis and without a minority discount.

364. Dr Potamianos submitted that even if SRL is not a quasi-partnership, the general rule should still be that no discount applies, on the basis that “It would substantially defeat the purpose of the new remedy [for unfair prejudice] if the oppressing majority were routinely rewarded by the application of a discount for a minority shareholding” (Re Blue Index Ltd [2014] EWHC (Ch) 2680, Robin Hollington QC at [26]).

365. Dr Potamianos further submitted that none of the offers made by Mr Prescott were reasonable. Mr Prescott submitted the reverse, namely that each of the three open offers that he had made were offers to acquire Dr Potamianos’ shares at a fair value.

366. Mr Prescott’s first offer was at a fixed price of £1.34m. On the one hand, Dr Potamianos argued that no offer at a fixed price can be considered reasonable, even if it were subsequently to transpire that the price exceeds the true value of the shares as at the date of the offer, because a fixed price offer does not satisfy the tests propounded by Lord Hoffmann, which envisage that it will be possible to determine summarily from the terms of the offer whether it is reasonable or not. On the other hand, Mr Prescott contended that the proviso to Issue 2, namely that “any question concerning the reasonableness of Mr Prescott’s offer(s) for [Dr Potamianos’] shares shall, in so far as that question requires expert valuation evidence, be determined at any further trial” plainly envisages that expert valuation evidence may be relevant to a determination of whether an offer was reasonable, and that, accordingly, the submission that whether the offers in this case were reasonable must be determined by the terms of the offer alone cannot be right. Mr Prescott suggested that any finding of unfair prejudice and any relief must be ordered subject to the implementation of that proviso later showing that one of his offers was reasonable, as “To do otherwise would allow a procedural direction made for a split trial to have a potentially substantive effect on liability”.

367. I raised this point during the hearing because I was troubled by it. I consider that the answer to it is that Lord Hoffmann said what he did in the context of discussing whether the respondent to a petition had made an offer that was so plainly reasonable that the respondent would be entitled to have the petition struck out. That is why, although Lord Hoffmann accepted that there might be cases “in which it will be fair to take a discounted value”, he also said that “it will seldom be possible for the court to say that an offer to buy on a discounted basis is plainly reasonable, so that the petition should be struck out”. Lord Hoffmann was not saying that an offer at a discounted value can never be reasonable; but he was saying that such an offer will seldom be so plainly reasonable that it can form the basis of an application to strike out the petition.

368. In other words, although for purposes of a strike out application it is not possible to decide whether the offer is reasonable unless it complies with certain requirements which are plain from the terms of the offer itself, that does not mean that any offer which does not comply with those requirements is necessarily unfair or unreasonable. Any such rule would, or could, produce results which are unfair, unjust and even absurd: for example, the value of all the shares in a company may, on the most generous of assumptions and the most ambitious of arguments, plainly be worth less than £1m, and yet an offer of that entire sum for a minority holding would be “unfair”.

369. I therefore reject the submission that this fixed price offer of £1.34m was inescapably unfair or unreasonable simply because it was made at a fixed price.

370. Dr Potamianos’ next point was that the offer of £1.34m was unreasonable in any event. In so far as it was based on Baker Tilly’s observation in September 2015, that was not a formal valuation. Further, on 24 February 2015 (according to an email that Dr Potamianos sent to Mr Prescott on that date) Mr Levine had indicated that a sale figure of £3.5m-£4.4m could be expected, and that a “strategic buyer” might pay as much as 50% more such that “a figure of £6m wouldn’t be out of court” after the cash in the company had been reduced to about £100,000. Further, SEL had cash of about £1.5m, and Peregrine House was worth about £1.5m, which cannot have been taken into account in an offer of £1.34m. Finally, the offer was, in effect, subject to contract.

