Covid-19 Protocol: This judgment was handed down remotely by circulation to the parties' representatives by email, release to BAILII and publication on the Courts and Tribunals Judiciary website. The date and time for hand-down is deemed to be 10:30am on 26 June 2020
RICHARD SPEARMAN QC:
INTRODUCTION
- This is a claim by a litigation funder ("Manolete"), which entered into a Purchase Agreement dated 9 October 2017 whereby it obtained an assignment of the claims of Bright Future Software Limited ("BFS") and Mr Mustafa Abdulali and Mr Neil Dingley, the liquidators of BFS, against Eudora Thompson ("Ms Thompson") and the Respondent ("Mr Ellis"), the former directors of BFS, who were and are partners.
- BFS was incorporated on 9 March 2012 and began trading in April 2012. BFS was the brainchild of Ms Thompson, she was appointed a director on 9 March 2012, and she was at all times the largest shareholder. Mr Ellis was involved in BFS essentially from its inception, invested substantial sums in it over time, and became a minority shareholder. In particular, pursuant to a Subscription and Shareholders' Agreement dated 23 April 2012, Mr Ellis made an initial investment of £100,000, became a 30% shareholder, and was to be appointed "as a Non-Executive Investor Director".
- Manolete has pursued the assigned claims against Mr Ellis alone because it would appear that Ms Thompson has no substantial assets, and indeed has previously been made bankrupt. BFS went into creditors' voluntary liquidation on 23 February 2016.
- There are three principal heads of claim. The first, and much the largest, is for wrongful trading contrary to section 214 of the Insolvency Act 1986 ("the IA"). The claim is for £6,569,168, being the increase in the deficiency of BFS' assets against unsecured claims in the period January 2015 to February 2016. In short, it is contended that if BFS had been liquidated in January 2015 the net deficiency would have been £4,393,747, whereas it was £10,962,916 in the liquidation as happened.
- Manolete's pleaded case under this head is that "As at 31 January 2015 Mr Ellis knew or ought to have known that there was no reasonable prospect that BFS would avoid going into insolvent liquidation" (Points of Claim, [41]). During the course of the trial, Mr Adam Al-Attar, who appeared on behalf of Manolete, expounded that case by reference to a board meeting of BFS held on 16 December 2014. The thrust of Manolete's argument is that by the date of that board meeting Mr Ellis knew or ought to have known that BFS had no viable business and should have initiated an orderly winding up, which would have had effect from 31 January 2015. Mr Al-Attar submitted that, on this basis, and although the meeting forms no part of Manolete's pleaded case, there is no tension between the pleaded date of 31 January 2015 and the focus on that meeting which occurred at trial. Indeed, this approach is favourable to Mr Ellis, as the claim is thus limited to the increase in the liabilities and losses of BFS after 31 January 2015, as opposed to some earlier date in December 2014.
- The second principal head of claim is for a transaction at an undervalue or preference within the meaning of sections 238 and 239 of the IA. This is based on the payment by BFS to Mr Ellis of £325,000 by bank transfers in May and September 2014.
- The third is for a preference contrary to section 239 of the IA. This is based on the payment by BFS to Mr Ellis of £188,769 by bank transfers on 17 March 2015.
- There are parallel claims for breach of duty which rely on the same facts and matters. These parallel claims allege, in substance, that Mr Ellis wrongly acted in his own interests which were in conflict with those of BFS, or acted contrary to the interests of creditors of BFS, or acted as a reasonably diligent director with his general knowledge skill and experience ought not to have done (see Points of Claim, [44]).
- Mr Michael Green QC, who appeared on behalf of Mr Ellis, submitted that all these claims are without substance. He made, among others, the following points. Neither Mr Ellis nor Ms Thompson can be said to have caused BFS to continue to trade in order to benefit personally to the detriment of BFS' creditors. On the contrary, Mr Ellis has lost over £2 million of his own money which he loaned to BFS in order to support his partner, Ms Thompson, in a highly socially worthwhile venture aimed at providing employment and training in software development to young people in deprived areas of the North West. Further, the whole venture was heavily scrutinised by a host of other persons, none of whom suggested at any material time that it was inappropriate for BFS to continue trading. The joint liquidators of BFS did not interview, and Manolete did not call as witnesses, a number of persons who might be expected to have knowledge of many of the significant matters that are in issue. The liquidators' earlier report to the Insolvency Service resulted in a decision not to pursue directors' disqualification proceedings against either Mr Ellis or Ms Thompson. The liquidators did not investigate the present claims properly, and, further, did not comply with their obligations to act honestly and fairly in assigning these claims to Manolete (which has pursued them vexatiously) because the claims are manifestly hopeless and "If it is clear to the [liquidators] that the claim would be hopeless and that the potential assignee is bent on pursuing a hopeless claim in order to harass the third party, then [they] should normally decline to assign the hopeless claim" (LF2 Ltd v Supperstone [2018] Bus LR 2303, Morgan J at [66]).
- Mr Green made some further points which are not directly related to the merits of the three heads of claim. First, Mr Green pointed out that Manolete acquired the present claim for an up-front payment of only £5,000, and will obtain a substantial share of any recoveries, with the remainder being shared between the liquidators and the creditors of BFS. Mr Al-Attar's response is that there is nothing out of the ordinary about any of these matters: as BFS lacked the necessary funds, the liquidators had to obtain external funding in order to attempt to realise assets for the benefit of creditors; and any attack on the conduct of the liquidators, including in fixing their remuneration and striking a deal with Manolete, would need to be properly formulated and made the subject of separate proceedings, which neither Mr Ellis nor anyone else has sought to do. In light of Mr Ellis' sense of grievance at being made the subject of these proceedings, I understand why these points were made. However, I do not consider that they have any bearing on the issues which I have to decide.
- Second, Mr Green complained that the history of disclosure has been unsatisfactory. This complaint breaks down into three main matters. The first is the failure of the liquidators to gain access to BFS' computers and server. As to that, on the basis of the evidence at trial and the materials before me, I accept that there was such a failure, but I do not consider that I am in a position to attach or apportion blame for it. The second is the failure of the liquidators and Manolete timeously to seek or obtain documents from third parties, accompanied by late disclosure of two substantial Supplemental Lists of Documents in the run up to the trial, and followed by Manolete's stance that many of those documents did not need to be included in the trial bundles. As to that, Mr Green did not seek an adjournment of the trial (or any other relief or sanction), and I was not invited to find that any concrete or specific prejudice had been occasioned to Mr Ellis. The third matter concerns the late disclosure on 23 March 2020 (which would have been the sixth day of the trial, if Mr Ellis had not decided not to call Ms Thompson, and the parties had not decided to rely on written closing submissions alone) of a report prepared by the liquidators for the Department of Business, Innovation and Skills ("BIS") on or about 17 February 2017, which Manolete had previously claimed to be both irrelevant and subject to an overriding obligation of Government confidentiality. As to that, Mr Green was able to include in his closing submissions a number of points concerning the contents of this report, and if and to the extent that it is relevant and ought to have been disclosed earlier (which Manolete continues to deny on the basis that its relevance is not accepted, although Manolete has eventually abandoned its long-maintained claim to confidentiality) I am not satisfied that Mr Ellis has suffered any material prejudice because Mr Green was unable to cross-examine Mr Abdulali about its contents.
- The arguments at trial largely revolved around analysis of contemporary documents. This is unsurprising, for the following principal reasons. First, those documents include a number of agreements, the meaning and effect of which are of significance, especially to Manolete's case. Second, those documents are extensive – although it is important to bear in mind that they are not complete, due to the above difficulties in accessing a number of BFS' electronic documents. Third, neither the liquidators nor Manolete have any contemporary knowledge of material events. Fourth, consistent with his case that, having built up substantial personal wealth through other business ventures, he "[had] taken a step back from commercial activity [and] was content to act as a "hands off" investor in a number of businesses including BFS" (first witness statement, [30]), Mr Ellis had limited involvement in, and knowledge of, those events. Fifth, although Ms Thompson undoubtedly had such involvement and knowledge, and although two witness statements made by her were served on behalf of Mr Ellis, as matters transpired she was not called to give evidence on his behalf. Mr Green submitted that this did not cause any disadvantage to the Court for the reasons explained by Leggatt J (as he then was) in Gestmin SGPS S.A. v Credit Suisse (UK) Limited [2013] EWHC 3560, culminating in the statement at [22] that "the best approach for a judge to adopt in the trial of a commercial case is … 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". It should be noted, however, that Leggatt J went on to make clear that he was not suggesting that oral testimony serves no useful purpose and to say that its value includes "the opportunity to gauge the personality, motivations and working practices of a witness".
THE WITNESSES
- The only witness called by Manolete was one of the joint liquidators of BFS, Mr Abdulali. He is a partner in Moore (formerly Moore Stephens), qualified as an insolvency practitioner over 30 years ago, and is highly experienced. He made two witness statements. The first, dated 18 June 2018, sets out the basis of Manolete's claims. The second, dated 13 February 2020, was served in reply to the first and second witness statements of Mr Ellis dated 11 December 2018 and 16 January 2020 and the first and second witness statements of Ms Thompson dated 11 December 2018 and 17 January 2020. Neither of his witness statements contains much direct evidence. In the main, they are concerned with exposition of documents and with making forensic points. For example, at [10] of his second witness statement Mr Abdulali states: "Mr Ellis states that he had no operational responsibilities or executive role at BFS. He was however a duly appointed director of BFS and a substantial stakeholder in its business. I also note that (1) Mr Ellis received a salary from BFS … (2) He attended board meetings … which were arranged by reference to his diary … and at least one management meeting … (3) On 5 July 2013, Mr Ellis wrote to BFS's solicitors, Kemp Little … as follows … from which I believe it is reasonable to infer that Mr Ellis had an active role in the financial and other affairs of BFS". Mr Abdulali was cross-examined for more than a day.
- Although witness statements of both Mr Ellis and Ms Thompson were served, as mentioned above Ms Thompson was not called to give evidence, and Mr Ellis alone gave evidence on his own behalf. He was cross-examined for more than two days.
- Mr Green was highly critical of Mr Abdulali, both with regard to his conduct as a liquidator and with regard to his evidence in these proceedings. Some of those criticisms have been touched on above. Dealing with them in greater detail:
(1) As appears below, the funding which BFS obtained from the Regional Grant Fund ("RGF"), and Manolete's claim that BFS breached the terms on which that funding was made available in such a way as to jeopardise the viability of BFS, form important aspects of this case. In particular, Manolete contends that only private investment from Mr Ellis was approved by RGF, whereas Mr Ellis contends that RGF was happy with investment provided by My Futures Bright Limited ("MFB") as well. Nevertheless, the liquidators did not interview anyone at RGF concerning these issues. According to Mr Abdulali's second witness statement (at [116(10)]): "Due to the departure of key staff who were BFS's contacts at BIS and the RGF, I have been unable to speak to anyone at BIS with contemporaneous knowledge of this matter".
(2) Mr Abdulali's oral evidence was to slightly different effect:
(i) The RGF's claim in the liquidation of BFS was made by letter dated 11 February 2016, which named Angela Humphries as the RGF monitoring officer for the project and the contact for enquiries. Mr Abdulali said that he could not remember speaking to Ms Humphries, but that he may have done so. The liquidators' report to creditors dated 23 February 2016 included a statement of affairs which listed the Department for Communities and Local Government ("DCLG") as an unsecured creditor with a claim of £2,800,000. Mr Abdulali said that the liquidators had spoken to "two ladies" who attended the creditors' meeting on behalf of what they called the RGF, he could not say what department they came from, or identify them without looking at his file, but they made representations in respect of both the RGF Grant and the RGF Loan (i.e. the sums of £2,800,000 and £2,000,000 considered below).
(ii) The RGF letter dated 11 February 2016 attached the RGF Offer Letter dated 27 March 2014, which stated that in the event of queries relating to the Offer Letter contact should be made with Graham Hart or Rob Don. When asked whether he had made contact with anyone who was involved when the RGF Grant and RGF Loan were being made in 2014 and 2015, Mr Abdulali said "as far as I can recall, all the people who were involved at that time were no longer in the department", and that Manolete's solicitors had tried to make contact "[With] Graham Hart or somebody. And my understanding is that, because the issue had been so many years gone, he did not want to get involved or make any comment about it" but "Certainly, from our perspective, I didn't get in touch with anybody".
(iii) In sum, therefore, it is possible that Mr Abdulali did speak to one or more women who had contemporaneous knowledge, although he did not establish whether they had such knowledge; and, in any event, it was possible to speak to at least one person who had such knowledge, namely Mr Hart, although Mr Hart was unresponsive.
(3) Mr Green submitted that Mr Abdulali was not telling the truth about these matters, either because he knew that the RGF did not support the case against Mr Ellis or to cover for his deliberate failure to interview anyone. I do not consider that any such findings are justified. Taking Mr Abdulali's evidence at face value, however, it is clear that neither the liquidators nor Manolete were able to find anyone able or willing to give evidence as to the knowledge and stance of the RGF at any material time concerning its dealings with BFS. In addition, I find it surprising, and I consider that it should have given Manolete pause for thought, that an employee in a government department was reluctant to become involved in assisting the pursuit of claims which, if sound, would enable it to recover a significant part of £4,800,000 of public money. I shall bear these matters in mind when assessing Manolete's wrongful trading case.
(4) The liquidators did not interview either Ms Thompson or Mr Ellis. In oral evidence, Mr Abdulali explained that "I felt that once the letter before action had gone, there was an opportunity at that time to put forward any issues they had". I agree with Mr Green that this was not a good reason for not interviewing Ms Thompson and Mr Ellis. Especially without access to all of BFS' records, I consider that it would have been prudent to interview them, both to gain a better understanding of BFS' affairs and in fairness to them.
(5) Mr Abdulali explained that although the liquidators had BFS' server in their offices and asked their IT people "to come and take a look at it to see if they could gain access to it because we needed to" they could not gain access. He said that they did not ask Ms Thompson or anybody at BFS for any passwords or user names in 2016 "[b]ecause we felt that we had enough records from other sources … from the other people we had contacted". Later, after the present proceedings had been started, a request was made for passwords, but Ms Thompson and Mr Ellis were unable to provide them. Although Mr Green submitted that this conduct was incomprehensible, I do not consider that on the evidence available to me it would be safe to conclude that Mr Abdulali's approach was unreasonable. Nor, as indicated above, do I feel able to say who as between the liquidators on the one hand and Ms Thompson and Mr Ellis on the other is more to blame for the ultimate failure to gain access to the server.
(6) Mr Green submitted that Mr Abdulali was incoherent in relation to some very important figures, particularly in relation to the increased deficiency calculation which forms the basis of Manolete's claim for £6,569,168 in respect of wrongful trading. I will return to this when considering that claim.
(7) Mr Green submitted that Mr Abdulali had alleged breaches of the RGF Offer Letter without any proper basis for doing so, and without explaining why he considered such breaches existed, and, more generally, had no belief in the wrongful trading claim because (for example) it was not included in the report to the Insolvency Service. I will return to these points to the extent that I consider appropriate after I have determined the merits of that claim.
(8) An RGF Project Monitoring Visit Report relating to BFS dated 12 May 2015 states: "Private Investment is a combination of the existing investor and alternative funding including TCA". The final "Independent Accountants Report" from Hurst & Co Accountants LLP ("Hurst & Co") dated 16 June 2015 states: "The private investment funding includes £649,209 received from [MFB]". In light of the contents of these documents, in particular, Mr Green submitted that Mr Abdulali's claim that he had seen "no evidence that MFB was disclosed as a Private Investor" was being maintained in the face of overwhelming evidence to the contrary. Again, I will return to this below.
- In 124 pages of written closing submissions, Mr Al-Attar makes no mention of the evidence of Mr Abdulali save in relation to one matter. This reflects the fact that, as mentioned above, Mr Abdulali's evidence essentially comprises a narrative based on the documents, interspersed with matters of argument. The one aspect of Mr Abdulali's evidence which Mr Al-Attar does address concerns the quantification of the increased deficiency which is central to the wrongful trading claim. Mr Al-Attar submitted that Mr Abdulali had wrongly made concessions "[u]nder substantial pressure in cross-examination". This is an important point, which I address below.
- Mr Al-Attar also made no general submissions concerning the credibility of Mr Ellis, preferring to make specific points as to certain aspects of Mr Ellis' evidence by reference to what the documents show, contrasts between his written and oral evidence, and so forth. I will deal with those points as part of the factual background.
- Mr Green submitted that Mr Ellis was an honest witness who reasonably accepted adverse points and gave his evidence in a sincere and considered manner. As emerged from his evidence and his demeanour, he and Ms Thompson did not set out to extract public money while protecting their own exposure, but instead supported BFS for virtuous motives, and remained committed to its business until the very end. Mr Ellis agreed to provide funding of up to £10.2m, and was "prepared to back a turnaround plan … had they asked me … 'We need some money from you … to make this work and your equity has to reduce and you have to write off your debt' or whatever … I would have done that. It wouldn't perhaps have been such good business from my point of view but I would have done that and been pleased to do it". Mr Ellis and Ms Thompson were devastated when BFS failed, and to be accused of having wrongfully traded BFS from January 2015 was "absolutely dreadful" and "felt like being hunted down for some, what feels to me, at any rate, like some mythical violation of something which I am not aware that I might have done".
- I broadly accept that description of Mr Ellis and his evidence. It is nevertheless important to bear in mind that Mr Ellis did not have a detailed recollection of many of the material events, which occurred several years ago, and, further, that his evidence falls to be tested by comparison with the contents of the documents.
- Mr Ellis was and is a wealthy man. He was worth in excess of £20m at the material time, holding his money in cash and various investment projects (but not in equities). If called upon to do so, he had sufficient liquidity to provide the full £10.2m of funding that he committed to provide to BFS in April 2014. The lending he provided to BFS both before and after that date was substantial, and there appears to have been no set pattern to it. Both BFS and MFB were essentially Ms Thompson's projects.
- I have concluded that, while the sums involved were significant, Mr Ellis did not focus very keenly on the amounts which he was being asked to lend, or indeed the commercial wisdom of that lending, but was instead prepared to do as Ms Thompson asked because he was supportive of her, believed in those projects, and could afford to do so. At the same time, based on Mr Ellis' evidence and what the documents show, while Ms Thompson had faith in her own business acumen and genuinely hoped that the projects would succeed, she also had a much better appreciation than he did of their day to day finances. I believe this prompted her to temper the demands on Mr Ellis' pocket as time went on, and the projects faltered. These points go some way to explaining why Mr Ellis signed an agreement which inaccurately stated the amount of his lending to BFS (an aspect of the claim for £325,000), and why his lending to BFS trailed off over time (an aspect of the wrongful trading claim).
- A particular feature of this case concerns individuals who were not called to give evidence. These include, on the one hand, neither any RGF, BIS or DCLG personnel nor Mr Moseby of Kemp Little (the solicitors for BFS), and, on the other hand, Ms Thompson. Both sides placed reliance on the well-known observations of Brooke LJ in Wisniewski v Central Manchester Health Authority [1998] PIQR 324, at 340:
"(1) In certain circumstances a court may be entitled to draw adverse inferences from the absence or silence of a witness who might be expected to have material evidence to give on an issue in an action.
(2) If a court is willing to draw such inferences, they may go to strengthen the evidence adduced on that issue by the other party or to weaken the evidence, if any, adduced by the party who might reasonably have been expected to call the witness.
(3) There must, however, have been some evidence, however weak, adduced by the former on the matter in question before the court is entitled to draw the desired inference: in other words, there must be a case to answer on that issue.
(4) If the reason for the witness's absence or silence satisfies the court, then no such adverse inference may be drawn. If, on the other hand, there is some credible explanation given, even if it is not wholly satisfactory, the potentially detrimental effect of his/her absence or silence may be reduced or nullified."
- In addition, with regard to Mr Ellis' decision not to call Ms Thompson, Mr Al-Attar referred me to Phipson on Evidence, 19th Ed., at 11-15:
"Where a party declines to call a witness in respect of whom he has served a witness statement, the court cannot compel the party to call him as a witness, but the court may draw an adverse inference against a party who fails to call a witness to deal with certain evidence. No such adverse inference will be drawn where it is not reasonable to expect the witness to be called, for example where there is no case to answer."
- Mr Al-Attar also referred me to Jaffray v Society of Lloyd's [2002] EWCA Civ 1101, in which Waller LJ, speaking for the Court of Appeal, said at [406] that it was somewhat unsatisfactory that a statement by a witness who was not called to give evidence should have been prepared and placed before the judge for his pre-reading. The Court then addressed the question of whether the judge should have drawn an adverse inference against the party who had served the witness statement, and stated:
"It seems to us that on aspects where the evidence points in a direction against Lloyd's in an area which could have been dealt with by Mr Randall the judge should have drawn an adverse inference from Lloyd's failure to call Mr Randall to deal with it. This does not mean that any allegation that the names make against Mr Randall must be accepted because he did not give evidence. It simply means that where the evidence points in a certain direction an adverse inference can be drawn from a failure to call the witness to deal with it."
- In line with these authorities, the case for drawing adverse inferences from Mr Ellis' decision not to call Ms Thompson is clear. That decision took place against the backdrop of the Covid-19 pandemic. The trial started in a week in which the emerging seriousness of the pandemic gave rise to evolving guidance as to the conduct of trials, the upshot of which was that, by the end of the week, the emphasis had moved away from carrying on so far as possible as usual to one of continuing to conduct trials but doing so remotely if at all practicable. However, Mr Green did not suggest that health concerns played any part in the decision not to call Ms Thompson (in fact, I had arranged for the second week of the trial to be moved to a large court room with video facilities, which would have enabled social distancing and enabled her to give evidence remotely). Instead, Mr Green explained that the decision was taken because in light of Mr Ellis' evidence her evidence was not needed to support Mr Ellis' case. The adverse inference that Mr Al-Attar invited me to draw against Mr Ellis is that Mr Ellis has no answer to the natural implications of the documents.
- The case for drawing adverse inferences from the absence of Mr Moseby and of any individual from the RGF, BIS, DCLG is less clear, but in my view is also made out.
- In cases, like the present, which relate to events which happened years ago, 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 witnesses, 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 (cited above) 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.
- 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 recollections of Mr Ellis, save where they appear uncontroversial, or objectively probable, or are supported by the contemporary documents. That does not mean that the reliability of Mr Ellis is of no consequence. Where it is significant, however, I consider that it is probably safer to make findings with regard to specific instances, rather than to form a view as to Mr Ellis' 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
- BFS carried on business as a software developer and provider of software services, as well as providing vocational training for apprentices. The basic premise of the business was that an opportunity existed to provide services to organisations which outsourced software development to foreign countries such as India and which would move their outsourcing requirements back to the UK if the supply of skills was available and represented value for money for them. BFS undertook a pilot programme of recruitment and training in 2012/13 to test the validity of this concept.
- MFB was incorporated on 13 June 2012 and, until it entered creditors' voluntary liquidation on 9 March 2016, carried on business as a trainer of apprentices, and provided the formal training of apprentices employed by BFS. MFB was funded through apprenticeship funding. MFB had two contracts with Total People Limited ("Total People"), numbered CO15-370 and TB15-416. Total People was a primary contractor of the Skills Funding Agency ("SFA"), and contracted with MFB as a sub-contractor. The terms of those two contracts are relevant to whether, as Mr Ellis contends, MFB was free to use its money as it wished, or whether, as Manolete contends, MFB had obligations which fettered its use of monies received from Total People. Mr Al-Attar pointed out, for example, that under contract CO15-370, MFB was appointed by Total People to provide "Services" comprising education services to train young people to achieve an academic qualification, either an NVQ or a degree level qualification; MFB was obliged "to allocate sufficient resources to provide the Services in accordance with the terms of this agreement"; MFB was also obliged to adhere to the SFA funding rules; and MFB's right to payment up to the "maximum contract value" of £2,463,225 depended on achieving the "delivery volume", in other words the number of students committed over the period defined.
- BFS and MFB were under the common ownership and control of Mr Ellis and Ms Thompson, who were each directors of both companies at all material times, and the two companies shared office space, facilities, training and other costs in Media City, Salford. (I omit discussion of any other directors and shareholders, as they are not relevant.) BFS charged a management fee to MFB in respect of its share of the costs.
- Mr Al-Attar submitted that the provisions of the cost sharing agreements between BFS and MFB were relevant to the following issues. First, whether MFB was free to use its money as it wished. Under one cost sharing agreement MFB was obliged to pay over its "net income" towards BFS' expenses. Under the other MFB was obliged to pay over its "fair share of costs to BFS as a contribution towards BFS's expenses". Mr Al-Attar submitted that this "fair share" was another substantial obligation of MFB. Second, whether MFB had "surplus" cash. Mr Al-Attar submitted that a conscious deferral of the payment of the management charge does not in any real sense generate "surplus" cash, because the due debt remains to be paid. Third, whether the RGF approved MFB as a Private Investor. Mr Al-Attar submitted that it is implausible that the RGF would have given such approval if the RGF had known that MFB was paying over its monies from Total People and the SFA for use by BFS to fund BFS' own project, when (i) MFB had an obligation to allocate sufficient of those monies to the provision of academic education services, which was a matter distinct from BFS' own project, and (ii) MFB's generation of an apparent cash surplus was illusory, being the result of MFB not paying its due debts.
- In 2012, Mr Ellis provided finance to BFS: first, by subscribing for £99,999 of shares in BFS pursuant to an agreement dated 23 April 2012 ("the Subscription Agreement"), and, second, by a loan of £155,000 on 2 October 2012 which was increased to £185,000 on 14 November 2012.
2013
- In or about March 2013, BFS applied to the RGF for a grant. In a letter of support from Mr Ellis, he stated that the grant of £4.88m applied for represented "just under one third of the total investment necessary to achieve an initial level of profitability in year 3 of the project" and would "allow our further element of private funding to proceed with confidence". In cross examination, Mr Ellis was asked "You were going to provide and you did end up providing £10.2 million?", and he replied "Yes. 'Our', 'my', yes. I would make them interchangeable, but yes".
- BFS' application was entered in a competition held by BIS. On 9 July 2013, BIS gave notice that BFS' application had been successful for an allocation of funding in principle, subject to due diligence and negotiation by BIS and the RGF. There then followed a period of due diligence and negotiation between the RGF and BFS, which included the following stages in 2013 and 2014 respectively. Hurst & Co, accountants, produced a draft due diligence report in October 2013, which was updated in November 2013. Hurst & Co produced a Final Confirmatory Due Diligence Report in January 2014, and an Addendum thereto in February 2014.
- Mr Ellis accepted in cross examination that it would have been "desirable" had he read both the Final Due Diligence Report and the Addendum at the time of their publication by Hurst & Co, those documents being signed as true as to their factual content by Ms Thompson on behalf of the board of directors of BFS on, respectively, 24 February 2014 and 3 March 2014.
- The Final Due Diligence Report stated that BFS "has identified a private investor who is prepared to fund the project to meet the investment gap of £6m". This was a reference to Mr Ellis. The section entitled "Loans" stated "Mr R Ellis has loaned [BFS] £325k since its inception. A legal agreement was drafted in July 2013 providing a £500k borrowing facility to BFS from Mr Ellis, including the £325k already borrowed. This agreement has since been amended to increase the amount to £632k and we understand it is to be re-drafted to increase the amount further". Mr Al-Attar submitted that the omission of MFB as a lender of the amount of £591,855, which (as will appear) is said by Mr Ellis to have been lent to BFS from July 2013, (a) shows that MFB was not regarded as a private investor in BFS at this time, and (b) supports Manolete's case that MFB was not approved as such by the RGF.
- The following points emerge from the Final Due Diligence Report, which was provided to BIS and the RGF. BFS projected costs of £27.319m by 31 March 2016 in order to achieve a project that created 356 full-time jobs from BFS' premises in Salford. BFS applied for funding in connection with the costs of that project to 30 June 2015, and "After that year, the company is projected to be generating sufficient profits to fund costs and repay private investment". BFS had originally forecast costs of about £18.55m to the end of the 2014/2015 financial year, for which it required about £15.1m funding, of which £10.2m was to be provided by private investment. The original costs and funding estimates were revised downwards based on an increased projection of "internally generated funds", which were projected to be: £346,000 by 31 March 2014; £4,785,000 by 31 March 2015; and £16,744,000 by 31 March 2016. On this basis, it was submitted to the RGF that the amount of £6m which - in accordance with a letter from him to Hurst & Co dated 14 November 2013 - Mr Ellis was prepared to commit at that time was adequate private investment.
- In an email to Ms Thompson dated 23 December 2013, Mr Hart wrote:
"Following his call with you earlier today Alistair Edwardes has asked me to forward this email to you as he now left the office for Christmas holidays. He has proposed a meeting by conference call early in the w/c 6th January to discuss with you how BIS can reach agreement with you on the following matters which will be of concern to the RGF Investment Committee when it considers approving the grant award to Bright Future. These are the some of the same matters raised when he came to see you a few weeks ago in Manchester:
1. Confirmation the project is and will remain fully funded and that the taxpayer bears no more risk than other investors:
We have received confirmation through the due diligence that the investor Mr Ellis has expressed his continued financial support for the business. The RGF Offer Letter would require (as a preliminary condition) that before Bright Future may draw down any RGF grant we have received evidence that the investor's funds have been formally committed to Bright Future to ensure that the project is fully funded. This means that:
a). in the event that the performance of Bright Future is insufficient to enable it to achieve the projected level of internally generated funds that Bright Future may call on the investor's funds to support the business to meet the shortfall up to £10m; and
b). in the event that Bright Future fails to create the number of jobs that it has contracted for having been paid its RGF grant and the company is unable to repay the grant in full then in those circumstances BIS:
i). ranks equally with other investors in the recovery of funds which are still in the business; and
ii). If the investor's £10m facility has not been drawn in full, BIS may require Mr Ellis to inject funding up to £10m so that Bright Futures could meet its obligations to BIS.
2. Ensuring we are still only giving the minimum sum of money necessary for the project to go ahead:
The RGF Investment Committee will be concerned that the amount of financial support from the investor ('private leverage') has been reduced since the application from £10.2m to £6m whilst the amount of grant being claimed from RGF is unchanged. It is understood from the due diligence that this is because the owners wish to rely on the projected higher level of internally generated funds from additional income opportunities rather than call on the funds which are still available from the external investor. However in effect this means that the owners of Bright Future have voluntarily chosen not to take up private funding which is still available to them."
- In 2013, between 31 July 2013 and 17 October 2013, Mr Ellis loaned further sums to BFS, amounting in total to £413,525, which were secured by an all monies debenture from 5 July 2013. On the same date, all previous lending was rolled into a loan facility agreement ("the £500,000 Facility"). This was amended on 16 August 2013 to increase the facility to £632,000 and again on 17 September 2013 to increase that facility to £662,000. Mr Ellis agreed further written and secured loans with BFS on 30 November 2013 for £274,747, and on 28 December 2013 for £220,000.
- In the trading period from 9 March 2012 to 30 April 2013, BFS made a loss of £244,767 and had net liabilities of £144,767.
2014
- On 10 January 2014, Mr Alistair Edwardes of the RGF wrote to Ms Thompson:
"We discussed the case this morning with our investment committee who will ultimately approve the project. Their view was that Ministers agreed to a commitment of £10m in private investment to support the project and that a reduction in commitment and use of this facility should result in a proportional reduction in the level of RGF grant."
- Mr Green submitted that this email constituted notification to BFS that the RGF had decided to split the funding between a loan and a grant. I do not read it that way.
- This prompted BFS to consider revised proposals. In an email from Ms Thompson to Mr Hart and Mr Edwards dated 14 January 2014, she initially proposed a grant of £3.535m and a loan of £1.247m, and a reduction of external funds from £10.2m to £7.34m. Any shortfall in sales "would be suffered by Mr Ellis rather than the RGF".
- Mr Ellis accepted in evidence that BFS' original application had indicated that he would fund £10.2m, that Ms Thompson kept him up to date with the material developments in discussions with the RGF, and that in response to the BIS' reaction to his willingness to fund only £6m neither he nor Ms Thompson explained to BIS that there should be no concern about this as MFB was also a known and approved lender to BFS. Mr Al-Attar submitted this evidence supports Manolete's case that even if MFB was a lender to BFS it was not one known to or approved by the RGF.
- Mr Robert Don of the RGF responded to Ms Thompson's proposal later on 14 January 2014:
"I'm afraid I don't quite understand the logic of your revised proposal below. Can you please explain the basis for reducing the private investor's funding from £10.2m to £7.34m and the RGF grant element to £3,535,000?
Based on some of your comments below and on the telephone, I am also concerned that there may still be some misconceptions about why these complexities are arising at this point. The bullets below are intended to try and dispel any myths and explain where we are coming from a little better:
1. The RGF is designed to unlock projects which would not otherwise go ahead by providing funding to plug a "gap" between what a project costs and what an applicant can raise. In all cases the RGF will be funder of last resort and the sum ultimately awarded is to the minimum sum necessary for the project to go ahead.
2. RGF case officers are tasked with contracting the bid which Ministers approved at the outset - and when the bid changes, a bid that is at least as good as that original bid. This is to stop a bidder from being selected, at the expense of others, then reducing their side of the bargain to what they actually thought.
3. In your bid, you had £10.2m of up front private leverage from the investor Mr Ellis. This as I have said was important to Ministers because it showed, despite an ambitious and risky business plan, that the private sector was prepared to take on a significant amount of the risk and was prepared to commit to inject £10.2m of his own cash. Subsequently, we are now told that you plan not to use the whole £10.2m facility and will use incremental (but uncertain) operating cash flows instead. This creates two issues for us:
a. You no longer have up front investment of £10.2m, which significantly increases the risk for the taxpayer: So if the business plan doesn't go to plan, we can't be sure that the full investment you anticipated occurs - which means the taxpayer might not get the jobs (which is ultimately why we are supporting the project). What if the additional incomes you forecast don't occur? Would Mr Ellis still want to put his £10.2m in if it looks like the business plan won't work? We suspect not - and when we have asked what assurance we have that he will invest the full £10.2m as described in your application, we've been told he is not willing to commit.
b. It's no longer clear that you need £4.88m to unlock this project: If you expect more revenues and cash and can use more retained earnings than you initially thought, plus you still have the £10.2m facility Mr Ellis had committed and was in your bid, then actually the funding gap has reduced. As we informed you on Friday our Finance and Investment Committee (FISC - the panel that decides on the awards) therefore advised that if the external investment reduces, we should reduce RGF too. I think that is what your proposal below attempts to recognise, but you have not justified the basis for the new figures. There's actually an argument to say if you voluntarily pass up more than £4.88m of Mr Ellis's funding then you don't need any RGF at all - the project now costs £27.3m, the expected operating cashflows are projected at £16.4m, and Mr Ellis's funding is £10.2m - meaning you'd need an RGF award of circa £700k (note we have to be agnostic about share dilution etc, this is just about the funding gap). But FISC has actually been more generous than that by saying we'd expect our funding to reduce in proportion to the amount up-front private external leverage reduces. So if the external private funding is reduced from £10m to £6m, the RGF would be approximately £2.9m (60%)."
- Following this exchange, and having requested and been granted an extension of the period of negotiation to 24 January 2014, BFS made a second revised proposal for a 100% convertible loan of £4.882m on 21 January 2014. Mr Hart replied that he would present this proposal to the RGF Investment Committee.
- On 24 January 2014, Mr Hart wrote to Ms Thompson:
"The Panel indicated support 'in principle' to the proposal, subject to some further clarification from you and, as we discussed previously, to some additional confirmatory due diligence. In particular:
• they would be reluctant to support an upfront single payment and would be more likely to support phased drawdowns within the 2014/15 claims period alongside (but not ahead of) injections of funding by a private external investor
• they would want to understand from further due diligence the amount of 'headroom' in the company's financial projections to meet loan repayments
• due diligence to confirm market rate salaries and dividend policies
• confirmation that the RGF ranks pari passu with the most superior debt
The Panel also raised an additional query today: They wanted to understand whether you had explored the possibility of any additional funding towards the costs of the NVQ3 and NVQ4 training from the Skills Funding Agency/DfES as an alternative to RGF funding. I would be grateful if you would confirm that you have explored and have exhausted this avenue for alternative public funding. We'd also like the due diligence to confirm the 'associated company' relationship between MFB and Bright Future, how much funding is received from the SFA by MFB for Bright Future's staff and why the SFA funding to MFB for the apprentices should not count towards the total state aid benefit as part of an employment package to Bright Future staff".
- Mr Al-Attar submitted that these documents reflect that: (1) Mr Ellis was the sole "private investor" in BFS; (2) it was BFS (not the RGF) which moved from the position of a 100% grant when BFS sought to reduce the amount of Mr Ellis' private investment to £6m; and (3) MFB was not assessed by the RGF as a private investor.
- Following a conference call between Ms Thompson, Mr Hart and Mr Don on 27 January 2014, Mr Hart instructed Hurst & Co to prepare the Addendum to the Final Due Diligence Report. He required an assessment of BFS' debt capacity based on its projected income to assess whether BFS could repay the proposed loan. The initial projections had included BFS repaying Mr Ellis early on the basis that his loan would be expensive. This proposal was dropped upon Mr Hart informing BFS on 4 February 2014 that the RGF would be unlikely to consent to such payments: "We would be unlikely to consent to repayment of private money whilst the company is still in receipt of public funds and whilst the project has not completed."
- In his email to Hurst & Co, Mr Hart stated "The draw down profile for the RGF loan will be based on BF's funding requirements set out in the company's financial plan and alongside (but not ahead of) injections of private money – it being recognised that private investors have already injected funds since the conditional offer was made" (underling added). Mr Green submitted that this, and other documents such as Mr Hart's email to Ms Thompson dated 24 January 2014, showed that the RGF knew of MFB's existence and function, knew of MFB's relationship with BFS, and knew that MFB was receiving funding from the SFA. That would appear to be correct.
- Mr Green further suggested that the reference to "private investors" in the plural showed that the RGF knew that MFB had injected funds into BFS. I do not consider that is right. The next sentence in the email to Hurst & Co states "The basis of the conversion would relate to the amount of external private funding introduced into BF by the investor(s) over the period extending from the start of the project (July 2013) until 31 March 2016". This undermines the suggestion that the RGF knew that there had been more than one "private investor" into BFS since July 2013. In my view, the email merely indicates that the investment which was to be taken into account for purposes of matching it to RGF funding might be provided by one or more private investors, exactly as was in fact catered for when the RGF Offer was later made.
- It appears from an email from Ms Thompson to Mr Ellis dated 28 January 2014 that, although Mr Ellis was apparently not involved directly in any of the discussions with the RGF, he was kept informed of the above developments by Ms Thompson.
- In accordance with the cash flow analysis in the Addendum prepared by Hurst & Co, in the year-ended 31 March 2015, BFS' projected negative operating cash flow of £4.925m, arising from a loss of £5.465m, was to be met by £3.271m from Mr Ellis and £3.130m from the RGF. In the next year, sales were projected to rise from £4.822m to £16.744m, thus sustaining the business without substantial further private investment. The Addendum stated:
"By 31 March 2016, the company is anticipated to be generating a profit. It is expected that the company will achieve a positive balance sheet position by 31 March 2018.
Although the projections record a negative balance sheet position until the year ended 31 March 2018, cash-flow projections forecast that the company will be able to meet its liabilities as they fall due. The company would, therefore, not be trading from an insolvent position."
- By email dated 11 February 2014, Mr Hart raised queries with Hurst & Co, which included the following:
"Looking at the longer term financial projections there is a case that the company would be trading whilst balance sheet insolvent and therefore clearly dependent on the continued financial support of shareholders/investors."
- Mr Ellis agreed in evidence that a decline in actual sales against projections would have put more demand on his facility, that as a lender and director he should have paid attention to how the projected cash-flows modelled by BFS and discussed by Hurst & Co compared to actual performance, and that he and Ms Thompson should have had regard to Hurst & Co's opinion concerning insolvency in the Addendum.
- Based on the foregoing, Mr Al-Attar submitted that as of February 2014 it was or should have been known (1) that BFS would trade while insolvent and (2) that this was justified only if (a) Mr Ellis stood by BFS and provided funding to see BFS through its forecasted loss-making period, and (b) BFS performed at a level at least approximate to its projected high-growth forecasts.
- Ms Thompson first contacted Kemp Little concerning the work that had to be done for BFS in connection with the draft Offer Letter from the RGF on 11 February 2014. As required by the draft Offer Letter, she instructed Kemp Little's James Wilkinson to prepare the inter-creditor agreement which Mr Hart, of the RGF, had indicated on 7 February 2014 would be required.