371. Mr Prescott referred to his contemporaneous workings (which he did not share, and was not asked to share, with Dr Potamianos at the time) to show that these points were wrong. In particular, Mr Prescott took into account both cash and the value of the equity in Peregrine House; he did not apply a minority discount; and he based his offer on a framework and a multiplier of 4 that his contemporary notes recorded as having been agreed at his meeting with Dr Potamianos on 30 September 2015 – hence his reference to being “guided by our previous discussions” in his email to Dr Potamianos dated 16 October 2015. Mr Prescott also contended that Dr Potamianos had agreed to a valuation based on a capitalised maintainable earnings basis at that meeting, and that on this basis it is usually wrong to value assets such as cash and buildings separately unless they are surplus assets, which Peregrine House at least would be unlikely to be as it was needed as offices for SRL and to carry on SRL’s serviced office business.

372. I accept Mr Prescott’s evidence about the basis of his offer, and, accordingly, I find that it was made in good faith and in pursuit of the objective, recorded in his notes dated 1 October 2015, that he and Dr Potamianos “agreed that they would do their best to agree a fair value for whatever solution is deemed appropriate”. The three possible changes to group structure discussed at that meeting did not include Dr Potamianos buying Mr Prescott’s shares in SRL. So it was unhelpful for Dr Potamianos to respond to the offer as he did, without putting forward any indication of the price that would be acceptable to him, and instead offering to buy out Mr Prescott’s majority shareholding at the like level of value as was implied by Mr Prescott’s offer. However, I am in no position to decide whether this offer, or for that matter whether the increased offer of this amount plus a post-sale 4 year contract for BDL at £60,000 pa on top, was fair and reasonable. On the contrary, I consider that the resolution of those issues requires expert valuation evidence. Therefore, in accordance with the Order made on the CMC, they fall to be determined at a further trial.

373. I also reject the argument that the offer of £1.34m was self-evidently not fair or reasonable because it was subject to drawing up a legally binding contract at a later date. I was not referred to any authority in support of this proposition. Ultimately, when considering unfair prejudice, the central concern of the court is to determine what is fair, just and equitable. It is inimical to that exercise to introduce a restrictive requirement that an offer which is not so formulated that it can be converted into a comprehensive legally binding contract by a bare acceptance is incapable of preventing conduct that would otherwise be unfairly prejudicial from having those characteristics.

374. Those legal conclusions also apply with regard to Mr Prescott’s offer of £1m. In accordance with the Order made on the CMC, the question of whether or not it, also or alternatively, was fair and reasonable falls to be determined at a further trial.

375. As to the letter from Moore Blatch dated 16 November 2016, this indicated a willingness to pay an “appropriate price” which reflected (among other things) (a) that the allegations of unfair prejudice were unfounded and (b) a minority discount. It further suggested, in terms that appear to me to have contradicted the basis suggested for an “appropriate price”, that an expert should be instructed to produce a report, which would be binding on the parties, valuing the shares with and without a minority discount, and that whether a minority discount should be applied should be agreed between the parties and in default of their agreement by the Court. In my judgment, this letter did not contain any offer to purchase Dr Potamianos’ shares.

376. In these circumstances, I am unable to conclude on the material at present before me that Mr Prescott made an offer for Dr Potamianos’ shares that was so manifestly fair and reasonable as to have the consequence that whatever conduct Dr Potamianos succeeds in establishing was not unfairly prejudicial. It is therefore necessary to consider the unfair prejudice complained of. At the same time, it may transpire that, once expert valuation evidence is obtained, one or more of Mr Prescott’s offers was, in fact, fair and reasonable so as to have that consequence. It follows that (on the basis that the point about the timing of his offers is not being conceded by Mr Prescott) the question of liability for unfair prejudice and, accordingly, whether relief for unfair prejudice is appropriate (i.e. whether any buy-out order is appropriate) must depend on the determination of these issues at the further trial. This is unfortunate, but seems to me to be the inevitable consequence of the split trial that was ordered on the CMC.