- By email to Ms Thompson dated 12 February 2014, Mr Hart attached a draft RGF Loan Offer Letter and explained (among other things) that "The draft offer letter [from the RGF] does permit some flexibility for you to source private funding from investors other than Mr Ellis with our consent".
- On 13 February 2014, Ms Thompson sent an email to Helen Besant-Roberts, of Hurst & Co stating "This is not at all helpful".
- On 14 February 2014, Ms Thompson received comments from Mr Wilkinson of Kemp Little on the draft RGF Offer Letter, who noted (among other things) that in accordance with draft Clause 2(b) the amount could be provided under that facility by "Private Investors" (plural). Mr Wilkinson's email prompted the following comment from Geoff Hancock, a business consultant advising BFS at the time, which Ms Thompson relayed to Mr Wilkinson by email dated 17 February 2014: "Clause 2b refers to Preliminary Conditions, so the changes here make me understand you anticipate other funders (? MFB) to be part of the £10.2m facility and thereby enable the funding which has gone in from MFB so far to be eligible!" Ms Thompson asked: "Are we correct in our understanding?" The documents available at the trial did not include any reply to that email from Ms Thompson.
- In an email to Ms Thompson dated 21 February 2014, Mr Don said that the RGF would revert with a revised Grant Offer Letter template, and listed among other "initial reactions" that he would like to have worked through the following:
"RGF funding profile vs the investors: we would like to see that our funding is going in alongside the private sector investment on an equal risk basis. Therefore I'd like to stick to the model that our money goes in £1 for £1 with the pace of private sector investment and no faster."
- On 21 February 2014, Mr Wilkinson circulated a draft of the £10.2m Facility to Ms Thompson "for Robin [Ellis]". He stated: "this document replaces all existing loans and facilities from Robin" and asked Ms Thompson to "check that the definition of "Previous Facility Agreements" is correct and picks up all previous arrangements".
- On 24 February 2014, BFS agreed a further loan of £20,000 with Mr Ellis.
- By email to Messrs Hart and Don dated 7 March 2014, Ms Thompson stated:
"Our private investors are now fatigued with the time scales involved and changes of potential public support from grant to loan with grant conversion to simple loan and then the additional timing and other issues now introduced. They are now very cynical and wary of the 'incentive' that Dept BIS wish to provide and are ready and willing to walk away from the project …" (underlining in the original)
- The delay in the agreement of RGF funding resulted in Mr Ellis being required to provide further funding for BFS, as evidenced by emails between Ms Thompson, Mel Rawlinson, BFS' finance manager, and Mr Ellis on 11 and 23 March 2014 for a drawdown of £160,000. This was in addition to the previous draw down request of £148,000 made on 29 January 2014. In connection with this funding, Ms Thompson wrote to Mr Ellis on 23 March 2014:
"We have calculated the minimum shortfall on our working capital requirements due to the delay in the RGF funding.
This shortfall amount is dependent upon working with our suppliers and agreeing payment plans with them. Without additional funds we will not be able to meet the payroll at the end of this month.
We commit to pay over all the monies received from Total People in May'14 to repay part of this loan amount. These monies currently equate to approximately £120,000. We commit to pay the balance in June."
- A further draft Offer Letter was produced by the RGF on 21 March 2014, which proposed a grant of £2.882m and a repayable loan of £2m. The email stated:
"We have assumed an exceptional claim in April 2014, but you will need to have met all of the preliminary conditions before you can claim. The drafting means that if you fail to meet the preliminary conditions by the first claim date the offer will lapse and all of the funding will be lost."
- On 23 March 2014, Mr Ellis entered into a further loan agreement with BFS for £200,000. Pursuant to this agreement, and the earlier loan agreements dated 30 November 2013, 28 December 2013, and 24 February 2014, between 2 December 2013 and 5 April 2014, Mr Ellis loaned BFS sums amounting in total to £565,222. Accordingly, between 11 July 2013 and 5 April 2014 he loaned £978,747 in total.
- On 27 March 2014, the RGF confirmed to BFS in a telephone call between Mr Hart and Ms Thompson that an offer would be made of a grant of £2.882m and of a loan of £2m ("the RGF Offer Letter"). The loan was to be convertible to a grant, if all £10.2m of private investment was achieved. A lesser proportion would be converted to the extent that private investment exceeded £5.32m. The RGF Offer Letter was signed on behalf of the Secretary of State (at BIS) and the Accounting Officer on 27 March 2014, and was signed by Ms Thompson on 28 March 2014.
- In his first witness statement, Mr Ellis stated at [43]: "I was not involved in the decision to accept the terms offered by the RGF". In his oral evidence, he said: "I agreed to it in the end somewhere, I think … I believe I signed something to do with it". Mr Al-Attar submitted that these two accounts were diametrically opposed to one another, and that this called into question the reliability of Mr Ellis' written evidence. I do not agree. Read in the context of his answers more generally, I do not consider that this part of Mr Ellis' oral evidence contradicts his written evidence.
- The RGF Offer Letter dated 27 March 2014 included the following terms:
(1) At paragraph 1, the RGF offered a grant of up to £2.882m ("the RGF Grant") and a loan of up to £2m ("the RGF Loan") "to help implement the project to recruit, train and employ apprentices, disadvantaged workers and others in software development and web design, creating 356 direct full-time equivalent jobs by 31 March 2015 and safeguarding 64 current jobs … by 31 March 2015" at BFS' premises in Salford ("the RGF Support").
(2) At paragraph 2, the RGF Support was conditional upon (among others) the following conditions:
(i) receipt by the RGF of a Project Delivery Plan provided by BFS;
(ii) a signed and exchanged loan facility for £10.2m with "any private sector lender or lenders (the "Private Investors") approved in writing by Us…by which the Private Investors in aggregate agree to lend to [BFS] and/or to subscribe for equity shares in [BFS] in aggregate up to £10,200,000… (… "the Private Investor Financing") to be capable (at the discretion of [BFS]) of drawdown and/or call for subscription until 31 March 2016, for the purpose of the Project" ("the Facility Agreement");
(iii) security for the RGF Loan that ranks pari passu with "the most senior debt from Private Investors"; and
(iv) an inter-creditor agreement between the RGF, BFS and the Private Investors which is in form and content satisfactory to the RGF.
(3) At paragraph 4, a prohibition on the amendment of the terms of the Facility Agreement without the prior written consent of the RGF, which was not to be unreasonably withheld or delayed.
(4) At paragraph 5:
(i) A condition that required the use of the RGF Grant or RGF Loan only for the Permitted Purpose, i.e. the project, as further defined in Schedule 2.
(ii) A prohibition on the use of the RGF Grant or RGF Loan to support MFB.
(5) At Schedule 2:
(i) Paragraph 1 defined the "Project" as the expenditure of £27m essentially for the purposes set out in paragraph 1 of the Offer Letter.
(ii) Part 1 defined the conditions for the payment of the RGF Grant, which were set out in Part 1 and in a table in that Part. The categories comprised: SME Employment Aid (A1); Disadvantaged Worker (B1); and General Training (C1). There had to be private investment that was received and also expended in categories A1, B1 or C1. The table outlined under categories A1, B1 and C1 indicative types of expenditure within these categories (A2, B2 and C2). If such investment was received and relevantly expended, the RGF would match it (subject to any cap) provided that it was received and expended for before a relevant "No Obligation to Pay Date", which for A1, B1 and C1 was 20 February 2015. BFS was, accordingly, scheduled to submit claims for payment of instalments of the RGF Grant on 15 April 2014, 15 May 2014, 15 August 2014, 15 November 2014 and 15 February 2015.
(iii) Part 2 defined the conditions for the payment of the RGF Loan. A summary is set out in the Particulars of Claim (at [12]). The "No Obligation to Pay Date" was, again, 20 February 2015. The other conditions included a maximum drawdown of the RGF Grant by that date also. The use of the loan was limited to "Project Cost", being "all costs defrayed for the purposes of the Project at the Premises" excluding "VAT, finance and interest charges". A schedule for repayments of principal and interest was set out, providing for the RGF Loan to be repaid in full by March 2021. The first repayment was scheduled on 30 June 2016.
(6) At paragraph 6, a permission to refinance the Facility Agreement with the RGF's prior written consent, which was not to be unreasonably withheld or delayed, provided that "the new private sector investor is acceptable to Us".
(7) At paragraphs 7 and 8, provisions for monitoring on behalf of the RGF, including quarterly reports "to update Us on progress with respect to achievement of the Jobs Target … and progress with the achievement of Your financial projections and with Your Project Delivery Plan".
(8) At paragraph 9, the RGF's requirement for "a report confirmed by an independent accountant confirming that for a period of 3 years from the date on which the investment comprising the Project has been completed … the conditions of this Offer Letter have been complied with".
(9) At paragraphs 10 to 12, conditions for drawdown and repayment of the RGF Support.
(10) At paragraph 13, a right for the RGF to withhold or to require early repayment of the RGF Grant or the RGF Loan in the circumstances set out in Schedule 5, and an obligation on the part of BFS to inform the RGF "immediately" if any of those circumstances occurred. The circumstances specified in Schedule 5 included:
(i) at paragraph 2b, "the Project is financed other than by way of Private Investor Loan and/or Private Investor Subscription";
(ii) at paragraph 2d, "in Our opinion, progress on the Project … is not satisfactory";
(iii) at paragraph 2e, "in Our opinion, the future of the Project is in jeopardy";
(iv) at paragraph 2h, "in Our opinion the Facility Agreement … is terminated or becomes ineffective …";
(v) at paragraph 2i, "the preconditions in paragraph 2 of the Offer Letter are not satisfied and/or cease to be satisfied";
(vi) at paragraph 2k, "[BFS] repays in full or in part any of the Private Investors Loan before 31 March 2018 other than as permitted …";
(vii) at paragraph 2n, "… [BFS] becomes insolvent …"; and
(viii) at paragraph 2s, "[BFS] fails to comply with any terms or conditions of this Offer Letter or in the Schedules".
(11) At paragraphs 26 and 30, terms to the effect that the RGF Offer Letter was an entire agreement and that variations of it "will be effective only if You and We agree them in writing."
(12) A form of wording whereby in signing the RGF Offer Letter, Ms Thompson represented and confirmed that she had read carefully its terms and that BFS had not applied for or received grants or other payments from any public authority, including "any … partly or wholly publicly financed body or charitable fund".
- Mr Al-Attar submitted that, and relied on Mr Ellis' broad acceptance in evidence that: (a) there is "no rational" explanation for BIS having agreed a careful finance structure with Mr Ellis in accordance with condition 2 of the RGF Offer Letter and having agreed no such arrangement with MFB, if MFB was also a lender to BFS which was known to and approved by the RGF, (b) on the contrary, if the RGF had known and approved of MFB as a "Private Investor" in BFS, either in April 2014 or earlier, the RGF would have bound MFB into the structure that it had agreed, and (c) there was no substitute elsewhere for the direct rights and remedies that Mr Ellis had agreed with BIS under the Inter-Creditor Deed dated 10 April 2014 ("the ICD").
- Mr Green submitted that BFS clearly complied with the preliminary conditions in the RGF Offer Letter to the satisfaction of the RGF. Further, there was no "refinancing" of Mr Ellis' original loan, and RGF was not in any worse position by the involvement of MFB as a private investor, as MFB's lending was not secured and was subordinated to the RGF loan. He also submitted that there was nothing in the RGF Offer Letter which stipulated that there had to be written approval by the RGF for MFB's lending to be regarded as eligible private investment. Moreover, the sanctions set out in Schedule 5 of the RGF Offer Letter if "the preconditions are not satisfied and/or cease to be satisfied" were not engaged because Mr Ellis continued to be bound by the £10.2m Facility and by the ICD. As to paragraph 2b of Schedule 5, Mr Green submitted that the RGF clearly knew and approved of MFB as a provider of eligible private investment and the RGF has never at any time sought to terminate or require repayment of the RGF Support, save as a debt in the liquidation.
- With regard to Mr Al-Attar's submission that the RGF would have acted differently if it had known and approved of MFB as a "Private Investor", Mr Green accepted "[i]t is curious that the RGF did not seek to tie MFB in some way into the RGF arrangements" but submitted "it is explicable on the basis that [the RGF] had the full commitment from Mr Ellis that [the RGF] required, [the RGF] could not expect MFB to sign up to any sort of similar arrangement, and in any event it was of no concern to the RGF if BFS could find much cheaper financing from another private investor which was not taking security and which did not threaten the RGF's security". He suggested that Mr Ellis may have lit on the correct explanation:
"I mean it certainly suggests a lack of joined-up thinking if part of the RGF on the ground knew about it and the people who drafted this document didn't."
- In my judgment, it is clear from paragraph 2b that, for the purposes of the RGF Offer Letter, "Private Investor" or "Private Investors" meant "any private sector lender or lenders … approved in writing by [the RGF]". The context of that requirement was a stipulation that only a Facility Agreement made with such Private Investor(s) would be acceptable to the RGF. In principle, therefore, Private Investors other than Mr Ellis might have been approved by the RGF. In fact, however, the only Facility Agreement which was ever entered into, for the entire sum of £10.2m, was with Mr Ellis. In these circumstances, in my view, he alone became a "Private Investor".
- In addition, I agree with Mr Al-Attar that if the RGF had known and approved of MFB as a "Private Investor" in BFS, either in April 2014 or earlier, the RGF would not have bound Mr Ellis alone into the structure stipulated by the RGF, but would instead have bound MFB into that structure as well. I do not consider that Mr Ellis' suggestion of "lack of joined up thinking" answers this point. The terms of the RGF Offer Letter are clear, and the antecedent history is apparent from the documents, which lend no support to that suggestion. If BFS, Ms Thompson or Mr Ellis had wanted to seek the RGF's approval in writing of MFB as a "Private Investor" it was open to them to do so, and they could have made MFB a party to the £10.2m Facility which Kemp Little subsequently prepared. However, they did not take these steps.
- It follows, in my view, that if and to the extent that the Project was financed by MFB a breach of paragraph 2b of Schedule 5 of the RGF Offer Letter occurred. Whether the RGF knew of, or cared about, any such breach is a matter I shall return to below.
- In the meantime, Kemp Little and Nabarro, the external lawyers for BIS, progressed work on the £10.2m Facility and the ICD. On 19 March 2014 Mr Moseby sent Nabarro marked up copies of the draft £10.2m Facility. He noted that that the "Initial Loan" is "the outstanding amount which is being rolled forward (rather than repaid)" and that the definition of "Previous Facility Agreement" had been changed to the date of the last loan agreement from Mr Ellis in February. David Stanbridge of Nabarro responded on 28 March 2014, and Mr Moseby responded later on the same day stating that he had discussed the documents with BFS and that "they remain subject to my client's comments and the comments of Robin Ellis".
- On 23 March 2014, BFS agreed a further loan of £200,000 with Mr Ellis.
- The terms of engagement of Hurst & Co were set out in their letter to BFS dated 9 April 2014 as being "to perform a mixture of a high and moderate level of assurance engagement and report in connection with the [RGF] Loan/Grant as referred to above, between the Secretary of State for Business Innovation and Skills and [BFS]". The letter further recorded that "BFS are now required to submit to BIS reports that are also signed by an accountant to provide independent assurance" and that "Our accountant's report will be prepared on the following basis …The accountant's report will be prepared for the confidential use of BFS and BIS and for the purpose of submission to BIS in connection with their requirements in connection with this loan/grant". Among other things, Hurst & Co were required "to confirm the amount of external financing which the Company has received from the Private Investors".
- On 10 April 2014, the RGF, BFS, Mr Ellis and Ms Thompson executed the following documents in satisfaction of the conditions precedent to the RGF Offer Letter:
(1) A £10.2m Facility Agreement between Mr Ellis as lender, BFS as borrower and Ms Thompson as guarantor ("the £10.2m Facility").
(2) The ICD between BIS, Mr Ellis and BFS, which regulated the respective rights of the RGF and Mr Ellis as creditors of BFS.
- Mr Ellis accepted that, unlike his prior facility loans to BFS, the £10.2m Facility contained no right on the part of the lender to override a draw down request, and was a sole commitment by him to fund £10.2m over the Availability Period. Mr Ellis further accepted (and I would hold in any event) that from both his own perspective and that of BIS there was every reason to bind in any other known lenders into the structure contemplated by condition 2b of the RGF Offer Letter, in particular, from his perspective, to share the £10.2m commitment, and, from BIS' perspective, to afford BIS direct rights against any Private Investors under the terms of an ICD, and to ensure that all lending was subject to the terms of a facility satisfactory to BIS.
- Mr Ellis and Ms Thompson approved the entry into the £10.2m Facility and the ICD by a board resolution of BFS on 7 April 2014. Events which took place in the run up to that event are relevant to the claim for £325,000 and I consider them below.
- I also consider below some of the material terms of the £10.2m Facility. It further provided:
(1) By Clause 1.1 (Definitions and Interpretation) that the "Available Facility" meant the Commitment less any outstanding Loans; that the "Commitment", as defined in Clause 2, meant £10.2m; that the "Available Period" meant until 31 March 2016; that "Loan" meant a loan by Mr Ellis to BFS or "the principal amount outstanding for the time being of that loan"; and that "Initial Loan" meant "the total Loan as at the date of this agreement, being £1,535,602".
(2) By Clause 5, interest was 1% per calendar month payable in arrears on the (monthly) Interest Payment Date.
(3) By Clause 7 and Schedule 2, Mr Ellis had a right to cancel the facility in the event of illegality, and BFS had a cancellation right on notice. Mr Ellis otherwise had no cancellation right, save for that under Clause 13 exercisable upon notice in the event of a default by BFS.
(4) By Clause 14, Ms Thompson guaranteed the debts of BFS under the facility and offered a charge over her property in London (Flat 7 North Block 5, Chicheley Street) as security.
- In due course, Ms Thompson was made bankrupt and lost her home as a result of her involvement with BFS. Whether this occurred pursuant to Clause 14 does not matter.
- The ICD provided, among other things, as follows:
(1) Recitals A and B recorded that Mr Ellis had agreed to provide the "RJE Debt" (defined elsewhere as that under the £10.2m Facility), that the respective rights of Mr Ellis and the RGF were to be regulated in accordance with the ICD, and that BFS was a party in connection with certain covenants thereunder.
(2) By Clause 2, Mr Ellis and the RGF agreed a pari passu ranking of the RJE Debt and the RGF Debt and the respective security for those debts.
(3) By Clause 3, BFS promised not to pay the RJE Debt or the RGF Debt except for a Permitted Payment, defined in Clause 5, being a payment in accordance with the agreed debt documents in Schedule 1 and Schedule 2.
- On 10 April 2014 Ms Rawlinson sent an email to Maria Valizadeh of Hurst & Co stating "Attached is the schedule for Private Investment together with screen shots for all entries". One of the attachments to that email was a copy of the nominal ledger of BFS which showed that "Private Investments" amounting in total to £1,535,602 had been made, but did not identify the lender(s). Other attachments, namely screenshots, did identify the source of the investments. In some instances, Mr Ellis was identified as the source, but in other instances MFB was identified.
- On 11 April 2014 BFS submitted its first claim form to the RGF for a payment of £1,087,921 under the RGF Grant. The claim form stated that the amount drawn down as private investment was £1,535,602 (the amount of the Initial Loan under the £10.2m Facility). The first claim was paid on 15 May 2014. Mr Al-Attar points out that the post-contractual documents submitted by Ms Thompson the day after the execution of the £10.2m Facility on 10 April 2014 accordingly affirmed that £1,535,602 was the correct amount of the Initial Loan which was owed to Mr Ellis.
- The claim form required, among other documents, that BFS should include "Latest accounts as set out in [the Grant Offer Letter] and introductory notes of claim form". The same requirements were contained in subsequent claim forms. In this instance, the claim form dated 11 April 2014 stated "Project delivery plan enclosed. All other documentary evidence is now with BIS through BFS lawyers".
- Also on 11 April 2014, Hurst & Co delivered a report to BFS' directors which confirmed, among others things, the following:
"During the period from Commencement of the project 11 July 2013 to 15 April 2014 [BFS] has received external financing of £1,535,602 from the Private Investors. (underlining added)
No principle (sic) of any amount received from the Private Investor Loan has been repaid during the period from 11 July 2013 to 14 April 2014.
We have confirmed that [BFS] has not made any payments to [MFB]."
- The RGF Project Monitoring Visit Report, also dated 11 April 2014, stated: The forecasted private investor contributions will be provided in May as they are exploring alternative sources rather than the private investor they are presently using." This, says Mr Al-Attar, is a confirmation that, as other contemporary documents show, Mr Ellis was the sole approved private investor as at April 2014.
- BFS' accounts for the year 1 May 2013 to 30 April 2014 recorded a profit of £175,639. This took into account grant income from the RGF of £1,323,112.
- From May 2014 onwards, BFS and MFB prepared managements accounts. The amounts stated in those accounts were not contested by Mr Ellis.
- The RGF Project Monitoring Visit Report dated 7 May 2014 stated: "Bright Future are still exploring other private funding options and will update as soon as progress is known but this does not impact on the project as the existing private funding option is still available". This is consistent with the contents of the Report dated 11 April 2014.
- On 13 May 2014, BFS submitted its second claim form to the RGF for payment of £230,191 under the RGF Grant. The second claim was paid on 16 June 2014.
- On 22 May 2014, Mr Moseby sent an email to Ms Thompson and Ms Rawlinson, advising them about payment of the 'RJE Debt' as defined in the ICD. Following that, BFS paid Mr Ellis £99,000 on 29 May 2014 and £61,000 on 30 May 2014. These matters are relevant to the claim for £325,000, and I return to them below.
- As at the end of May 2014, BFS' management accounts recorded sales of £65,425 in that month, a loss for that month of £240,217, and net liabilities of £209,366 and, after a reduction in management charges, of £107,213.
- As at the end of June 2014, BFS' management accounts recorded sales of £15,000 in that month, a loss for that month of £389,354, net liabilities of £598,720 and, after a reduction in management charges, of £496,567.
- The RGF Project Monitoring Visit Report dated 24 July 2014 states: "The present Private Investor arrangements are ongoing with the existing investor continuing to provide additional funds. Clarity of the actual amount of investment and also expenditure will be confirmed next week after the audit which is taking place at the present time is concluded". This is consistent with the two earlier Reports.
- As at the end of July 2014, BFS' management accounts recorded sales of £37,250 in that month, a loss for that month of £311,826, and net liabilities of £200,385 and, after a reduction in management charges, of £98,233.
- On 7 August 2014, BFS received a notice from HMRC warning about enforcement action if an overdue tax debt of £64,028 was not paid immediately.
- On 15 August 2014, BFS submitted its third claim form to the RGF for payment of £710,161 under the RGF Grant. This sum was paid on 15 September 2014.
- As at the end of August 2014, BFS' management accounts recorded sales of £30,683 in that month, a loss for that month of £378,007, and net liabilities of £1,288,554 and, after a reduction in management charges, of £1,186,401.
- BFS made payments to Mr Ellis of £99,000 on 3 September 2014 and £66,000 on 4 September 2014. These sums form part of the subject of the claim for £325,000.
- As at the end of September 2014, BFS' management accounts recorded sales of £32,875 in that month, a profit for that month of £318,236 (due to the inclusion of grant income of £710,161 received on 15 September 2014), and net liabilities of £970,318, and, after a reduction in management charges, of £868,165.
- On 7 October 2014, Ms Thompson sent an email to Gill Rogerson, the monitoring officer allocated to BFS by the RGF, paraphrasing the RGF Offer Letter:
"We could have some new private investors in this claim period. Strictly speaking we need to get permission however this cannot be unreasonably withheld. Could you please let me know how we should go about this.
Should we refer to our lawyers for example and get them to deal with it?"
- Ms Rogerson replied on 30 October 2014, copying in Mr Hart:
"There is no issue with you obtaining investment from new private investor – in fact it was expected that you would secure alternative Private Investment funding from a source other than Mr Ellis. I've copied Graham [Hart] into this email so that he's kept updated."
- No follow up correspondence has been disclosed in this litigation. However, in response to a letter sent by Mr Abdulali on 29 January 2020, Michael Ball, the RGF National Operations and Finance Manager at BIS, stated that BIS only ever received a signed and exchanged Loan Facility Agreement and executed ICD from Mr Ellis.
- On 16 October 2014, BFS received a further notice from HMRC warning about enforcement action if an overdue tax debt of £81,626 was not paid immediately.
- In the course of its audit in October 2014 of BFS' and MFB's financial statements for the year ended 30 April 2014, Hurst & Co noted that MFB had paid £691,855 of the amount of £1,535,602 that was paid to BFS, and opined that BFS' and MFB's financial statements were true and fair in recording a liability owed by BFS to MFB in the sum of £691,855. These matters are relevant to the wrongful trading claim.
- As at the end of October 2014, BFS' management accounts recorded negative sales of £96,819 in that month, a loss for that month of £607,586, and net liabilities of £1,577,904, and, after a reduction in management charges, of £1,465,751.
- On 14 November 2014, BFS received a further notice from HMRC warning about enforcement action if an overdue tax debt of £158,480 was not paid immediately. The letter confirmed an arrangement to pay this sum as to £59,000 on 13 November 2014 and £99,480 on 17 December 2014.
- Also on 14 November 2014, BFS submitted its fourth claim form to the RGF for payment of £853,726 under the RGF Grant. When this was paid on 15 December 2014, the RGF Grant of £2.882m was paid in full.
- As at the end of November 2014, BFS' management accounts recorded sales of £32,253 in that month, a loss for that month of £440,678, and net liabilities of £2,082,865, and, after a reduction in management charges, of £1,926,712.
- Mr Al-Attar contrasted the above figures with those contained in BFS' application to the RGF, which projected sales of £346,000 by 31 March 2014, of £4.785m by 31 March 2015, and of £16.744m by 31 March 2016. In the period May to December 2014 (in which the sales were £24,119) the aggregate sales totalled £237,605, whereas to achieve sales in accordance with the projection to 31 March 2015, BFS had to earn £398,000 per month. He submitted that it was readily apparent, and should have been readily apparent to Mr Ellis and Ms Thompson at the time, that the sales revenue was minimal both in absolute terms and relative to (i) BFS' costs, and (ii) BFS' projected sales forecast to the RGF as set out above.
- Mr Al-Attar further submitted as follows. BFS had at this time around 328 employees with an average salary of £1,149.39 per month. Its aggregate monthly wage bill was £377,000. BFS would have had to generate sales in excess of £4,524,000 per annum in order to break even having regard to the wage bill alone. This required a manifold increase in sales relative to the then current rate of sales. Further, funding had been modelled specifically to assess whether BFS would have cash to pay its creditors during the forecast loss-making period to expected profitability in about June 2016. However, Mr Ellis had never provided lending in the amount of the scheduled drawdowns stated to the RGF as part of the due diligence process described above, and he had ceased lending from October 2014; and MFB had no commercial capacity to act as a lender to BFS, and was not approved as a Private Investor by the RGF. On this basis, it is apparent, and should have been apparent to Mr Ellis and Ms Thompson at the time, that (i) BFS did not have a viable business model, (ii) the growth forecasts developed to obtain RGF funding had proved over-optimistic and unreliable at best, being far higher than the sales in fact achieved, and (iii) BFS should have been wound up as soon as practicable. The same should have been apparent from BFS' deteriorating balance sheet position, in accordance with which BFS had been balance-sheet insolvent since (at least) May 2014, and the deficiency of assets compared to liabilities had been increasing continuously since September 2014. In addition to the figures set out above, BFS' management accounts as at the end of December 2014 and January 2015 recorded net liabilities, after a reduction in management charges, of £1,591,527 and £2,076,026 respectively. I will return to these submissions below.
- A meeting of the board of directors of BFS was held on 16 December 2014 ("the December Board Meeting"). Mr Ellis acknowledged that the sales figures, wage overhead costs and monthly and cumulative loss figures were available to him at the time of the December Board Meeting. He further gave evidence as follows:
"Q. You would agree that those actual sales, the sales achieved in life, showed the unreliability of the forecasts, don't you?
A. Clearly the forecasts were overly optimistic, yes, by some margin."
"Q. And what we see here is that one of those crucial cashflows has performed 90% below forecast performance consistently throughout BFS' trading history?
A. Yes.
Q. That vital component of its trading cashflow that should have allowed it to pay its creditors as they fell due just wasn't there, was it?
A. It appears not."
"Q. All you had to do is look at the due diligence report signed by the board, and you had to compare it with the sales figures.
A. Yes, I would have needed (a) to have decided that this was where I should be focusing my attention, and then find the right documents to do it, and all of those things . And those things I would need to have done and then to have reached those conclusions. Clearly the figures are very disappointing. But I didn't do that at the time, and it wasn't pointed out to me by anybody that this particular set of figures were – well, it just wasn't pointed out to me."
- In addition to the above, BFS owed arrears to HMRC from December 2013. Some of the enforcement notices emanating from HMRC have been considered above, and the situation continued until 4 February 2016, when HMRC presented a winding up petition for £684,370.
- The minutes of the December Board Meeting record the attendance of Mr Ellis and Ms Thompson (among others) and that the following matters were discussed and agreed:
"Management accounts review
RS presented the management accounts for November 2014. MFB sales were above budget by £5k, BFS sales were below budget by £5k
…
RGF Additional Monies
ET outlined the thinking to fully utilise the £4.882m RGF grant. To date £2.882m has been drawn down of the grant.
The current staffing level of 350 is in line with RGF projections.
To access the remaining £2m of RGF facility – which is loan, which cannot start to be repaid before 2017 – private funding of £2m needs to be injected into BFS by end Jan 2015.
Approx £800k can be invested by MFB (based on Nov, Dec, Jan receipts).
ET outline MFB has an opportunity to borrow £1.2m to [sic] BFS, thus releasing the additional £1.2m of RGF grant.
One provider is currently in legals to provide the £1.2m loan to MFB.
If this can be arranged, it would provide the business with an additional war chest of £1.2m. There are no current plans to utilise these monies.
Business planning for 2015
ET outlined a process to create the business plan for 2015, with an aim to deliver £5m of revenue for BFS for 2015 alongside further growth of the MFB business.
Opportunities to grow MFB
…
CJ outlined plans for BFS to become a direct training provider and MFB to become a prime contractor. This opens up a large market for training
In addition there is the opportunity for an assessment business to be added to the group.
The culmination of all these changes is that the group as a whole could treble its' [sic] revenue on the same cost base."
- Mr Al-Attar made a number of points in relation to these topics, which may be summarised as follows. Although the £10.2m Facility provided by Mr Ellis remained in place, and Mr Ellis had substantial amounts of cash available to meet demands made of him, neither Ms Thompson nor he caused BFS to draw down on the £10.2m Facility, whether to unlock funding from the RGF or to pay debts owed to HMRC (or other creditors). Instead, the proposed course of action was to borrow money from MFB, which MFB itself would need to borrow (without consideration at the meeting of whether MFB was a "Private Investor" approved by the RGF). These points seem uncontroversial in light of the contents of the relevant minutes. However, there is no claim against Mr Ellis that he acted in breach of duty by not causing BFS to have recourse to the £10.2m Facility. Mr Al-Attar argued that these points were nevertheless relevant to the wrongful trading claim, on the footing that borrowing money from anyone other than Mr Ellis would place BFS in breach of paragraph 2b of Schedule 5 of the RGF Offer Letter, and thus trigger RGF's right to withhold funding or require repayment or previous funding. I will return to that point below.
- Mr Al-Attar submitted that Mr Ellis accepted in evidence that it was "unusual" for no consideration to have been given to drawing down on the £10.2m Facility. However, I do not consider this is correct. It was put to Mr Ellis a number of times that it was "unusual", but the answer which he finally gave and which I consider to be material was as follows: "Well, I didn't see it as unusual because I understood it, MFB, was an investor that could stand alongside me, and they had the ability to do that".
- Mr Al-Attar further submitted that MFB had no substantial "surplus" cash and no substantial lending capacity, that these matters were known to Mr Ellis, and that Mr Ellis could not explain on what basis a reasonable director of BFS could have formed the view that MFB had the capacity to provide funding to BFS. However, I consider that this ignores the following parts of Mr Ellis' evidence: "Well, I am sorry my understanding was that MFB had a very profitable training programme in operation … I am sorry, that is what I understood to be the position …Well, I have given you an explanation … that it seemed rational to me at the time …"
- Mr Al-Attar submitted that no director at the December Board Meeting could have thought that MFB was an approved "Private Investor" on the basis that the RGF had been given notice of MFB's payments to BFS by being sent BFS' bank statements, and that Mr Ellis had been right to accept this. The history in detail is as follows:
(1) The 11 April 2014 documents, comprising the first claim form and the first RGF Project Monitoring Visit Report, evidence the RGF's understanding that the first claim on the RGF Grant was made by BFS on the basis of the Initial Loan under the £10.2m Facility, which was stated to be a loan by Mr Ellis.
(2) The bank statements submitted to Hurst & Co on 10 April 2014 that show payments from MFB (a) were mixed up with bank statements that show payments from Mr Ellis, and (b) in any event, added up to the amount of the Initial Loan (£1,535,602) relied on in support of the first claim on the RGF Grant, which, as set out above, was a loan which was stated to have been made by Mr Ellis.
(3) The only payments between 1 May 2014 and 27 November 2014 concerning MFB are those on 20 June 2014 (of £100,000 and £199,000, being payments to BFS) and on 28 July 2014 (of £125,000 and £166,000, being payments to MFB). MFB was, accordingly, a net payee of £40,000. This may explain why MFB's payments on 20 June 2014 are not recorded as private investment by MFB in BFS' internal schedule of private investment.
(4) Further, the RGF Claim Form submitted on 11 August 2014 was not based on these payments by MFB, but was instead based upon payments from Mr Ellis and bank statements that showed the same. In this regard, Ms Rawlinson attached to an email to Ms Rogerson at the RGF dated 15 August 2014 not only the 11 August 2014 claim form but also as "Proof of private investment" a screenshot of BFS' bank statement. This showed transfers from Mr Ellis of £240,000 and £190,000 on 30 and 31 July respectively, but nothing from MFB.
(5) Accordingly, in the period between 1 May 2014 and 14 November 2014, being the only relevant claims prior to the December Board Meeting, there were no payments by MFB to BFS which were claimed by BFS as private investment.
- As against these points, Mr Green relied on the fact that the Directors' Report and Financial Statements of BFS for the year ended 30 April 2014, which were signed by Ms Thompson on 30 October 2014, included the following statement:
"During the year, [BFS] received an investment loan of £691,855 from [MFB]. This amount is included in creditors due after more than one year.
[BFS] has also received investment loans from R Ellis during the year and at the year-end owes R Ellis £978,747 (2013: £264,345). This amount is included in creditors due after more than one year.
In addition, [BFS] has received a further loan from R Ellis of £325,000 which has been included in creditors due within one year."
- Mr Green submitted that, accordingly, not only did Hurst & Co know the true position but also that, as the RGF would have subjected BFS' accounts to careful scrutiny, the RGF would have known that MFB had provided a substantial amount of investment into BFS and was "clearly content to include the MFB loans as qualifying private investment for the purposes of allowing BFS to draw down [the RGF Grant and the RGF Loan]". I consider that these points are only right in part.
- With regard to the first point, as discussed in greater detail below, this statement in BFS' accounts resulted from questions raised by Hurst & Co in the course of their audit, from which it emerged that the "Initial Loan" figure of £1,525,602 in the £10.2m Facility had not taken account of the fact that some of that money had been paid to BFS by MFB. Viewed in this context, the statement in BFS' accounts is consistent with the conclusion that Hurst & Co did not discover the true position until October 2014, and could not have told the RGF about it any earlier than that.
- With regard to the second point, BFS had submitted and the RGF had paid three claims before BFS' accounts were signed by Ms Thompson on 30 October 2014. The fourth claim was submitted on 14 November 2014 and paid on 15 December 2014. In the absence of any evidence from any person at the RGF, and in light of Mr Hart's disinclination to become involved in the present claim, I am prepared to infer that BFS' accounts were read and considered by the RGF, that they made it apparent to the RGF that some of the "Initial Loan" figure of £1,525,602 in the £10.2m Facility had in fact been provided by MFB and not Mr Ellis, and that the RGF was content to make no complaint about this. In my view, these considerations do not go so far as to mean that the RGF accepted MFB as a "Private Investor" for purposes of the RGF Offer Letter, but rather that, on seeing the accounts after 30 October 2014, it was not minded to invoke paragraph 2b of Schedule 5 and withhold payment of the fourth claim monies or require early repayment of the first three claim monies already paid.
- Accordingly, I consider, and find, that at the time of the December Board Meeting a reasonable director of BFS could have thought that the RGF would not withhold or require early repayment of the RGF Grant or the RGF Loan in circumstances where a substantial part of the investment into BFS was provided by MFB and not Mr Ellis. In addition, I have no doubt that Mr Ellis, and for that matter Ms Thompson, did in fact genuinely believe this, both having heard Mr Ellis give evidence and in light of the contents of the relevant minutes. There was no question of concealing from the RGF that the contemplated further investment was not going to come from Mr Ellis (although, as set out below, MFB was later not identified as an investor to the RGF), and it would have made no sense to consider obtaining investment other than from Mr Ellis if he (or Ms Thompson) had thought that the RGF would treat this as a basis for withholding, or requiring early repayment of, the RGF Grant or the RGF Loan.
- Mr Green submitted that Mr Ellis' answer - when it was put to him that deciding to borrow from MFB when it was not approved as a "Private Investor" by the RGF put BFS in jeopardy - "effectively demolished" Manolete's case (emphasis added):
"Q. Well, you didn't think about it evidently; you didn't even consider the problem?
A. And neither did anybody else, neither did any of the accountants and the monitoring- RGF/Hurst, whoever it was. All of those people. Nobody -- to repeat what I said before: nobody suggested that -- I don't know, what is the right phrase? That it was all over, that the game was up, we should throw in the towel. If you had asked anybody at the time, I don't think they could have found the towel to throw in. It wasn't -- it just wasn't the currency of what was going on. I don't know how many times I can say that. Nothing -- we had created at that stage, I don't know, 300/350 jobs. We were next door to the BBC, across the road from Salford University. There were people -- the general enthusiasm for everything that was going on here. The excitement that the Peel management, the people that ran Peel would come in with other tenants and say, "Look what is going on here; you wanna be using these guys to do your IT." All this sort of thing was going on. I had every expectation that it was all moving forward in a sensible and reasonable way. I don't know how many times I can say it. You know, there were -- it was really exciting. The -- you know, to repeat again, there were 300-odd/350 kids, who would otherwise have been shelf-stacking or whatever, coding. They were trained, those jobs were created. Those individuals still exist, actually. It may be the case that obviously the company didn't or doesn't exist any more, but those 400 plus people that went through the system then are still out there. They are still there. And those jobs were created and those youngsters had a decent, you know, start. And it is a tragedy that the system that Eudie had created to do that didn't continue, because it strikes me that that is exactly what the country needs. But the basic point is, to go back to your point, is that I didn't have any -- it wasn't suggested to me and it was certainly no thought of mine at all that the things you suggested that I might reasonably have thought of I did think of and did or didn't do. It is just -- couldn't be further from the truth."
- I accept that evidence, although it does not provide a conclusive answer as to what a reasonable director in Mr Ellis' position might or might not have thought and done.
- Mr Al-Attar further submitted that Mr Ellis' evidence that he had an expectation that other investors would come in to fund BFS at some point should be rejected, and that Mr Ellis was not telling the truth when he denied that the £10.2m Facility was not drawn because he was not prepared to lend any more to BFS. I reject those submissions. Mr Ellis said "I did have the expectation", and I believe him, notwithstanding the suggestions to the contrary which were put to him in cross-examination. As already indicated above, I also accept his evidence that he was "prepared to back a turnaround plan … It wouldn't perhaps have been such good business from my point of view but I would have done that and been pleased to do it". I also accept Mr Ellis' answer to the following question:
"Q. … The natural inference is [that] you didn't put any more money in because you didn't believe the prospects to be incredibly positive. You actually knew that the prospects were bad, and the decision taken is to allow BFS to continue to trade on the basis of public monies rather than your monies?
A. Oh – well, the simple answer is no."
- Mr Green submitted that Mr Ellis' evidence showed that he was acting in the best interests of BFS, whereas Mr Al-Attar submitted that Mr Ellis' explanation was implausible and should be rejected. The relevant exchanges included the following:
"Q. So why not lend to it?
A. Well, (a) I was not asked to and (b) once my money was in, it was in and then locked in at that rate for however long it was. I think it was 2016 or '17 or something.