The unfair prejudice complained of

377. In O’Neill v Phillips [1999] 1 WLR 1092, at p1104 Lord Hoffman considered a submission made on behalf of the petitioner to the effect that where trust and confidence between the parties had broken down it is obvious that there ought to be a parting of the ways and the unfairness lies in a respondent who accepts this to be the case not being willing to allow the petitioner to recover his stake in the company and leaving him locked into the company as a minority shareholder. In the course of rejecting that submission, Lord Hoffmann said:

“There are cases …. in which it has been said that if a breakdown in relations has caused the majority to remove a shareholder from participation in the management, it is usually a waste of time to investigate who caused the breakdown. Such breakdowns often occur (as in this case) without either side having done anything seriously wrong or unfair. It is not fair to the excluded member, who will usually have lost his employment, to keep his assets locked in the company. But that does not mean that a member who has not been dismissed or excluded can demand that his shares be purchased simply because he feels that he has lost trust and confidence in the others.”

378. As I read those words, Lord Hoffmann was not dissenting from the proposition that where a minority shareholder has in fact been excluded from management by the majority as a consequence of a breakdown in relations “it is usually a waste of time to investigate who caused the breakdown”. This is because, even where such a breakdown occurs “without either side having done anything seriously wrong or unfair”, it will usually not be fair to the excluded member to keep his assets locked in the company, in particular where he has lost his employment as a result of the exclusion. Accordingly, once it has been found, as I have found in the present case (subject always to the question of whether any of Mr Prescott’s offers were reasonable), that the starting point is that it was inequitable for the majority to exclude the minority shareholder from participation in the management without giving the excluded member the opportunity to remove his capital on reasonable terms, and where the majority cannot demonstrate that any such opportunity has been afforded to the excluded member, it is generally appropriate for the court to move straight to consideration of the appropriate relief. All that Lord Hoffmann was rejecting was the proposition that a subjective perception of loss of trust and confidence, which does not in truth and assessed objectively constitute an exclusion from management, should entitle the minority member to a buy-out order.

379. The breakdown in relations in the present case was, to borrow the language of Arden LJ, multi-layered and multi-faceted, taking place over about three years and involving issues of employment law, accounting practice, succession planning, budgeting, the costing of building works and the management of building projects, intellectual property disputes, personal conduct (such as exchanges of emails behind people’s backs and the covert taping of meetings) and appropriation of chattels. Exploration of all the issues involved would be extraordinarily time-consuming. In addition, it is likely to be unsatisfactory, both because of the difficulty of getting to the bottom of many of these disputes, and because at the end of the day, to borrow a phrase from Leggatt J, its utility may well be disproportionate to its length. Nevertheless, both sides in the present case adopted the stance that the Court needed to grapple in fine detail with all these issues.

380. In the present case, the allegations of unfair prejudice are based on alleged failure to consult/exclusion from management of Dr Potamianos and alleged resultant mismanagement of SEL and SRL in relation to (1) the first decision to terminate Mrs Macdonald’s contract (2) the second decision to terminate Mrs Macdonald’s contract (3) the engagement of Mr Pearson (4) the Business Plan (5) the engagement of Mr Levine/his company to review the Business Plan (6) the engagement of Mr Levine as SEL’s business development and marketing manager (7) the engagement of Mr Levine’s company to perform marketing and similar functions for SEL (8) the retention of Dr Fells (9) the termination of the Bardac project (10) ceasing to pay BDL’s invoices after 15 July 2016 (11) the establishment of the Sub-Committee and (12) the continued employment of Mr Van Der Wee (the costs of which Mr Prescott promised to pay personally on 16 and 17 March 2015, and which he has not in fact paid, but in respect of which he said “I am quite happy for it to be considered [on] quantum eventually.”).

381. A further allegation, that excess sums were spent on renovation of Peregrine House, was pursued by Dr Potamianos until the close of evidence, but was then abandoned.

382. In addition to the above, there is the fundamental complaint that Dr Potamianos has been removed as a director of SEL. Indeed, that was one of the two central planks that were identified at the outset of Dr Potamianos’ opening submissions. The other plank, which I have rejected, related to the Source Code claim, which was said to be invented. The opening paragraph of Dr Potamianos’ written submissions before me allege:

“This trial concerns a boardroom coup perpetrated by Mr Prescott …against his fellow director and shareholder, Dr Potamianos. The result is that [Mr Prescott] has unfairly and unlawfully deprived [Dr Potamianos] of his right to participate in management. Furthermore, [Mr Prescott] and SEL seek retrospectively to invent a right to obtain the source code of certain computer “firmware” developed by Dr Potamianos’ service company, BDL. They thereby seek to obviate the need to retain BDL’s services and to exclude [Dr Potamianos] from the business more generally.”