…
A. Well I would have thought that my money would be viewed as quite expensive. It is that simple."
- I accept the first of these reasons, but not the second. The first reason – that Mr Ellis did not lend more at this stage because he was not asked to - accords with the contents of the contemporary minutes. The second reason – that Mr Ellis did not lend more because borrowing from him was regarded as expensive for BFS – is not reflected in the contemporary minutes, and is, I suspect, a product of subsequent rationalisation. I also agree with Mr Al-Attar that the "expense" point is unconvincing, as the interest costs would not be dramatic for BFS if (which must have been the premise of its further borrowing) its business was going to flourish.
- From his point of view, as he said in evidence, Mr Ellis had backed BFS very significantly by investing substantial sums in BFS; and he was fully prepared to continue backing BFS, which is why he had provided a £10.2m Facility which remained in place and which he did not (and indeed could not) seek to revoke. It may well be that Ms Thompson was more alert than he was to the grounds for misgivings about BFS' future prospects that were put to Mr Ellis in cross-examination, and that, whether she was conscious of this or not, at least part of her motivation for proposing that further borrowing should come from MFB rather than Mr Ellis was to shield him from further risk to his own monies. However, I do not consider that it occurred to Mr Ellis that there was anything out of the ordinary, let alone sinister, about the proposal that BFS should borrow money from MFB instead of him, notwithstanding the fact that MFB would have to borrow in order to be able to do this. The picture painted in the minutes, which was primarily created by Ms Thompson but which was supported by other attendees with apparent knowledge of the accounts and trading prospects, was that there was another £2m of RGF funding available to be accessed; that MFB was in a position to provide the matched funding of £2m that would be needed to unlock the RGF funding by investing £800,000 that it had or would have available to invest and by taking advantage of an opportunity to borrow a further £1.2m; and that this would do more than meet BFS' immediate needs and would instead produce surplus funds for BFS: "it would provide the business with an additional war chest of £1.2m. There are no current plans to utilise these monies".
- As at the end of December 2014, BFS' management accounts recorded sales of £24,119 for that month, a profit for that month of £335,182 (due to the inclusion of grant income of £853,726 received on 15 December 2015), and net liabilities of £1,693,680, and, after a reduction in management charges, of £1,591,527.
2015
- The RGF Project Monitoring Visit Report dated 3 February 2015 included the following:
"Claims
Grant – the grant element has been fully drawn down and the last two claims will be purely on the loan element and they are expecting to claim the full entitlement by the 2nd March claim. February forecast claim amount is £856,000 and the remainder in March.
Expenditure
The expenditure requirements in the GOL will be achieved. Private Investment is a combination of the existing investor and options for alternative sources but the full amount in the GOL is expected to be achieved.
Other aspects
Sales- the sales pipeline is really positive and it was agreed that a copy of the pipeline will be sent with the claim documentation. There are five full time Sales Directors in place and one sector related. The number of sales is forecasted to increase by double within a year and it is planned that it will be £5m during 2015/2016.
BRATHAY Challenge (similar to the Duke of Edinburgh Award) – a number of apprentices have been selected for this award and in regards to the amount of money raised for charity so far £2,500 has been raised.
Ministerial visit – there is a potential visit at the beginning of March but this is yet to be confirmed.
Closure Procedure
GR confirmed in line with the revised GOL that Bright Future can submit an additional claim on 2nd March 2015. An Accountants' report would need to be submitted by 30th April 2015 and an additional Accountants' report would need to be submitted by 31st March 2018. The ongoing monitoring will be 2015/16 quarterly, 2016/17 half yearly and during the period 2017/18-2020/21 it would be annual.
Risks
The project is actively managing its risks and issues that have previously been identified. No new risks/issues have been identified since the last monitoring meeting."
- This supports Manolete's case that no one other than the "existing investor" (Mr Ellis) had been approved by the RGF as a "Private Investor". It also supports Mr Ellis' case that the fact that BFS was contemplating alternative sources of funding was made known to the RGF, and, more generally, that BFS' operation was viewed positively by the RGF. This included that BFS' sales prospects were regarded as "really positive". The Report also contemplates that BFS will continue trading.
- It is part of Mr Ellis' case that MFB and BFS agreed a credit facility of £8m on about 11 June 2015 which was "backdated" to 23 January 2015 ("the MFB Facility"). Mr Al-Attar points out that this Report makes no mention of the MFB Facility, and that there is no other document which shows that the RGF was told about it.
- On 12 February 2015, BFS submitted its fifth claim form to the RGF for payment of £856,248 under the RGF Loan. This claim was paid in full on 16 March 2015.
- On 18 February 2015, HMRC sent BFS a letter confirming an arrangement to pay the sum of £135,168.54 by two instalments on 17 March 2015 and 17 April 2015.
- This arrangement appears to relate to different sums than those which formed the subject of the arrangement recorded in the letter from HMRC of 14 November 2014.
- On 19 February 2015, Ms Thompson, for MFB, signed a mandate for Fuse Three Finance Limited ("Fuse 3"), a loan broker, to source a loan to MFB for between £250,000 and £1m against security to be provided by MFB. On 20 February, Ms Thompson, for MFB, agreed terms with Fuse 3 including to pay Fuse3 "3% of the gross value of such funding as is agreed in the Offer". Fuse3 then identified Trafalgar Capital Advisors ("TCA") as a potential lender to MFB.
- On 23 February 2015, Ms Thompson signed heads of terms with TCA, which provided:
"TCA Global Credit Master Fund, LP (the "Investor") is pleased to provide financing to My Futures Bright Ltd., its affiliates and subsidiary(s) (the "Company'').
…
Company: My Futures Bright Ltd.
Investor: TCA Global Credit Master Fund, LP
Debenture Facility: This Facility is for a maximum $3,000,000 senior secured debenture (the "Maximum Debenture").
From mutual agreement between the Investor and the Company on the Closing Date, the Investor shall make available $1,000,000 (the "Initial Debenture")
…
The Investor shall cause a designated account to be opened at Coutts Bank for the funding, while legal documents and diligence are completed.
When the Borrower receives the $1,000,000 from Regional Growth Fund, it is agreed that they will make a one-time payment to the Investor of $350,000 dollars to bring the note compliance. Payment must be made no later than March 15th to the Investor's Designated account, held at Coutts Bank."
- On 24 February 2015, TCA sent an email to Ms Thompson which stated:
"We will have your counter-signed term sheet for to you by tomorrow for My Bright Future, Inc. As part of the next steps in the funding process, you will be assigned an analyst who will be your point of contact at TCA. The analyst should be reaching out to you shortly regarding the diligence and underwriting process. If for some reason the analyst has not contacted you within 2 days of this email, please reach out to me.
In order for you to qualify for the match funding; we will be setting up a lockbox account for the money to be deployed into that account Friday. We'll need to set up a call w/ our banking team."
- Also on 24 February 2015, Mr Moseby sent Ms Thompson a draft of the MFB Facility, and explained:
"Attached is my draft facility agreement for the £8m loan from MFB to BFS. I've based this on the facility agreement we prepared for Robin, so the RGF will be familiar with it. There are a couple of questions/ points for you I've highlighted in the document- perhaps we could set up a call once you've been through this to discuss."
- It seems from this email that Mr Moseby understood that the MFB Facility was to be shown to the RGF. Manolete contends there is no evidence that this was ever done.
- In her reply dated 25 February 2015, Ms Thompson wrote to Mr Moseby:
"We have succeeded in getting $1m loan to My Futures bank at a very punishable rate but it does enable us to draw down the balance of the RGF funds."
- As at the end of February 2015, BFS' management accounts recorded sales of £17,255 for that month, a loss for that month of £532,541, and net liabilities of £2,710,430, and, after a reduction in management charges, of £2,608,547.
- On 2 March 2015, BFS submitted its sixth (and final) claim form to the RGF for the payment of £1,143,752 under the RGF Loan. This was paid on 30 March 2015. The full RGF Loan of £2m was thereby received by BFS.
- That claim form stated that BFS had received external funding from Private Investors in the aggregate amount of £4,886,967. On the basis, which I consider to be correct, that Mr Ellis was the sole "Private Investor" approved by the RGF, this statement was wrong: he had provided funding in the total amount of £2,009,747. Further, the sum provided by Mr Ellis included £36,000 which he had paid to BFS on 3 March 2015. Yet it forms part of Mr Ellis' case in answer to the claim for £188,769 that this payment was made in error, and should have been made by MFB rather than him.
- On 3 March 2015, TCA sent Ms Thompson a snapshot "showing the $1MM converted to GBP put into the Coutts Account". According to the snapshot, the account was named "Trafalgar Capital Advisors II Inc (Re Bright Future Software Ltd), Business Current Account", and the sum in the account was £649,209.18.
- On 17 March 2015, the day after BFS received payment of £856,248 under the RGF Loan, Mr Ellis was repaid £188,769 of the liability owed to him under the £10.2m Facility. This is the subject of Manolete's claim for £188,769.
- In March 2015, BFS suffered a "denial of service attack". In a Memorandum dated December 2015, BFS stated that the attack "resulted in disruption of its processes and reduced productivity", that "[t]he impact of the attack lasted approximately three months", that the direct costs of the attack "were not significant", and that "Management estimate that approximately £0.1 million of potential revenue was lost during the three-month period to May 2015".
- As at the end of March 2015, BFS' management accounts recorded sales of £27,622 for that month, a loss for that month of £556,431, and net liabilities of £3,267,132, and, after a reduction in management charges, of £3,164,979.
- During April 2015, Kemp Little, for MFB, and Reed Smith, for TCA, were engaged in negotiating the terms of the loan from TCA ("the TCA Loan") and security. On 28 April 2015, Ms Thompson and Mr Moseby exchanged emails. She wrote to him "We also need an agreement between MFB and BFS. I think I had sent outline terms." He replied "I sent a draft through on this back in February- see attached. Are the terms of this still as they were? There are some questions in the document for you/ Robin." On 29 April 2015, Deborah Angel, an associate at Kemp Little, wrote to Ms Thompson: "Finally, Eudie, what is that status of the agreement between MFB and BFS? Is this to be signed before completion?" As matters transpired, the MFB Facility was not signed until after completion of the TCA Loan.
- As at the end of April 2015, BFS' management accounts recorded sales of £149,368 for that month, a loss for that month of £778,310, and net liabilities of £1,675,075, and, after a reduction in management charges, of £1,593,390.72.
- The TCA Loan and related security documentation were executed on 1 May 2015. Pursuant to the TCA Loan, MFB obtained the net sum of £581,155. The gross sum of $1,000,000 or £649,209 was reduced by fees payable by MFB at closing, legal and conversion costs, all of which were deducted from the gross amount. MFB agreed to pay (i) interest at 18% pa compound on the gross sum; and (ii) an advisory fee of $225,000 payable in instalments of $75,000 6 months, 9 months and 12 months from the date of the advance. Manolete submits that the effective rate of interest was in excess of 40%. MFB agreed in favour of TCA (i) a debenture and (ii) an assignment by way of security of its rights to income under its contracts with Total People.
- On 8 May 2015, Ms Angel sent a further draft of the MFB Facility to Ms Thompson, enclosing draft minutes for BFS and MFB relating to that facility:
"Further to our call last week, I have amended the loan agreement in line with our conversation and attach draft board minutes for MFB and BFS. However, you mentioned that you would like the repayment provisions in schedule 2 to mirror the repayment tranches obligations in Robin's previous agreement. On a review of our files, I have found an agreement between you, Bright Future Software Ltd and Robin from last year which had no repayment tranches just a longstop repayment date and therefore at present I have left schedule 2, as drafted."
- No reply to this email is contained in the papers available at the trial.
- The RGF Project Monitoring Visit Report dated 12 May 2015 included the following:
"Expenditure
The expenditure for the May Claim is still to be confirmed but AC/AK confirmed that the requirements in the GOL will be achieved. Private Investment is a combination of the existing investor and alternative funding including TCA – evidence to be sent of the amount of investment during March and April …
Jobs
… The project is confident of meeting the 424 target during 2015/2016.
Other aspects
Accountants report
KB [i.e. Kerry Braithwaite of Hurst & Co] joined the meeting at this point. A list of queries [was] tabled which overall were answered …"
- Mr Al-Attar submitted that it is apparent from this Report that (a) the RGF was not told about any loan agreement between MFB and BFS, (b) TCA was portrayed as an investor in BFS, which was not accurate, as TCA was a lender to MFB, not BFS, (c) the RGF had no evidence of the amount of TCA's investment at this time, and (d) TCA was not an approved "Private Investor" in BFS, whether in accordance with the requirements of the RGF Offer Letter, or by acquiescence on the part of the RGF.
- Mr Green submitted that it is apparent from the words "Private Investment is a combination of the existing investor and alternative funding including TCA – evidence to be sent of the amount of investment during March and April …" that the RGF knew that persons other than Mr Ellis had provided eligible private investment. He further submitted: "It is beyond doubt that the RGF knew of the involvement of TCA and MFB and did not consider that this was a breach of the Offer Letter conditions" and "it indicates that these other private investors were approved".
- I consider that Mr Al-Attar's first three submissions are correct. As to his fourth submission, and the contrary submissions of Mr Green, I consider that the Monitoring Report tells one nothing about what the RGF knew before this date about "alternative funding", and that all that it indicates is that Ms Rogerson understood on that date that the "options for alternative sources" which had been mentioned in the Monitoring Report dated 3 February 2015 had now progressed to the identification of other sources "including TCA". I am unable to read the Report as reflecting any knowledge or acceptance on the part of the RGF of MFB as an approved "Private Investor" in BFS. Nor do I consider that it is right to read this Report as evidencing or comprising an acceptance by the RGF that TCA was an approved "Private Investor" in BFS. However, even if that is wrong, TCA was not, in fact, an investor in BFS, and so any such approval takes Mr Ellis' case nowhere.
- Mr Green also pointed out that in respect of the draft Accountant's Report, after the words "[a] list of queries were tabled which overall were answered", the Monitoring Visit Report went on to say that "the following two were still unresolved and GR agreed to obtain clarity from BIS", and that this reflected that Ms Rogerson from the RGF was going to check with BIS in relation to those queries, all of which were about whether certain items of private investment were eligible private investment. Two items arose: the first concerned an HP amount of £78,147 and whether this "can count as Private Investment"; the second item was depreciation and whether this "could count as spend against Private Investment?" Looking forward to Hurst & Co's report which was later submitted, it appears that neither was allowed by BIS.
- On 29 May 2015, Kerry Braithwaite of Hurst & Co sent to the finance director and finance manager of BFS, Adrian Carter and Andrew Kay, copying in Ms Thompson, a draft accountants' report "on the grant claims up to 28 February 2015". Ms Braithwaite asked for a copy of the TCA Loan. In his response of the same day, Mr Kay explained that the TCA Loan had been incorrectly entered into the accounts of BFS, that "the loan is actually between TCA and MFB, with MFB then investing the money into BFS", and that accordingly the loan agreement from TCA would not be required. Ms Braithwaite replied asking (a) for BFS bank statements showing the receipt of the relevant funds from MFB, and (b) why the TCA Loan had been included as part of the private investment received by 28 February 2015 when the TCA Loan was only received on 1 May 2015.
- Also on 29 May 2015, a meeting described as a board meeting of both BFS and MFB was held, attended by Ms Thompson, Mr Ellis, Mr Carter (the financial controller), and Mr Hancock (the business consultant). The minutes record that Mr Carter "summarised the points raised in his report which had been circulated earlier" and "went on to provide a presentation of the key challenges facing the business". Apart from saying that "I recall that I sat in on one or maybe two of the quarterly board meetings in early 2015 at BFS's premises", Mr Ellis does not deal with this meeting. Accordingly, in the absence of evidence from Ms Thompson, there is nothing to go on save for the contents of the minutes themselves, which are not entirely clear. For example, the minutes state that Mr Carter "outlined the future cash flow and outlined additional funding of c£1m was needed by the end of September", but this entry is preceded by the statement that Mr Carter "went through the MFB financials", and it is therefore unclear whether it refers to the needs of BFS or MFB or both companies. I consider that all that can safely be said about this meeting so far as concerns BFS is that the focus was on continuing and developing business, and that it does not appear to have occurred to anyone present that BFS was at or beyond the stage where it could not trade out of its financial difficulties and ought instead to be wound up.
- Although Mr Green submitted that a Financial Review 2015 document was prepared at this time, that document is undated, and I do not consider that it is clear on the face of it when it was prepared. However, the like points as emerge from the minutes dated 29 May 2015 are reflected in a Sales Directors Report for May 2015, which may be the same document as the report of Mr Carter "which had been circulated earlier" which is referred to in the minutes. The Sales Directors Report concluded:
"I was brought in to establish a sales operation. I have spent my time recruiting a team and establish a strong sales and quoting process. In my view I am confident of meeting and exceeding the targets we have set and fully expect our sales to continue to grow as we focus our efforts and target the public sector. I would anticipate public sector sales contributing in from Q2 at a conservative rate of £100k by September and growing from there."
- As at the end of May 2015, BFS' management accounts recorded sales of £37,447 for that month, a loss for that month of £539,746, and net liabilities of £2,022,822, and, after a reduction in management charges, of £1,941,137.
- Between 1 and 11 June 2015, emails were exchanged between Hurst & Co (Ms Braithwaite and Ms Besant-Roberts) and BFS (Mr Adrian Carter and Ms Thompson). Among other things, Hurst & Co required a copy of the MFB Facility. On 4 June 2015, Ms Thompson (who was not in the UK) provided the draft agreement and said "I will get the last page executed with Robin and send it on tomorrow". On 11 June 2015, Ms Thompson provided a single, separate execution page bearing her signature and that of Mr Ellis, and the date 23 January 2015. In light of the decision not to call Ms Thompson as a witness, no explanation for this backdating is in evidence before me. Mr Ellis said that he had no recollection of signing the MFB Facility, or of any details such as where and whether or not in the presence of Ms Thompson it was signed, but accepted that he must have signed it.
- In light of these exchanges, Ms Braithwaite wrote to Ms Thompson on 11 June 2015 (bold type as in the original):
"Thank you for sending scanned copies of the signature pages of the BFS/MFB agreement. I have updated the paragraph to be included in our report by inserting the text highlighted in "bold" below and removing reference to not having seen the signed agreement.
The private investment funding includes £649,209 of monies received from My Futures Bright Limited. These monies were transferred from Trafalgar Capital Advisors Inc ("TCA") into a holding account held by Coutts in the name of Bright Future Software Limited on 3 March 2015. These funds were subsequently transferred to My Futures Bright Limited's current account on 1 May 2015. My Futures Bright Limited transferred £590,000 on 7 May 2015 and £59,209 on 1 June 2015 to the Company.
Please let me know if you are okay with this paragraph now and I will re-issue our report."
- Hurst & Co's Independent Accountant's Report was finalised in this form and submitted to the directors of BFS on 16 June 2015. It also included the following:
"The private investment funding includes £78,147 of monies received under sale and leaseback (hire purchase) agreements. We understand this is not eligible to be included as private investment for the purposes of the RGF loan drawdown. However we understand that this was disclosed to the RGF by the Company on receipt of the monies. The total private investment excluding this hire purchase funding amounts to £4,808,820 representing a potential shortfall against the required level of private investment of £73,180. Management have informed us that if the RGF had advised that such monies would not qualify as private investment funding, additional private investment would have been obtained to cover this potential shortfall."
- Mr Green submitted that this final Independent Accountant's Report was important because it confirmed that there were no breaches of the conditions of the RGF Offer Letter, save in the one small respect of the above sum of £78,147 which it addressed in detail. He further submitted that from a consideration of the Report "it is implicit that the RGF knew all along that MFB had been approved as a private investor".
- Mr Al-Attar submitted that the material part of the Report identified TCA as the source of £649,209 invested in BFS, and specifically that (1) TCA paid those monies into an account at Coutts "in the name of" BFS, (2) there was then a transfer of those funds to MFB on 1 May 2015, and (3) this was followed by subsequent retransfers from MFB to BFS on 7 May and 1 June 2015. Accordingly, the Report provides no direct evidence that the RGF knew of and approved MFB as a lender to BFS. In fact, the Report was wrong in stating that £649,602 was received into an account of BFS' with Coutts & Co, because BFS never had any such account. Mr Al-Attar suggests that this a further factor which militates against any finding of acquiescence, on the basis this would require complete and accurate disclosure to the RGF, and that this plainly did not occur as a result of this Report (or at all) as regards TCA and MFB.