383. While Dr Potamianos submits that the Court “only needs to accept the most severe kind of prejudicial conduct in order to establish unfair prejudice”, he also argues that “the earlier conduct is still relevant because it affects the extent of the prejudice and the relief to which [he] should be entitled”. As it is common ground that, if Dr Potamianos is entitled to relief, it would be appropriate to make a buy-out order, I take this to refer to another aspect of his case. This is that the valuation should be based on a date before the dispute began, with its consequent effects on the business of SEL and SRL. He suggests that date should be 31 October 2014, which is the end of SEL’s financial year.

384. Dr Potamianos further contends that some of Mr Prescott’s conduct was not simply unfairly prejudicial in itself, but was made more unfairly prejudicial because it gave rise to breaches of Mr Prescott’s directors’ duties under sections 171, 172, 175 and/or 177 of the CA 2006. In broad terms, Dr Potamianos says that Mr Prescott acted for ulterior motives in excluding him from management.

Mr Prescott’s position

385. For his part, Mr Prescott argues that the rights and wrongs of all the allegations made by Dr Potamianos should be examined in detail on the basis that this is a case in which it is necessary or at least appropriate to investigate whether and to what extent Dr Potamianos is to blame for the events with which those allegations are concerned. This is against the background that, in his witness statement in the Source Code claim, Mr Prescott describes Dr Potamianos as a “textbook sociopath” and the arrangement whereby he allowed Dr Potamianos to acquire a 40% shareholding in SEL as a “Faustian pact” that he had only entered into in order to ensure the future of SEL.

386. Mr Prescott contends that Dr Potamianos’ conduct should be taken into account, either to deny him any relief, or alternatively when deciding what remedy is appropriate. As, in the event that there is any entitlement to relief, the principle of a buy-out is accepted, the latter point has two aspects. First, that there should be no adjustment to the buy-out price to take account of any unfairly prejudicial events that occurred before the valuation date. Second, that the buy-out price should be discounted to reflect Dr Potamianos’ contributory fault, perhaps even to the extent that he should be treated as having made a constructive election to depart from SRL so that it would be fair for him to be bought out on the basis that he freely decided to sell his shares (i.e. at a minority discount). Among other things, Mr Prescott relied on Hollington at [7-114] and [8-152]:

“There will, however, be cases where the excluded minority has brought his exclusion upon himself by his own wrongful or unconscionable conduct. The courts then have to wrestle with the individual facts of particular cases to determine whether the majority were justified in excluding the minority …”

“… In the case of quasi-partnerships where the minority has been unfairly excluded from management, there is a strong presumption that no discount should be applied … It has been suggested obiter, however, that a discount may be applied if the petitioner’s conduct has contributed to the actions on the part of the majority of which complaint is made, but this seems anomalous, although there is no reason in principle why a court should not apply a discount in such circumstances if the justice of the case exceptionally so required …”

387. These arguments have to be viewed in the context that the court is not in a position to second-guess or interfere with matters of commercial and managerial judgment, and that what needs to be shown is mismanagement which is sufficiently serious to justify the intervention of the court (see, for example, Re Macro (Ipswich) Ltd [1994] 2 BCLC 354, Arden J at 404i-405a).

388. As to the allegations of breaches of directors’ duties, Mr Prescott denies that there were any breaches. If, contrary to his primary case, he is found to have acted in breach of duty, he contends that he is entitled to relief under section 1157 of the CA because he acted honestly and reasonably and having regard to all the circumstances of the case.

Discussion and conclusion

389. In the present case, I have given careful consideration to all the allegations upon which the petition is based, much of the history of which is apparent from the documents that I have summarised above. I think that there is force in the submission that in many instances Dr Potamianos was consulted, or at least apprised of what was happening. However, even if it were to be assumed in respect of each matter complained of that he was entitled to be consulted and that he was not consulted, I am not persuaded that any of the matters alleged amounted to mismanagement, let alone serious mismanagement. Nor am I persuaded, to the extent that Dr Potamianos was not consulted, that it would have made any or any material difference in any instance if he had been consulted.