- In my judgment, Mr Al-Attar's primary submissions on the meaning and effect of the material wording of the final Independent Accountant's Report from Hurst & Co are plainly correct. Read in isolation, the statement that "The private investment funding includes £649,209 of monies received from [MFB]" clearly supports the argument of Mr Green. However, that statement must be read in context, and, when read in that way, the Report is clearly stating that the monies were paid by TCA to BFS, and were then paid by BFS to MFB, before being paid back by MFB to BFS. That would not make MFB an investor in BFS, or inform the RGF that MFB itself is an investor.
- The fact that the Report contains the inaccuracies that it does is a complicating factor. It should be noted, however, that those inaccuracies were the responsibility of BFS, because Ms Braithwaite expressly sought Ms Thompson's approval for the material wording. It is also right to point out that the information conveyed to the RGF by the Report was the same as that apparently conveyed at the Monitoring Visit on 12 May 2015, namely that TCA was investing in BFS. Without going into further granularity in respect of Mr Al-Attar's secondary submissions, it is hard to see how the RGF can be said to have acquiesced either in accepting MFB as an approved "Private Investor" when it was not told that MFB was an investor, or in accepting TCA as an approved "Private Investor" when TCA was not, in fact, an investor.
- Nevertheless, Mr Green is entitled to point to the fact that the information that TCA was being considered as an investor in BFS, and, later, that TCA had become an investor in BFS, did not produce any adverse reaction from the RGF. Mr Al-Attar contends that the RGF would have regarded investment by TCA in a significantly different light to investment by MFB, on the basis that monies emanating from TCA constituted true "private investment" whereas monies emanating from MFB did not, because MFB was essentially publicly funded, and, moreover, was not free to use its income as it wished, but instead was obliged to achieve certain objectives. In the absence of any evidence from the RGF, I am not prepared to reach that conclusion.
- One complicating feature in this regard concerns the status of monies in the hands of MFB. Mr Green submitted that once monies were received by MFB, they belonged to MFB and MFB was free to do as it liked with its own monies. I believe that Mr Al-Attar was inclined to accept that this was right when considered purely from the perspective of legal and beneficial ownership of assets. However, Mr Al-Attar contended that this missed the point as to what he submitted would have mattered to the RGF, which concerned (a) the source of the monies which were paid to MFB and (b) whether MFB was free to use them as it wished in accordance with the obligations to which MFB agreed as a condition of being paid them in the first place.
- I understand Mr Al-Attar's contentions. However, they involve an analysis of whether, on this approach, monies which MFB paid to BFS were, for example, free of MFB's obligation to allocate sufficient of the monies which MFB received to the provision of academic education services, which was a matter distinct from BFS' own project. Whether, if these considerations mattered to the RGF and if the RGF had turned its mind to them, it would or would not have been satisfied that all or any of the monies which MFB paid to BFS were free of MFB's obligations, is not a matter which I consider I am able to decide on the materials which are available to me. It involves analysis not only of MFB's finances from time to time but also of the RGF's likely appraisal of those finances, and, in my judgment, the case which Mr Al-Attar seeks to make out is simply not made out on the evidence that is before me.
- In these circumstances, although I do not consider that it is right to say that the RGF ever accepted anyone other than Mr Ellis as a "Private Investor" for the purposes of the RGF Offer Letter, at the same time I consider that it is right to say that the RGF was not concerned to invoke any rights to reclaim monies that it may have had in light of being told that some of the investment in BFS was not being provided by Mr Ellis.
- Mr Green is also entitled to point to the fact that, having carried out "a reasonable level of assurance assignment" as detailed in the final Independent Accountant's Report dated 16 June 2015, sufficient to report that "the claims for payment of RGF support claimed by [BFS] has (sic) been calculated in accordance with the terms and conditions of the Grant Offer Letter dated 27 March 2014, and the contract variation letter dated 24 February 2015", Hurst & Co did not express any concerns that BFS was continuing to trade when it ought not to, whether on the basis that there was no reasonable prospect that BFS would avoid going into insolvent liquidation or at all.
- As at the end of June 2015, BFS' management accounts recorded sales of £70,186 for that month, a loss for that month of £503,759, and net liabilities of £2,526,581, and, after a reduction in management charges, of £2,444,896.
- On 15 July 2015 and again on 23 July 2015, BFS received letters from HMRC requiring payment of £76,344 in respect of PAYE income tax deductions, National Insurance and a small amount of interest.
- Also in July 2015, Ms Thompson and Mr Carter met with Kyriacos Karsa, a director of K-Works, the Management Consulting part of KPMG, to discuss a potential strategic partnership between KPMG and BFS. In an email dated 22 July 2015, Mr Karsa wrote "there could be a partnership in the making", outlined the possible basis on which "we can work together", and asked Ms Thompson to sign an NDA so that they could take the matter forward.
- As at the end of July 2015, BFS' management accounts recorded sales of £62,537 for that month, a loss for that month of £484,079, and net liabilities of £3,010,640, and, after a reduction in management charges, of £2,928,975.
- During August 2015, the discussions between BFS and K-Works were progressed, as appears from Mr Karsa's email of 5 August 2015, the email from Steve Smith (whose email address was "superconnectedcity.com") of 6 August 2015, the emails from David Muir of KPMG of 7 and 11 August 2015, the email from Fahad Anwar of BFS of 19 August 2015, and the email from Mr Karsa of 20 August 2015.
- Mr Ellis' evidence is that Ms Thompson told him that KPMG "were interested in purchasing [BFS] to effectively act as KPMG's in house IT department", that this "gave me comfort and made me believe that [BFS] was viable and had a strong future ahead", and that "[Ms Thompson] had not mentioned any financial problems with [BFS] and I thought having the backing of a major accountancy firm such as KPMG would be a sensible financial move". Mr Ellis also spoke to Mr Muir of K-Works in or about July 2015, when Mr Muir "told me what a great company Eudie had developed and how he thought there would be a good 'fit' as a partnership between BFS and KPMG … [and] made some very encouraging remarks about the relationship between BFS and KPMG". This had the result that Mr Ellis "was pleased that Eudie's company, which was not only serving a commercial but also socially important aim appeared to be succeeding".
- On 7 August 2015, BFS received a letter from HMRC requiring payment of £71,737 in respect of PAYE income tax deductions, National Insurance and a small amount of interest.
- On 11 August 2015, BFS submitted its final claim form to the RGF. This referred to the "business plan for 2016" which had been presented to the board for approval.
- On 17 August 2015, HMRC wrote to BFS confirming the terms of a payment plan in relation to an outstanding sum of £227,504.
- As at the end of August 2015, BFS' management accounts recorded sales of £71,686 for that month, a loss for that month of £566,289, and net liabilities of £3,576,951, and, after a reduction in management charges, of £3,395,266.
- In September and October 2015, BFS made approaches for funding to the Manchester Combined Authority and the Angel Co-Investment Service, associated with the Greater Manchester Council.
- In the same period, Duff & Phelps were approached to review BFS' cash flow, negotiate with key stakeholders, help source new funding, and advise on restructuring. In an email dated 15 October 2015, Paul Smith of Duff & Phelps requested financial documents from BFS, including management accounts, cash flow projections, business plans and loan and RGF and TCA documentation. Following a meeting on that date, Duff & Phelps sent an engagement letter to Ms Thompson on 15 October 2015, which set out the scope of their work to include, in Phase 1, analysis of cash flow to 30 November 2015, negotiating with key stakeholders and potential investors leading to a review of options which would include an informal CVA, and potentially, in Phase 2, some form of restructuring with medium term debt/equity investment. By email to Ms Thompson dated 18 October 2015, Duff & Phelps stated "As discussed, unless there is a significant uplift in revenue very quickly then the ability to trade on is very challenging" and they went on to refer to various options, saying in respect of "Plan A" that "If having reviewed this you feel the business cannot be turned round then we need to look at other options". It would seem that Duff & Phelps were not, in fact, formally engaged by BFS at any time.
- At the same time, BFS approached KPMG for assistance and advice. By email dated 20 October 2015, Paul Flint of KPMG (copying in John Noon and Mr Muir of KPMG) explained to Ms Thompson that: "[A]ny assistance from KPMG at this stage is about the survival of the companies and a restructuring to ensure they are on a firm financial footing, this has to be stage 1. Any new potential customer, KPMG included is likely to want to ensure that stage 1 is achieved before they move to a commercial relationship." As recorded in Mr Noon's email to Ms Thompson dated 22 October 2015, KPMG's restructuring department was then retained on a contract for £5,000 per week plus VAT to "[assist] you with regard to stakeholder management alongside the running of our Early Options process (Accelerated M& A)". The proposed exploration of investment/sale options would involve the preparation of a "teaser" document which would be circulated to an agreed list of potential investors, and, thereafter, those that showed an interest would sign an NDA and KPMG would take that forward. The proposed assistance with stakeholder management would extend to HMRC, BFS' landlord and Salford Council, and involved monitoring cash against forecasts and exploring other options if the investor option did not succeed. The proposals in respect of BFS and MFB were named "Project Inler". A letter of engagement was sent to BFS on 2 November 2015.
- In the period October to December 2015, KPMG worked with Ms Thompson, Mr Carter and others at BFS (and MFB) to produce an information memorandum for third parties. There are a substantial number of emails between KPMG and Ms Thompson and others in relation to Project Inler during this period.
- Mr Green placed reliance on the following matters in particular, in support of submissions to the effect that KPMG did not consider that BFS should cease trading:
(1) On 28 October 2015, Mr Noon sent an email to Ms Thompson stating: "it looks positive that there will be sufficient to meet payroll commitments for October, albeit certain of the senior staff may be delayed…" With regard to the November 2015 payroll, Mr Noon suggested that Ms Thompson should refrain from going ahead with a possible borrowing of £100,000 for the time being because "If required it may be possible that it can be sourced from elsewhere at a cheaper rate, particularly if a potential deal is pending".
(2) In dealing with BFS's creditors, including Salford Council and HMRC, Mr Noon made it clear that KPMG were assisting BFS (and MFB) with stakeholder management in order to buy time to allow negotiations over external investment to be continued. At the same time, looking inwards rather than outwards, Mr Noon did not advise that BFS should cease to trade.
(3) The extensive documents relating to communications in November 2015 between KPMG, both Mr Muir and Mr Noon, and BFS evidence no suggestion that BFS should cease trading or that the directors were acting irresponsibly.
(4) Mr Green submitted that all this was reassuring, and provided a basis on which the directors of BFS could conclude that it was reasonable to continue to trade.
- In the meantime, BFS asked the RGF whether it would be prepared to convert the £2m loan into a grant. By email from Claire Daffon to BFS dated 21 October 2015, it was explained that BFS needed to complete an escalation memo to be sent to BIS "in order for them to assess any options available in light of [BFS'] current situation". Mr Green submitted that the fact that the RGF did not suggest that BFS had acted in contravention of the RGF Offer Letter or that the RGF would not consider varying the loan showed that the RGF continued to support the project involving BFS.
- On 22 October 2015, HMRC notified BFS of "a new debt" of £306,741, stating that this had to be paid as a condition of the payment plan that had been agreed with BFS.
- On 27 October 2015, Salford City Council served notice of enforcement on BFS in respect of business rates of £110,184, seeking payment by 5 instalments between 25 November 2015 and 25 March 2016.
- As at the end of October 2015, BFS' management accounts recorded sales of £38,206 for that month, a loss for that month of £567,225, and net liabilities of £4,681,653, and, after a reduction in management charges, of £4,599,967.
- By email to Mr Noon and Christopher Gibson (also of KPMG) dated 11 November 2015, Ms Thompson explained that BFS was "asking for £2.5m".
- By email dated 13 November 2015, Mr Noon wrote to Ms Thompson asking for her thoughts on potential Chinese investment in BFS, and asking the following:
"Regarding Robin Ellis, on the basis that the cash hole is circa £2.5m as evidenced in your forecasts, say we could find an investor who was willing to commit circa £2m (and GMIF for whatever reason couldn't get comfortable) would Robin commit?"
- It seems clear from the documents that BFS did not pursue the avenue of seeking further funds from Mr Ellis. Instead, on 17 November 2015, Mr Noon sent an email to Ms Daffon seeking support from the RGF. Mr Noon stated "With regards to looking for external investment, we have had a reasonable degree of interest to date" and, further, explained that "[BFS] is an employer of in excess of 300 staff (with plans to take a further 160 apprentices) in an area where employment prospects are challenging to say the least … Therefore attempting to find investment is key to give these employees the best prospect we can of keeping them in full time employment with this organisation". Ms Daffon responded by saying that BFS needed to go through a prescribed process, and complete the necessary paperwork.
- A Project Change Request Form was completed and sent to the RGF on 24 November 2015. It set out in detail the current financial position of BFS, including in particular the need for new cash investment and that "any potential investor would only likely invest if the existing liabilities of the business can be reduced or their terms renegotiated. This is particularly in relation to those existing creditors holding security in the business". It also explained that the potential investors identified by BFS to date would only be willing to proceed "if we are successful in securing the conversion of the RGF funding to being fully on a grant basis, alongside being able to compromise/renegotiate the terms of other lending in the business" and that without further investment "the business faces almost certain liquidation and the immediate redundancy of over 300 staff and apprentices".
- The RGF responded on 24 November 2015 asking BFS to consider a deferral of the repayments of the RGF Loan. Although by email of the same day Ms Thompson explained that this would not be enough for new investors, BFS amended the Project Change Request Form to ask for a deferral of repayments on the RGF Loan, and to ask also that it should become unsecured and for there to be a freeze on interest.
- As at the end of November 2015, BFS' management accounts recorded sales of £57,611, a loss for that month of £560,621, and net liabilities of £5,242,273, and, after a reduction in management charges, of £5,160,588.
- The Project Inler information memorandum to be issued to potential investors was produced at some time in December 2015. It is unclear from the papers available at trial how far discussions with third parties may have progressed, but those papers do not, for example, include any NDAs or term sheets. Mr Al-Attar drew attention to the fact that, in the Project Inler information memorandum (a) only Mr Ellis and the RGF were listed as lenders to BFS, (b) TCA was listed as a lender to MFB, and (c) MFB was stated to be BFS' largest source of "revenue", with the entire amount of "other income" received by BFS from MBF in 2014 and 2015 being attributed to the management recharge BFS applied to MFB for services provided by BFS to MFB.
- A meeting took place on 4 December 2015, attended by Mr Noon and Mr Gibson from KPMG, Ms Thompson and Mr Carter from BFS, and Ms Daffon and Ms Blackwell on behalf of the RGF. The outcome of that meeting is not in evidence. However, email contact was maintained, and by email dated 8 December 2015 Ms Thompson told Sue Blackwell of the RGF that "We remain positive that we have a solvent business going forward". Nevertheless, in the same email Ms Thompson continued "I would be grateful if we could get some help to bridge the shortfall in our salaries and wages which is currently £130,000".
- On 5 December 2015, in light of the RGF's indication that it was focussing on the possible deferral of the RGF Loan (as opposed to the other measures which BFS had asked the RGF to consider by the Project Change Request Form), Ms Thompson wrote to Mr Noon "In that case it looks as if we have no way out?" In his email in reply of the same date, Mr Noon rehearsed the features of what he described as "a very difficult situation", and ended:
"I know you have told me umpteen times that Robin cannot assist, I will however reiterate that existing shareholders and investors backing a turnaround plan gives a potential investor the confidence that the existing team believe the plan, if not this reluctance brings into question whether the business plan is actually a plan that can be adhered to."
- Mr Al-Attar submitted that Ms Thompson and Mr Ellis had not explained either (a) why, as directors of BFS, the £10.2m Facility was not called upon, especially as wages and tax debts were going unpaid, or (b) why, if the prospects of BFS were believed to be as good as had been asserted in defence of Manolete's claims, no investment from Mr Ellis was willingly forthcoming. So far as concerns Ms Thompson, and in light of the decision not to call her as a witness at trial, those submissions are undoubtedly correct. So far as concerns Mr Ellis, his evidence as to his position viewed from the perspective of a lender, which I accept, is that he was not asked "umpteen times" to assist BFS, and indeed that he never positively declined to assist. In fact, of course, if he had been pressed to make further payments pursuant to the £10.2m Facility he would have had no right to refuse under that Facility. At the same time, he was not rushing to pay over further funds pursuant to the £10.2m Facility because, while he had not lost faith in BFS, he had already invested substantial sums, and it was not attractive to him to tie up further monies.
- So far as concerns Mr Ellis' position as a director of BFS, I consider that Mr Al-Attar's submissions are probably correct. Both Mr Ellis and, in light of her personal relationship with him, Ms Thompson were subject to conflicts of interest. If BFS required funds in order to keep trading or pay its debts as they fell due, it was in the interests of BFS, and in keeping with their duties as directors of BFS, to draw down further funds under the £10.2m Facility, if necessary until it was exhausted. At the same time, because further investment in BFS would tie monies up for a considerable time, and indeed might not be repaid at all, that was not in the interests of Mr Ellis. It seems to me that Mr Ellis never himself confronted, and was never asked by Ms Thompson to confront, this dilemma head on. Instead, as I find, over time Ms Thompson steered BFS' investment requirements away from the £10.2m Facility, and both Mr Ellis and the RGF acquiesced in that: Mr Ellis, because he deferred to Ms Thompson with regard to the business and financial affairs of BFS, and thought that this made commercial sense for BFS; and the RGF for reasons which are unclear, but which may include that those who had day to day dealings with BFS as time went on were reluctant to press Mr Ellis to honour the £10.2m Facility.
- Having said that, it is important to bear two matters in mind. First, the present claims do not include a claim for breach of duty against Mr Ellis, on the footing that he could and should have caused further calls to be made on the £10.2m Facility. Second, these submissions are made in respect of a time which long post-dates 31 January 2015. That is pleaded by Manolete as the date on which Mr Ellis knew or ought to have known that there was no reasonable prospect that BFS would avoid going into insolvent liquidation, and it was common ground between the parties that an applicant in a wrongful trading claim cannot change the date the applicant is contending for from the one pleaded (see Re Sherborne Associates Ltd [1999] BCC 40, HH Judge Jack QC at p42; Re Brian D Pierson (Contractors) Ltd [1999] BCC 26, Hazel Williamson QC, sitting as a deputy judge of the High Court, at pp49-50).
- In email exchanges between Ms Blackwell and Ms Thompson on 8 and 9 December 2015, Ms Thompson wrote "We have worked on the cash flow and project going forward with the agent of a potential investor and attach a forecast showing the impact of delaying the loan and removing the debenture on future loans". Ms Blackwell replied, questioning the rationale for the request to remove the debenture and asking "Has the same request been put to Mr Ellis?". Ms Blackwell also wrote "You also said that Mr Ellis had removed the credit facility due to investor fatigue. Could you please provide some more detail on this, we will be asked exactly why he withdrew the funding. Could you also please clarify his relationship with [BFS], as he is still listed as a Director and shareholder on the Companies House website, and also for [MFB] (which I understand is the linked trading company)". Ms Blackwell later added further questions concerning sales figures and sales projections.
- Ms Thompson did not answer those questions. Instead, Ms Thompson replied that BFS was in the middle of discussions with potential investors and "I do not believe that we have reached the level of negotiation that you are current looking for at this stage to enable you to put our case forward. Could I please get back to you next week …" Ms Blackwell replied "It is up to you."
- To complete this part of the history, later, on 17 December 2015, Ms Blackwell asked Ms Thompson whether there had been any progress. Ms Thompson replied "We believe that we have secured funds to pay the December salaries. At present we cannot answer your questions as we are waiting for potential investors to put their conditions in writing". Ms Blackwell replied "Sorry, I don't understand why you cannot answer our questions and provide the requested information. None of these rely on your discussions with investors". Ms Blackwell chased for responses by emails to Ms Thompson dated 5 January 2016 and 13 January 2016. By email dated 13 January 2016, Ms Thompson replied "At your meeting, you emphasised that there could be no further funds from BIS. This was clear to us and therefore any request for further information to BIS can only be dependent on [BFS] securing private funds … In the absence of an interested party, any request made by the business to BIS and the PI [i.e. private investor] may not be followed through".
- In short, therefore, Ms Thompson ended up saying not that Ms Blackwell's questions could not be answered without knowing the position of proposed new investors, but rather that there was no point in BFS answering them until a further source of funds was found, because without that any requests to the RGF might not be pursued.