390. I am also entirely unpersuaded that in any of the instances complained of Mr Prescott was not acting bona fide and in what he perceived to be the best interests of SEL (and SRL) but was instead acting for ulterior motives such as to fortify his position vis-à-vis Dr Potamianos. On the contrary, having heard and seen Mr Prescott give evidence, I have no doubt that he acted in what he believed to be the best interests of SEL (and SRL) throughout, and that he went to great lengths to try and maintain a working relationship with Dr Potamianos and to keep him on board, even though the two men had very different personalities and even though they had difficulty working together. In my judgment, these findings are also supported by the documents considered above.

391. In substance, as Mr Prescott was a majority shareholder, and as SEL represented the greater part of his life’s work, his interests and the interests of SEL and SRL were aligned. It would have made no sense for him to act contrary to the best interests of SEL or SRL, as that would damage his own interests. Moreover, whatever problems there may have been between Dr Potamianos on the one hand and Mr Prescott and other individuals such as Mr Keen and Dr Gardiner on the other, Dr Potamianos was indispensable. So it was senseless to isolate him, or build up a power base against him.

392. Those considerations ceased to apply when Dr Potamianos, for all practical purposes, downed tools, stopped providing work product to SEL and became difficult and evasive about the source code. At that stage, however, it is impossible to say that it was not reasonable and necessary to take steps to address these issues, for example by the formation of an appropriate Sub-Committee, to protect the interests of SEL (and SRL). It would have been entirely unworkable to involve Dr Potamianos in the consideration of the merits of SEL’s claim to the source code and related documents and the steps SEL could or should take against Dr Potamianos and BDL in that regard. It is also important to keep in mind that, as I have found, Dr Potamianos was in the wrong in denying SEL the source code, and in not making his position about it clear to SEL.

393. At the same time, I do not consider that the fault in this case lies by any means all on one side. To take a single example, although Dr Potamianos approved the appointment of the JMDs, they got off to a very bad start by releasing the Press Release at the time (June 2014) and in the terms that they approved, and Dr Potamianos was fully justified (as was Mr Prescott) in expressing serious dissatisfaction with their conduct. It was not unreasonable for Dr Potamianos to want the JMDs to undergo, in effect, a period of retraining (although, equally, it was not unreasonable for Mr Prescott to think that this was inappropriate, as it would have undermined the individuals who both men had decided should succeed them for purposes of the day to day running of SEL). Furthermore, the fact that Dr Potamianos had been party to the decision to appoint the JMDs did not mean that he was not entitled to have misgivings about the Business Plan that they produced, and although he was wrong to rely on the express terms of the Shareholders Agreement, and although he was partly to blame for the fact that no new agreement was drawn up in relation to the rights of shareholders in SRL, he was, as I have found, right in saying that he was entitled to a significant say on such matters.

394. Nor do I consider that Dr Potamianos’ conduct was so serious as to justify his exclusion from management altogether, as effectively happened by the formation of a Sub-Committee which although inspired by the need to consider and deal with issues concerning the source code was (in the words of Mr Keen) “formed …to run the business generally whilst such issues were ongoing”, and still more by his removal as a director. In fact, unhappy and divided though they may have been in many respects, Mr Prescott and Dr Potamianos (and others) managed to hold things together throughout all the ups and downs concerning Mrs Macdonald, the expenditure on Peregrine House, the retention of Mr Van Der Wee, the Business Plan, and so forth, without excluding Dr Potamianos from management. The dispute over the source code represented a more significant issue, and justified the establishment of a Sub-Committee for the purposes initially identified in the minutes dated 26 September 2016 (i.e. “to consider the difficult issues relating to [Dr Potamianos]”). In my judgment, that was sufficient to address that issue, and to enable Dr Potamianos to continue to be involved in management (and, indeed, to provide ongoing programming services) in spite of its existence and while SEL took legal advice as to SEL’s position and potential remedies.

395. In fact, the Sub-Committee assumed a wider role, which had the effect of excluding Dr Potamianos more generally, which I do not accept to have been justified because the source code dispute was “inextricably intertwined” with all of SEL’s other business.

396. In any event, Dr Potamianos’ removal as a director was not justified by his conduct, and, certainly, the contemporary documents, in particular in the form of the minutes dated 10 April 2017, do not explain why anyone considered that it did: the “Written Particulars of Concerns” had been answered by the “Written Representations”, and it was not fair to remove him without determining why, if it be the case, those answers were deficient. As it transpires, in accordance with my findings, the answers given in respect of what was probably the most significant single ground for concern, namely the source code dispute, were misguided. In my judgment, however, Dr Potamianos’ stance on that issue did not justify his removal as a director. It was inherent in the Contracts that conflicts of interest might arise between SEL on the one hand and Dr Potamianos/BDL on the other, and the history of this litigation and my ruling on the Source Code claim provide ample testimony that there were grounds for dispute that he was in a position to put forward in good faith in the interests of himself and BDL.

397. The points made above are subject to three qualifications. The first relates to the payments that were made to Mr Prescott’s service company, Sameaim Limited, in respect of Dr Fells. This complaint does not involve an allegation of mismanagement so much as one of breach of duty, which is said to have damaged SEL (and, thus, Dr Potamianos’ minority shareholding) by extracting an exorbitant mark up of 300% which was not disclosed to the other directors of SEL. I reject that complaint. I consider that it was proper and understandable, and in no way unfair to Dr Potamianos as a minority shareholder, to hire Dr Fells in circumstances where, in his absence, SEL had all its relevant programming eggs in the sole basket of Dr Potamianos and where disputes were emerging between SEL and BDL/Dr Potamianos about provision of programming services and intellectual property rights. The fact that Dr Fells’ engagement was not flagged up to Dr Potamianos was not part of some sinister conspiracy to undermine him or to oust him from SEL, any more than the contretemps with Mrs Macdonald were part of a plot against Dr Potamianos as opposed to a response to genuine difficulties arising from frictional working relationships, but was instead motivated by a desire to avoid adding fuel to the flames of the disputes between Dr Potamianos and Mr Prescott and others at SEL. I also consider that the “300% mark-up” allegation is wrong. This is based on the proposition that Dr Fells’ salary was £55,000 pa but Sameaim Limited invoiced SEL for £180,000 pa. However, I accept Mr Prescott’s evidence contained in paragraph 79 of his second witness statement, which I do not consider to have been undermined by what he said in cross-examination:

“Sameaim’s contracting levels remained at the same rate as they had done for several years previously apart from adding the cost of Graham Fells. The existing monthly rate was for £22,500 which Aris had never objected to in the past, having approved Sameaim’s contracts at this rate. This was increased to £27,000 per month to take account of the cost of Graham Fells. It is important to bear in mind that when Graham started with Sameaim he needed to be brought up to speed with DC drive technology. I took on the financial risk of this, and Sameaim did not start charging SEL for Graham’s cost element for 6 months. It was not until September 2016, and when Graham had commenced unravelling the source code that I started to invoice at the higher amount.”

398. This leads on to the second qualifying matter. This is that Dr Potamianos complains that Sameaim has continued to invoice SEL and to be paid by SEL while he and his own service company, BDL, have been shut out from doing so since disputes arose and, more particularly, he was excluded from management. Dr Potamianos asserts that this was in breach of a promise made by Mr Prescott on 15 July 2016 that Sameaim would stop invoicing SEL, and, in any event, that it has allowed Mr Prescott to extract monies from SEL in a way that is prejudicial to Dr Potamianos. In my judgment, the answer to this complaint is that Mr Prescott and SEL should be held to the bargain that was made with Dr Potamianos in or about 2007, to the effect that they would each invoice SEL and be paid by SEL in a manner that was proportional to their respective shareholdings. Accordingly, for every £6 that Sameaim Limited has been paid which is not matched by a payment of £4 to BDL since relations broke down, I consider that BDL is entitled to be paid a balancing payment (save that (a) in so far as the payments that were made to Sameaim Limited were used to pay Dr Fells, that element of those payments should be left out of account, and (b) I will hear submissions as to whether BDL is entitled to charge VAT in light of the fact that, in the events which gave happened, BDL has not performed any services for SEL). That may seem like rough justice in light of the fact that BDL and Dr Potamianos have made no contribution to SEL since that time, but, as against that, it is relevant to have regard to my finding that Dr Potamianos was unfairly excluded from management, and to set this decision in the context of my determination of wider issues as to the valuation date and other terms of buy-out discussed below.