- Mr Al-Attar pointed out that in the email exchanges on 8 and 9 December 2015: (a) no offer was made by MFB to defer any debt owed to it by BFS, and (b) the RGF asked only about the debt owed to Mr Ellis, not any debt owed to MFB. He submitted that this supported the conclusions that, in December 2015: (i) the RGF believed that the only "Private Investor" in BFS was Mr Ellis, and (ii) the RGF had not approved MFB as a private investor, and had never seen the MFB Facility said to have been executed on about 11 June 2015 and backdated to 23 January 2015. In particular, he submitted that the reference in the email from Ms Blackwell to Ms Thompson dated 8 December 2015 to MFB being "the linked trading company" supported the conclusion that the RGF did not regard MFB as an investor in BFS.
- It appears from emails dated 9 and 10 December 2015 that around that time Ms Thompson and Mr Noon (and others) held detailed discussions about a possible CVA in circumstances where "significant trade creditor build up has arisen as a result of cash pressures within the business" which were identified as "HMRC arrears circa £550k and rising" as well as "landlord arrears, currently in excess of £300k … [which will rise] to in excess of £600k" and "further balance is owed to trade creditors". An email from Mr Noon to Ms Thompson dated 9 December 2015 states "I know you are still looking for a solvent solution for your business". An email from Mr Muir to Ms Thompson of the same date discusses various models, but ends "I also think it would be prudent to start planning for an alternative if I can't get Andy, Lex or others interested … Difficult to think of one other than a full liquidation". This appears to be a reference to the prospect that another part of KPMG would invest in BFS. It ties in with an email from Mr Muir dated 7 December 2015, addressing what might be said about KPMG's commercial support for BFS in the Project Inler information memorandum, which states: "Spoke with Kyri on Friday and he will respond with KPMG position later today – I think an aspiration he'll say is OK." An email from Mr Carter to Ms Thompson and KPMG dated 10 December 2015 attached a "Non CVA Plan", indicating consideration of a solvent restructuring.
- On 11 December 2015, HMRC sent BFS a warning of winding up action and demanded payment of £469,789.46. It appears from his email to Ms Thompson dated 17 December 2015 that this resulted in Mr Noon having a lengthy discussion with HMRC in which he "explained our involvement … and what you were trying to achieve, namely to find an investor for the business that is able to support the WC requirement in the business moving forward and return the business to profitability".
- By email dated 18 December 2015, Ms Thompson asked Mr Noon "Is it ok for [BFS] to continue trading whilst is [sic] has prospects of new investments?".
- Mr Noon replied by email later the same day, stating (among other things):
"Regarding your question on whether to continue to trade in either [MFB] (not insolvent) or [BFS] is ultimately one for yourself and your fellow directors to make as a board. We can advise based on experience of situations such as this.
Clearly, in order for you to conclude any process for seeking the required investment into the business, whether via attempting to implement a CVA in the New Year or otherwise, the business (of either entity) needs to remain intact to the fullest extent possible, to preserve value for both the existing creditors of MFB and more importantly BFS, any potential investor and other existing stakeholders. Based upon our knowledge of your conversations with Total People and the Manchester College this week, and the call you have arranged with David Butterworth on Monday, there remains a prospect that the necessary investment into the businesses may be secured. However the extent to which this is the case is obviously something that needs to be ascertained sooner rather than later.
As you will no doubt already be aware, you do have certain responsibilities as a director of both MFB and BFS to consider their status as a going concern and the ability to continue to trade. It would be advisable to seek your own independent legal advice as to your position as a director …
To sum up, the fact that you still have a realistic prospect of an investor in the business, whether that be solvent or via a process, you are trying to ensure any 'value' in the business is protected. To say at this point my business is insolvent and I should wind it up would not necessarily be the correct treatment, and you may be criticised further were you to take this route."
- Mr Green submitted that, in light of that expression of professional opinion by Mr Noon based on his experience of similar situations and on his knowledge of BFS' then current position, it is difficult to understand how Manolete can maintain a case that Ms Thompson and Mr Ellis should have closed down BFS nearly a year earlier.
- As at the end of December 2015, BFS's management accounts recorded sales of £50,851, a loss for that month of £610,055, and net liabilities of £5,852,328, and, after a reduction in management charges, of £5,770,644.
2016
- On or shortly after 19 January 2016, Ms Thompson and Mr Ellis flew to the Isle of Man to meet a potential investor, Skanco. In an email to the RGF dated 20 January 2016, Ms Thompson wrote: "Should a deal not be forthcoming with this potential investor and [in light of] the continued lack of sales and further investment the only option regrettably open to the business is to cease to trade". However, as explained by Mr Ellis (first witness statement, [63]): "The investors seemed serious about their potential investment but ultimately they could not be persuaded to invest".
- On 27 January 2016, Ms Thompson sent an email to the RGF stating:
"Unfortunately our sales were poor for December and January and the potential investors pulled out on Monday and yesterday we agreed with KPMG that the business must go into liquidation."
- On 3 February 2016, BFS' offices at White Tower, Media City, Salford were repossessed by the landlord, Peel Media Limited. On 4 February 2016, HMRC presented a petition to wind up the company, based on an indebtedness of £684,370.99. On 23 February 2016, BFS entered creditors' voluntary liquidation.
- On 24 October 2016, the liquidators of BFS filed a report under section 7(3) of the Company Directors Disqualification Act 1986. The report provided details of unfit conduct under three headings: (i) "Non-payment of Crown debt" (namely £687,113.99 owed to HMRC), (ii) "Personal benefit to director" (namely receipt by Mr Ellis between 30 April 2014 and 31 March 2015 of £513,769.19 as repayment of his private investment), and (iii) "Inter-company accounts between BFS and MFB".
- Mr Abdulali accepted in cross-examination that if he had thought that there had been wrongful trading then he would have said so in this report.
2017
- By letters dated 18 January 2017, the Insolvency Service wrote to Ms Thompson and Mr Ellis informing them that their conduct as directors of BFS was being investigated for the purposes of potential disqualification proceedings. The initial areas of investigation were stated to be:
" - Breach of the terms of the grant/loan from the Regional Growth Fund
- Level of personal benefits drawn from the company
- Issues relating to the use/movement of assets of the company."
- By letter dated 11 May 2017, the solicitors for Ms Thompson and Mr Ellis provided a detailed response to the Insolvency Service, refuting these allegations.
- By letter dated 1 June 2017, the Insolvency Service wrote to Ms Thompson and Mr Ellis informing them that:
"… as a result of information supplied and my further enquiries the Secretary of State does not propose to take proceedings against you pursuant to section 6 of the Company Directors Disqualification Act 1986 in connection with the affairs of the above named company."
THE CLAIM FOR £325,000 – BASIS 1, TRANSACTION AT AN UNDERVALUE
Context
- Section 238 of the IA provides:
"(1) This section applies in the case of a company where—
(a) the company enters administration, or
(b) the company goes into liquidation;
and "the office-holder" means the administrator or the liquidator, as the case may be.
(2) Where the company has at a relevant time (defined in section 240) entered into a transaction with any person at an undervalue, the office-holder may apply to the court for an order under this section.
(3) Subject as follows, the court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if the company had not entered into that transaction.
(4) For the purposes of this section and section 241, a company enters into a transaction with a person at an undervalue if—
(a) the company makes a gift to that person or otherwise enters into a transaction with that person on terms that provide for the company to receive no consideration, or
(b) the company enters into a transaction with that person for a consideration the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the consideration provided by the company.
(5) The court shall not make an order under this section in respect of a transaction at an undervalue if it is satisfied—
(a) that the company which entered into the transaction did so in good faith and for the purpose of carrying on its business, and
(b) that at the time it did so there were reasonable grounds for believing that the transaction would benefit the company."
- Section 240 of the IA provides:
"(1) Subject to the next subsection, the time at which a company enters into a transaction at an undervalue or gives a preference is a relevant time if the transaction is entered into, or the preference given—
(a) in the case of a transaction at an undervalue or of a preference which is given to a person who is connected with the company (otherwise than by reason only of being its employee), at a time in the period of 2 years ending with the onset of insolvency (which expression is defined below)...
(2) Where a company enters into a transaction at an undervalue or gives a preference at a time mentioned in subsection (1)(a) … that time is not a relevant time for the purposes of section 238 or 239 unless the company—
(a) is at that time unable to pay its debts within the meaning of section 123 in Chapter VI of Part IV, or
(b) becomes unable to pay its debts within the meaning of that section in consequence of the transaction or preference;
but the requirements of this subsection are presumed to be satisfied, unless the contrary is shown, in relation to any transaction at an undervalue which is entered into by a company with a person who is connected with the company.
(3) For the purposes of subsection (1), the onset of insolvency is:
…
(e) in a case where section 238 or 239 applies by reason of a company going into liquidation at any other time, the date of the commencement of the winding up."
- As a director of BFS, Mr Ellis was a person "connected with the company" (see IA, section 249). Further, in the present case the period of 2 years ending with the onset of insolvency began on or about 23 February 2014. The payments on which the claim for £325,000 is based comprise payments by BFS to Mr Ellis in the following amounts on the following dates: £99,000 on 29 May 2014; £61,000 on 30 May 2014; £99,000 on 3 September 2014; and £66,000 on 4 September 2014. In accordance with the above provisions, it is presumed that BFS was unable to pay its debts at the time of those payments, although it remains open to Mr Ellis to prove the contrary.
- Accordingly, the first question which arises in respect of this basis of claim is whether the payments amounting in total to £325,000 constituted a gift or a transaction for a consideration the value of which was significantly less than the value of the consideration provided by BFS. Although Manolete's pleaded case alleges in the alternative that each of the payments was a preference (see Points of Claim, [33]-[37]), this claim was argued on the undervalue basis alone. If the answer to that question is negative, that is an end of the matter. If the answer to that question is affirmative, further questions arise or may arise. In brief, these are, first, whether Mr Ellis can rebut the presumption of insolvency; and, second, if he cannot do so, whether he can successfully invoke the statutory defence under section 238(5).
- There is no doubt that prior to the above payments, Mr Ellis had loaned a total of £325,000 to BFS, in addition to his original investment of £100,000 for share capital. On 4 October 2012, Mr Ellis lent BFS £100,000, pursuant to a Heads of Agreement signed on 2 October 2012 by Ms Thompson on behalf of BFS and by Mr Ellis. That Heads of Agreement was converted into a Secured Loan Deed dated 14 November 2012 whereby Mr Ellis agreed to lend up to £185,000 to BFS for working capital finance. Interest was fixed at 1% per month and it was repayable by 2 April 2014. The loan was secured by a fixed charge over BFS's premises and a floating charge over its other assets. Pursuant to the Secured Loan Agreement, Mr Ellis lent a further £85,000 on 28 January 2013. Between 4 April 2013 and 10 May 2013, Mr Ellis lent a further £140,000 to BFS, which was paid as follows: £10,000 on 5 April 2013; £45,000 on 24 April 2013; £35,000 on 8 May 2013; and £50,000 on 10 May 2013. Accordingly, by 10 May 2013 Mr Ellis had loaned a total of £325,000 to BFS.
Submissions
- Manolete's case, however, is that this indebtedness of BFS to Mr Ellis did not survive the execution of the £10.2m Facility. There are two main planks to that argument. The first is that the £325,000 loan was replaced and superseded by a Facility Agreement and Guarantee dated 5 July 2013 made between BFS, Mr Ellis and Ms Thompson ("the £500,000 Facility"). The second is that the £500,000 Facility was itself replaced and superseded by the £10.2m Facility. (The £500,000 Facility was amended by an Agreement dated 16 August 2013, but this merely increased that facility of £500,000 to one of £632,000, and is therefore irrelevant.)
- As to the first plank, Recitals A and B of the £500,000 Facility recorded that between 1 January 2012 and the date of the £500,000 Facility Mr Ellis had loaned BFS a total of £325,000 (excluding interest), and that Mr Ellis had agreed to provide BFS with "an aggregate secured facility not exceeding £500,000". In the £500,000 Facility, "Loan" was defined as "the loan made or to be made by [Mr Ellis] to [BFS] under this agreement or the principal amount outstanding for the time being of those loans". Clause 2.1 provided that Mr Ellis granted to BFS "a secured Sterling facility of a total principal amount not exceeding £500,000 on the terms, and subject to the conditions, of this agreement". Clause 2.2 provided that as at 28 June 2013 Mr Ellis had lent £325,000 to BFS on which interest of £7,215 had accrued, and "therefore the total Loan as at the date of this agreement is £332,125 (plus interest that has accrued between 28 June and the date of this agreement) ("Initial Loan") and the Available Facility as at the date of this agreement is therefore £167,875 (less interest that has accrued between 28 June and the date of this agreement)".
- As to the second plank, in the £10.2m Facility, "the Previous Facility Agreements" are defined as the Facility Agreements between the same parties dated 5 July 2013 and amended on 28 August 2013 (i.e. the £500,000 Facility), dated 30 November 2013, dated 28 December 2013, and dated 23 March 2014. The "Repayment Date" is defined as 31 March 2018. Recitals A and B of the £10.2m Facility record that between 11 July 2013 and the date of the £10.2m Facility Mr Ellis had loaned £1,535,602 pursuant to "the Previous Facility Agreements", and that the facility of up to £10.2m was "to replace the Previous Facility Agreements". Clause 15.1 of the £10.2m Facility provides "This agreement replaces and supersedes the Previous Facility Agreements". Clauses 15.2(a) and 15.2(c) provide that "As from the date of execution of this agreement, each of the parties (a) agrees and acknowledges that each of the Previous Facility Agreements is terminated and shall cease to be of any further force or effect … and (c) irrevocably waives any and all past, present and future actions, claims and demands against any of the other parties whatsoever in respect of the Previous Facility Agreements". The effect of Clause 7 and Schedule 2 is that BFS was obliged to repay the Loans (i.e. the "Initial Loan" and the "Loan") by the Repayment Date, that BFS was entitled to make voluntary prepayment of part or all of the Loans "by notifying [Mr Ellis] five Business Days in advance", and "No repayment or prepayment is permitted, except in accordance with the express terms of this agreement or with the prior written agreement of [Mr Ellis] and [BFS]".
- The effect of Clause 15 (and these other provisions) of the £10.2m Facility is pleaded in the Points of Claim (at [15]). Those provisions are admitted in the Points of Defence (see [19], first sentence). Accordingly, Mr Al-Attar submitted that Mr Ellis does not dispute that the £10.2m Facility replaced and superseded the Previous Facility Agreements, one of which governed Mr Ellis' entitlement to repayment of the loans totalling £325,000 which he had made to BFS by 10 May 2013. Manolete therefore contends that by entering into the £10.2m Facility Mr Ellis terminated and irrevocably waived any entitlement that he had to repayment of that £325,000.
- Manolete's pleaded case concerning the transaction at an undervalue is based on a series of payments that were made by BFS to Mr Ellis in the total amount of £325,000 between 29 May 2014 and 4 September 2014 (Points of Claim, [33]). Those payments are admitted by Mr Ellis (Points of Defence, [34]).
- Manolete then alleges that these payments were made for no consideration because they were made in discharge of obligations which had been terminated and irrevocably waived by Mr Ellis upon his entry into the £10.2m Facility (see Points of Claim, [35(1)]) "as pleaded in paragraphs 15(3)(c) and 15(4) above". In fact, the £500,000 Facility is not "pleaded in paragraphs 15(3)(c) and 15(4) above" but is instead referred to in paragraph 15(3)(a) of the Points of Claim. However, this makes no material difference either to the substance of the claim pleaded against Mr Ellis, or to the substance of his pleaded defence. The first limb of that defence is that the payments totalling £325,000 that were made by BFS "represented the repayment in the normal course of business" of the total indebtedness of BFS of £325,000 to Mr Ellis "as at 10 July 2013" and that his loan or loans amounting in total to £325,000 had not been terminated and irrevocably waived by his entry into the £10.2m Facility, but instead remained payable to him (Points of Defence, [35]-[37]).
- Mr Ellis' case at trial focussed on the wording of Recital A of the £10.2m Facility, which states "Between 11 July 2013 and the date of this agreement [Mr Ellis] has loaned a total of £1,535,602 … (excluding interest) pursuant to the Previous Facility Agreements". There are two limbs to this part of Mr Ellis' case. The first is that the sum of £1,535,602 is not a correct statement of what Mr Ellis had loaned to BFS, and further, as a matter of arithmetic, that sum does not include his loan of £325,000. The second is that the date of 11 July 2013 was inserted for a reason, namely to differentiate between those sums which had been loaned by Mr Ellis before and after a public announcement was made by the RGF on that date that BFS was one of the successful bidders in RGF Round 4 and would "take a share of a £506 million pot of funding to attract private sector investment to go into projects that it is hoped will create thousands of jobs". The thrust of the argument is that the loan of £325,000 which pre-dated 11 July 2013 was not within the scope of the "private sector investment" which was material for the purposes of the £10.2m Facility, and there was never any intention on the part of any of the parties to the £10.2m Facility to waive or terminate the loan of £325,000 which pre-dated 11 July 2013. On Mr Ellis' case, these points are supported by the fact that, before the repayments amounting in total to £325,000 were made to him by BFS, legal advice was sought and obtained by Ms Thompson on behalf of BFS from Mr Moseby, who had drafted the £500,000 Facility and the £10.2m Facility, which explained that the £325,000 could be repaid.
- Dealing first with the arithmetic, it is common ground that the actual sums which Mr Ellis loaned to BFS between 11 July 2013 and the date of the £10.2m Facility amounted in total to £943,747. These loans were made by a series of payments between 31 July 2013 and 5 April 2014. Further, during the same period MFB made payments to BFS in the total sum of £591,855. Those sums add up to £1,535,602, and it is clear that this figure in the £10.2m Facility in fact represents those sums.
- Furthermore, it is clear that no part of the total sum of £325,000 constituted a loan made by Mr Ellis between 11 July 2013 and the date of the £10.2m Facility.
- Based on these facts, Mr Green submitted that the loan of £325,000 did not become part of the £10.2m Facility. He also argued that there was never any intention on the part of any of the parties to the £10.2m Facility to terminate or waive that loan. This, he submitted, is supported by a consideration of the relevant documents. In brief:
(1) Mr Moseby drafted the £500,000 Facility (which was dated 5 July 2013), and for that reason if for no other reason it is apparent that Mr Moseby knew that Mr Ellis had loaned £325,000 to BFS prior to 11 July 2013, because Recital A states: "(a) Between 1 January 2012 and the date of this agreement, the Lender has loaned to the Borrower a total of £325,000 (excluding interest)".
(2) Mr Moseby also knew that the RGF Offer Letter specifically identified 11 July 2013 as the date from which Private Investor Financing could arise. Clause 2b provided: "The Private Investor Financing may include funds drawn down by [BFS] between 11 July 2013 and the date of this Loan Offer Letter".
(3) In an email of 4 April 2014 at 18:25, Mr Moseby asked Ms Thompson to add in to Clause 1.1 of the £10.2m Facility "the date of the last loan agreement in February into the definition of "Previous Facility Agreement"". Mr Green submitted that as Mr Moseby had drafted all the "Previous Facility Agreements", this date (in fact 23 March 2014) must have been apparent from his files, and that the fact that he did not look it up for himself suggested a lack of engagement on his part with the task that he had in hand. Mr Green then submitted that the reason why Mr Moseby failed to ensure that the definition of "Previous Facility Agreements" was limited only to loans which post-dated 11 July 2013 was probably because he did not check his own files for the terms of those earlier facility agreements. The suggestion is that if Mr Moseby had checked the terms of the £500,000 Facility: first, he would have seen that it included loans made before 11 July 2013 (totalling £325,000); and, second, he would have excluded those loans from the provisions of the £10.2m Facility.
(4) In an email to Mr Moseby later on 4 April 2014 at 20:49, Ms Thompson wrote:
"The figure of Approx £1.565 that I gave you was the loan from July 11 which is the subject of the Inter creditor agreement. Does this mean that the Company can pay Robin the loan that he provided BEFORE July 11 2013? The amount he provided before July 11 is not being considered by BIS as funding the project. We need to clarify this."