399. The third qualifying matter relates to the payments to Mr Van Der Wee. This is also more like an allegation of breach of duty or obligation of good faith than of mismanagement. It is also a relatively minor matter, both in the overall scheme of things and in terms of financial value (although not as minor as the allegation against Dr Potamianos improperly made personal telephone calls to family members in Greece to a value of about £400 at the expense of SEL). So far as those matters are concerned, I consider that Mr Prescott and Dr Potamianos should be held to their respective offers to reimburse these costs to SEL, and so remove any prejudice there might otherwise be.

400. Dr Potamianos also complained about expenditure on the Source Code claim. However, in light of my determination of that claim, there is no basis for this complaint. Indeed, the fact that this claim had to be brought, and that it was contested root and branch and as vigorously as it was, are, if anything, matters that weigh in the scales against him.

401. In the result, and subject only to these qualifications, I do not consider that all the additional matters relied on by both sides either add to Dr Potamianos’ case based on his exclusion from management in a manner that I have held to be inequitable, in particular by affecting the date at which his shareholding should be valued, or add to Mr Prescott’s case on the basis that they provide grounds for denying Dr Potamianos any relief, or alternatively because they affect the remedy that it is appropriate to grant.

402. In particular, in the language of Lord Hoffmann and of Hollington at [8-152], I do not consider that this is a case where there are “special circumstances” which point to a discounted value being appropriate, or where the justice of the case “exceptionally” requires the court to take into account the petitioner’s conduct by applying a discount.

Issue 3

403. This issue is whether Dr Potamianos is entitled to an order that Mr Prescott and SEL (or one of them) purchase Dr Potamianos’ shares at a price to be determined by the court.

404. In light of my findings and the extent to which the parties have been able to narrow their differences as described above, the resolution of this issue is straightforward: Dr Potamianos is entitled to such an order, which is to be made against SRL in the first instance, with liberty to apply in the event that SRL does not comply with that order. However, on the basis that the point about the timing of his offers is not conceded by Mr Prescott, this is subject to the determination, at a further hearing, of the issue of whether any of the offers which were made by Mr Prescott was a “reasonable offer”.

Issue 4

405. This issue, if Issue 3 is answered in favour of Dr Potamianos, relates to (1) the date at which that price should be assessed and (2) the basis on which such assessment should be made, and in particular whether it should be made on any of the following bases (a) a sale between a willing buyer and a willing seller, acting at arm’s length, of the entire share capital of SEL, (b) without any discount to reflect the fact that Dr Potamianos is a minority shareholder or to reflect any lack of marketability of his shareholding, and (c) taking account of and making allowance for the proven unfairly prejudicial conduct.

406. As to the first aspect of Issue 4, I did not understand it to be in dispute that (1) the valuation date is a matter for the discretion of the trial judge subject to the overriding requirement that it should be fair on the facts of the particular case (Profinance Trust SA v Gladstone (“Profinance”) [2002] 1 WLR 1024, Robert Walker LJ at [60]); (2) the starting point is that an interest in a going concern ought to be valued at the date on which it is ordered to be purchased (Profinance at [60]; In re London School of Electronics Ltd [1986] Ch 211, Nourse J at p224; (3) however, there are many cases where fairness to one side or the other requires the court to take a different valuation date, and the Court of Appeal provided an illustrative list in Profinance (at [61]).

407. In the present case, as mentioned above, Dr Potamianos argues for a valuation date of 31 October 2014, on the basis that unfairly prejudicial conduct which had an adverse effect on the value of SEL, SRL and his shares in SRL began on or before that date. In contrast, as also mentioned above, Mr Prescott argues for a valuation date of 7 March 2017, on the basis that Dr Potamianos’ departure from SEL was brought about by his own conduct, that he has made no contribution to either SEL or SRL since that date, and that it would be wrong in those circumstances for him to take advantage of the work product of others, as he would do if a later valuation date were to be ordered.

408. In light of my findings under Issue 2 in the Unfair Prejudice claim, I do not consider that there is any justification for taking either of these dates. The appropriate date is the date on which buy-out order is made. I should add that, although I do not know enough about the finances of the business to know whether viewed in the round there is a scientific basis for choosing a valuation date when SEL was producing some of its better results, I am not convinced that taking an earlier date would be of benefit to Dr Potamianos. Any earlier date would, as it seems to me, require his shares to be valued on the basis that SEL’s rights regarding the source code and related documents were at best uncertain, and it was the evidence of Mr Levine, which I accept, that if, at the time that he was giving advice to Dr Potamianos and Mr Prescott in February 2015 he had known that there was a dispute over intellectual property he would have given very different advice. Mr Levine had earlier said that in the case of the acquisition of a company the size of SEL which competes with much bigger companies, in the event that the founding members were leaving that would be likely to mean that a buyer would not pay so high a price, or might make it difficult to sell at all, and I infer that a serious issue about intellectual property rights would have similar consequences.

409. As to the second aspect of Issue 4, in light of my earlier findings I consider that the assessment should be made on the following basis: (a) that it reflects a sale between a willing buyer and a willing seller, acting at arm’s length, of the entire share capital of SRL, and (b) without any discount to reflect the fact that Dr Potamianos is a minority shareholder or lack of marketability of his shareholding, but (c) without taking account of, or making allowance for, the unfairly prejudicial conduct of which he complained.

410. Mr Prescott submitted that Dr Potamianos acquired his shareholding at a discount, and that this provided a further or alternative reason why a buy-out order should provide for a discount. However, I agree with Dr Potamianos that there is no logic in this argument. If right, it would imply that in a case where a petitioner obtained his shares free of charge, his shareholding should be given no value for purposes of a buy-out. The cases to which I have been referred lend no support to this approach, and it does not accord with the starting point that an interest in a going concern ought to be valued at the date on which it is ordered to be purchased, which seems to me to look at the objective market value of the shareholding, uninfluenced by the price at which it was acquired.

Issue 5

411. This issue is whether Dr Potamianos should have any other order that the Court thinks fit, and if so the basis on which those orders should be determined.

412. On the basis of my findings above, Dr Potamianos does not seek any further or other relief (a claim for quasi-interest that he flagged up being contingent on the Court ordering an earlier valuation date, which I have declined to do), and Mr Prescott contends that no further or other relief should be granted. However, this topic can be revisited to the extent that may be appropriate in light of the contents of this judgment.

CONCLUSION

413. For these reasons, in summary: (1) the Source Code claim succeeds; (2) BDL’s counterclaim for infringement of copyright fails and will be dismissed; (3) SEL’s claim in respect of Schedule No 270416 fails and will be dismissed; (4) SEL’s claim in respect of Schedule No 200815 succeeds; (5) SEL’s claim in respect of Schedule No 130116 fails save to the extent it relates to a claim for delivery up of materials; (6) subject to any of Mr Prescott’s offers being held to be reasonable, the Unfair Prejudice claim succeeds, and Dr Potamianos is entitled to a buy-out order on the above basis.

414. I ask Counsel to agree an order which reflects this determination of these proceedings. I will hear submissions on any points which remain in dispute as to the form of the order, and on any other issues such as costs and permission to appeal, either when judgment is handed down, or else on an adjourned hearing on some other convenient date.

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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 >> Sprint Electric Ltd v Buyer's Dream Ltd & Anor [2018] EWHC 1924 (Ch) (30 July 2018) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2018/1924.html Cite as: [2018] EWHC 1924 (Ch), [2018] WLR(D) 585

England and Wales High Court (Chancery Division) Decisions