(5) By email to Ms Rawlinson at BFS dated 22 May 2014, Mr Moseby wrote (emphasis added):
"Under the terms of the Intercreditor deed, you can't repay any of the "RJE Debt" without the consent of the RGF. "RJE Debt" is defined as the amount owed to [Mr Ellis] under the 10 April 2014 facility agreement, which covers the post-11 July 2013 debt of £1,535,602 which was then rolled up into an aggregate £10.2m loan. If you are looking to repay any amounts outside of the "RJE Debt" then you don't need the consent of RGF, but it would be worth making sure they have no issue with the repayment before it is made in any event (you don't want to sour the relationship)."
(6) No reply to Ms Thompson's email dated 4 April 2014 was in evidence at trial. Mr Ellis' case, however, is that the email dated 22 May 2014 in effect provides an answer to the earlier email, and, further, that it is appropriate to read it in that way in circumstances where the emails available to the Court are obviously incomplete (and moreover, as he contends, through no fault of his).
(7) By letter dated 7 February 2020, Mr Moseby answered a number of questions which were asked by Mr Abdulali in a letter dated 6 February 2020. Question 7 related to the above email dated 22 May 2014, and asked: "Is it correct that you were not informed of the debt that was to be repaid when Ms Rawlinson sought your advice?" Mr Moseby answered this question as follows: "We were not aware of any particular debt which was to be repaid at the time; the response was to a question regarding the mechanics of the existing documents". I agree with Mr Green's criticism of the leading nature of this question. I also recognise the force of the point that this exchange of letters is no substitute for evidence from Mr Moseby in a witness statement and, if that evidence is not agreed, under cross-examination. Leaving aside those points, however, and taking the answer entirely at face value, Mr Moseby does not dispute that his understanding at the material time, and the advice that he gave accordingly, was that loans made by Mr Ellis to BFS before 11 July 2013 were not "covered" by the £10.2m Facility, had not been "rolled up" into the £10.2m Facility, and could be repaid by BFS without seeking consent from RGF.
(8) Mr Ellis' evidence under cross-examination included the following answers:
"Yes, you say it [the £325,000] is being carved out. I would say that it was erroneously included within some document that – I think Kemp Little again probably – drew up in relation to that because I do not think – it certainly was my understanding at the time that that pre-dated the agreement with the Regional Growth Fund and – well it was not a part of it, and I think that was everybody's understanding."
"It was never the intent that it would be included and I do not think anybody thought that."
- Mr Green further submitted that the inclusion in the sum of £1,535,602 of £691,855 which had not, in fact, been paid by Mr Ellis was no more than a simple mistake, and that this was apparent from a consideration of the contemporary documents. Those documents provide the best evidence as to how an incorrect figure came to be inserted in the £10.2m Facility, and show there was no attempt to conceal anything.
- As set out above, on 10 April 2014, Ms Rawlinson sent an email to Ms Valizadeh of Hurst & Co stating "Attached is the schedule for Private Investment together with screen shots for all entries". One of the attachments to that email was a copy of the nominal ledger of BFS which showed that "Private Investments" amounting in total to £1,535,602 had been made, but did not identify the lender(s).
- By letter to Ms Thompson dated 23 October 2014, following their audit and discussions with Ms Thompson and Ms Rawlinson, Hurst & Co "noted inconsistencies between various documents in relation to Mr Ellis' loans", and went on to say with regard to the figure of £1,535,602 in the £10.2m Facility "We understand that this discrepancy has arisen as the loan agreement was drawn up based on the private investment balance in the nominal ledger without taking account of the split between Mr Ellis and [MFB]".
- As set out above, the Directors' Report and Financial Statements of BFS for the year ended 30 April 2014 were signed by Ms Thompson on 30 October 2014, and stated:
"During the year, [BFS] received an investment loan of £691,855 from [MFB]. This amount is included in creditors due after more than one year.
[BFS] has also received investment loans from R Ellis during the year and at the year-end owes R Ellis £978,747 (2013: £264,345). This amount is included in creditors due after more than one year.
In addition, [BFS] has received a further loan from R Ellis of £325,000 which has been included in creditors due within one year."
- Mr Al-Attar submitted that the scope of the release under Clause 15 of the £10.2m Facility is clear, and that it cannot be construed otherwise than to give effect to its plain language. Further, Mr Ellis is unable to make good a case for rectification of the £10.2m Facility which leaves BFS' liability to repay the £325,000 loan intact.
- With regard to construction, Mr Al-Attar submitted that no correction of a mistake could be made as a matter of construction because neither of the two necessary conditions are satisfied: (i) there is no clear mistake on the face of the instrument, and (ii) it is not clear what correction ought to be made in order to cure the mistake (see East v Pantiles Plant Hire Ltd [1982] 2 EGLR 111, Brightman LJ at 112; KPMG LLP v Network Rail Infrastructure Ltd [2007] EWCA Civ 363, Carnwarth LJ at [47] and [64]; Arnold v Britton [2015] UKSC 36, Lord Hodge at [70] and [78]).
- As to (i), there is no error on the face of the document either in Recital A of the £10.2m Facility (which refers to lending by Mr Ellis after 11 July 2013 pursuant to the Previous Facility Agreements) or in the extent of the release in Clause 15. In order to establish that the amount of £1,535,602 is too high in light of Mr Ellis' true advances since 11 July 2013, or to establish that the release in Clause 15 extends to advances made before that date (which ought not to be released, on the premise that Recital A is correct in rehearsing that the release is intended to be limited to advances made after that date), it is necessary to have regard to extraneous facts.
- As to (ii), there is nothing in the document which states by what amount the figure of £1,535,602 should be corrected or whether and in what way change is required to the definition of "Previous Facility Agreements" and/or Clause 15. Again, to make good a case on any of those points requires consideration of extensive external matters.
- Accordingly, the error which Mr Ellis asserts cannot be remedied as a matter of construction, and Mr Ellis needs to rely on a case of rectification based on mutual mistake. As to that, as explained by Leggatt LJ (as he then was) in FSHC Group Holdings Ltd v GLAS Trust Corpn Ltd [2020] 2 WLR 429, at [146]:
"The justification for rectifying a contractual document to conform to a "continuing common intention" is therefore not to be found in the principle that agreements (as objectively determined) must be kept. It lies elsewhere. It rests on the equitable doctrine that a party will not be allowed to enforce the terms of a written contract, objectively ascertained, when to do so is against conscience because it is inconsistent with what both parties in fact intended (and mutually understood each other to intend) those terms to be when the document was executed. This basis for rectification is entirely concerned with the parties' subjective states of mind."
- Mr Al-Attar submitted that Mr Ellis could not make good the contention that the parties to the £10.2m Facility intended that his advances to BFS prior to 11 July 2013 should have remained repayable to him after the execution of the £10.2m Facility.
- First, the contemporary documents show the following:
(1) By email dated 2 April 2014, Mr Moseby sent Ms Thompson "the latest draft of the facility agreement" and asked her for (i) "the outstanding amount of the loan from 11 July 2013" to state in Recital A, and (ii) the "Initial Loan", namely "the outstanding amount which is being rolled forward (rather than repaid)", and (iii) the date of the last of the "Previous Facility Agreements".
(2) By email dated Friday 4 April 2014 at 15:53, Ms Thompson supplied Mr Moseby with the figure of £1,535,602 as being the "Initial Loan" and the total debt currently outstanding from BFS to Mr Ellis under the "Previous Facility Agreements" (see the answer to paragraph 7 of the questionnaire provided by BIS' lawyers, Nabarro LLP, which Ms Thompson attached to that email).
(3) Draft documentation (in which the figure of £1,535,602 had been inserted in Recital A) was sent to Mr Ellis and Ms Thompson by Mr Moseby later on Friday 4 April 2014.
(4) Still later on Friday 4 April 2014, at 20:49, Ms Thompson sent Mr Moseby her email asking for clarification as to whether "the Company can pay Robin the loan that he provided BEFORE July 11 2013?"
(5) The disclosure in this litigation contains (a) no response from Mr Moseby to Ms Thompson's email of 20:49, and (b) no instruction from Mr Ellis or Ms Thompson either (i) that the amount of £1,535,602 should be amended, or (ii) that the amount of £325,000 should be carved out of the release and replacement of the "Previous Facility Agreements".
(6) On Sunday 6 April 2014 at 18:45, Ms Thompson wrote to Mr Moseby "I have been through the documents with Robin and we will sign them tomorrow." The only amendment that she sought was that the "long-stop date" for the grant of a second charge on her property should be extended to 30 April 2015.
(7) Mr Moseby replied by email on Monday 7 April 2014 at 09:31, stating that he had "updated the facility agreement with this date" and "I've also removed the square brackets from the definition of "Previous Facility Agreements".
(8) The £10.2m Facility and the ICD are inter-related, and, in particular, the ICD defines "RJE Debt" as "all liabilities which are or may become payable or owing by [BFS] to [Mr Ellis] under [the £10.2m Facility]".
(9) Mr Ellis and Ms Thompson approved the entry into the £10.2m Facility and the ICD by a board resolution of BFS on 7 April 2014.
(10) The next material documents in the chronology in the disclosure are the execution documents and the certificate from Mr Ellis (that he understood the terms of the ICD, and had been advised to take and had been given time to take but had chosen not to take independent legal advice in respect of it) signed on Monday 7 April 2014, and the first RGF claim form dated 11 April 2014 by which BFS sought a payment of £1,087,921 under the RGF Grant on the basis that the "Private Investment Loan Drawn Down" amounted to £1,535,602.
- Second, in his oral evidence Mr Ellis accepted that in the period 17 February 2014 to 7 April 2014 he and Ms Thompson had opportunities to review the terms of the draft £10.2m Facility, including on 21 February 2014 and over the weekend of 5 and 6 April 2014. Mr Ellis also confirmed that he and Ms Thompson did review the draft £10.2m Facility over the weekend of 5 and 6 February 2014, and that neither of them instructed any revisions other than that contained in Ms Thompson's email of 6 April 2014 at 18:45. Mr Ellis could not recollect why no other instructions were given.
- Third, because the amount of £1,535,602 can only be arrived at by adding together £591,855 (comprising the total payments by MFB to BFS in the period from July 2013 to 31 March 2014) and £943,747 (being the total amount of Mr Ellis's lending to BFS in the period from July 2013 to 31 March 2014), Mr Al-Attar submitted that Ms Thompson must have consciously reached that figure by adding together those amounts. Mr Al-Attar accordingly invited the inference that the amount of £1,535,602 was deliberately stated in the contemporary documents, so as to include the £591,855 that had in fact been paid by MFB (as opposed to Mr Ellis), in order to produce a higher "Initial Loan" figure and a higher claim on the RGF Grant.
- Mr Al-Attar submitted that, against this background, there is no evidence to support Mr Ellis' case that the £10.2m Facility contained a "significant error" in that "the stated "RJE Debt" of £1,535,602 was in fact split between money invested by myself and money invested by MFB" (his second witness statement, dated 16 January 2020, at [5]). As that witness statement makes clear, this evidence is based on further evidence of Ms Thompson, contained in her second witness statement dated 17 January 2020, the contents of which are not in evidence in light of the decision not to call her as a witness to give evidence on behalf of Mr Ellis. Mr Al-Attar submitted that, at the lowest, Mr Ellis and Ms Thompson had failed to recollect events accurately, and had provided an inaccurate reconstruction of events in their written evidence, based on a partial review of the contemporaneous documents.
- Fourth, Mr Al-Attar submitted that Mr Ellis' answers in cross-examination showed that he was unable to explain in his own words what the £10.2m Facility should have said. As to that, however, I consider that the tenor of his answers was tolerably clear. It was to the effect that the sum of investment of £1,535,602 should have been stated to have been invested by both him and MFB, and should have been divided up accordingly. Mr Ellis made clear that he did not recognise any error at the time, but that the error had subsequently been discovered and pointed out – a reference to what followed from Ms Thompson having reviewed documents in December 2019 following an unsuccessful mediation between the parties to this litigation. In the result, Mr Ellis' oral evidence was to the same effect as his second witness statement.
- Finally, Mr Al-Attar submitted that the reason why the "Previous Facility Agreements" were released in their entirety and without any contrary instruction to carve out the sum of £325,000 is that the effect of the £10.2m Facility as executed was to benefit Mr Ellis to the extent of about £266,000. The argument proceeded as follows: (a) although Mr Ellis' actual historical lending to 9 April 2014 was £1,268,747, the effect of the Initial Loan being quantified at £1,535,602 was that BFS' indebtedness of £591,855 to MFB became, on 10 April 2014, an indebtedness to Mr Ellis; (b) this was possible because, in light of his position as a director of MFB, he was able to procure that the sum of £591,855 which MFB had loaned to BFS should be treated instead as a loan to him; and (c) although, as a director of MFB, he would have a liability to account to MFB because he had taken the benefit of payments made by it, this is no reason to find an error in the £10.2m Facility.
- Pulling all these points together, Mr Al-Attar submitted that Mr Ellis could not make good any case to depart from the plain meaning of Clause 15 of the £10.2m Facility, whether advanced as a matter of construction, or on the ground of common mistake. In consequence, no debt to Mr Ellis was discharged by the payments of £325,000 that were made to him by BFS in May and September 2014, and accordingly there was a gift or a transaction at undervalue as a result of those payments.
Discussion
- In my opinion, the heart of the matter is that, on the one hand, the wording of Recital A of the £10.2m Facility supports Mr Ellis' case that the parties attached significance to the amount which Mr Ellis had loaned to BFS "[b]etween 11 July 2013 and the date of this agreement … pursuant to the Previous Facility Agreements", whereas, on the other hand, the wording of Clause 15 is not qualified by reference to those dates and has the effect that they are not material. The difference or tension arises because the definition of "Previous Facility Agreements" in the £10.2m Facility lists the £500,000 Facility without any qualification, as follows: "the facility agreement between the Borrower, the Lender and the Guarantor dated 5 July 2013 and amended on 28 August 2013". It could be resolved either by ignoring part of the wording of Recital A or by adding to that definition words to the following effect: "in so far as it relates to sums loaned by the Lender to the Borrower after 11 July 2013". The essential issue is what approach to these provisions should prevail.
- Mr Ellis' case is further supported by the language of Ms Thompson's email to Mr Moseby sent at 20:49 on 4 April 2014, because if she had understood or intended that the loan that Mr Ellis had "provided BEFORE July 11 2013" was going to be waived or terminated by the £10.2m Facility it would have made no sense for her to ask whether BFS was entitled to repay that loan to Mr Ellis in keeping with the ICD.
- There is no direct or immediate reply to that email in evidence before the Court, and I am unable to resolve whether any reply was, in fact, provided. It might be expected that any reply would have been made by email to Ms Thompson, and thus its availability would be unaffected by the difficulties in accessing BFS's electronic documents. But: it is possible that it was provided by some other means; Ms Thompson was not called to give evidence about it; and Mr Moseby was not asked about it in the letter dated 6 February 2020 to which he replied on 7 February 2020. However, there is no reason to doubt that the understanding of Mr Moseby, who was the solicitor responsible for producing an agreement which accurately reflected the intentions of BFS and Ms Thompson, was the same at the time that the £10.2m Facility was entered into as it was on 22 May 2014. It is clear from Mr Moseby's email of that date that it was his understanding that it was "the post-11 July 2013 debt of [BFS to Mr Ellis] which was then rolled up into an aggregate £10.2m loan". Accordingly, in my view, any reply that was made is likely to have been affirmative.
- The amount of that post-11 July 2013 debt was stated in the £10.2m Facility to be £1,535,602, when it is common ground that, as a matter of arithmetic, this figure can only be arrived by adding together £591,855 of payments made by MFB to BFS and £943,747 of payments made by Mr Ellis to BFS. It is Manolete's case that Ms Thompson consciously reached that figure by adding together those amounts, and Mr Ellis' case that the correct explanation is that which was given to Hurst & Co at the time of their audit of BFS' accounts, namely a mistake or oversight based on the total sum in the nominal ledger of BFS which contained no split between him and MFB.
- Accordingly, it is common ground that the figure of £1,535,602 does not include the loan of £325,000. Mr Al-Attar nevertheless argued that this last point did not support Mr Ellis' case on the basis that (1) quantifying the Initial Loan at £1,535,602 had the effect of increasing BFS' indebtedness to Mr Ellis by the amount of £591,855 which BFS had previously owed to MFB, and (2) trading an entitlement to be paid £591,855 for a surrender of an entitlement to be paid £325,000 provided Mr Ellis with a significant financial gain. I consider that this argument is very strained – Mr Green described it as "nonsense" – and I am not persuaded by it. Among other things, it is contradicted by what was said to Hurst & Co at the time of their audit, and the accounts for BFS for the year ended 30 April 2014. Those matters are inconsistent with any intention that the £10.2m Facility should have had the effect of altering the historic indebtedness of BFS to either Mr Ellis or MFB, and bear out what I find to be the most likely explanation for the inaccuracy concerning the figure of £1,535,602, namely a simple mistake. However, even if the first limb of Mr Al-Attar's argument is assumed to be correct, the loan of £325,000 was not within the figure of £1,535,602, and I do not accept that the second limb follows from the first. Although swapping an entitlement to £591,855 for one of £325,000 would make Mr Ellis better off, gaining an entitlement to £591,855 without giving up £325,000 would make him even better off, and there is no evidence that anyone lit upon or agreed the notion of swapping these two particular figures in the manner suggested.
- All of these points support the conclusion that it was not the intention of any of the parties to the £10.2m Facility that the loan of £325,000 should be terminated or waived by the £10.2m Facility. Instead, they intended that this loan should survive it.
- As against that, there are all the points made by Mr Al-Attar, including that (1) it is clear from the contemporary documents, and was confirmed by Mr Ellis' evidence, that both he and Ms Thompson not only had but also availed themselves of the opportunity to consider the proposed terms of the £10.2m Facility as drafted by Mr Moseby on the instructions of Ms Thompson before they signed the final version, (2) there is no clear or reliable evidence that either let alone both of them made a mistake as to the meaning and effect of Clause 15 of the £10.2m Facility, and (3) there is no evidence that the point raised by Ms Thompson in her email to Mr Moseby sent at 20:49 on 4 April 2014 was answered before the £10.2m Facility was signed (such that the parties were or may have been willing to sign regardless of whether Mr Ellis was entitled to be repaid the loan he provided before 11 July 2013).
- In my judgment, Mr Ellis has the better part of the argument on this issue. I have come to the conclusion that Recital A reflects the intentions of the parties and Clause 15 (read in conjunction with the definition of "Previous Facility Agreements") does not. It seems clear to me that specific thought was given to the contents of Recital A, whereas in light of the tortuous history and the complexity of the £10.2m Facility, I regard it as unsurprising, and I find, that no one (including Mr Moseby) appreciated that the definition of "Previous Facility Agreements" and Clause 15 as drafted picked up Mr Ellis' pre-11 July 2013 lending as well as his loans made after that date. In order to comply with the continuing common intention of the parties, the definition of "Previous Facility Agreements", and thus the ambit of Clause 15, needs to be rectified so as to relate to sums loaned by Mr Ellis to BFS after 11 July 2013.
- For these reasons, I find that BFS obtained full consideration for the payments amounting to £325,000 made by BFS to Mr Ellis between May and September 2014. It is therefore unnecessary to consider other aspects of this basis of Manolete's claim.
- In these circumstances, the claim under section 238 of the IA fails.
THE CLAIM FOR £325,000 – BASIS 2, BREACH OF DUTY
Context
- Section 172 of the Companies Act 2006 provides:
"(1) A director of a company must 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 in doing so have regard (amongst other matters) to–
(a) the likely consequences of any decision in the long term,
(b) the interests of the company's employees,
(c) the need to foster the company's business relationships with suppliers, customers and others,
(d) the impact of the company's operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
(2) Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.
(3) The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company."
- Section 175(1) of the Companies Act 2006 provides:
"A director of a company must 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".
Submissions
- Mr Al-Attar relied on the following propositions. First, a director's duty to creditors becomes dominant when the solvency of the company is doubtful (Brady v Brady [1988] BCLC 20, Lord Oliver at 40; West Mercia Safetywear Ltd v Dodd [1988] BCLC 250, Dillon LJ at 252–253) or where the company is otherwise subject to a very dangerous financial position (Facia Footwear v Hinchcliffe [1998] 1 BCLC 218, Sir Richard Scott VC at 228). Second, if there is no evidence of actual consideration of the best interests of the company, "the proper test is objective, namely whether an intelligent and honest man in the position of a director of the company concerned could, in the circumstances, have reasonably believed that the transaction was for the benefit of the company" (Re HLC Environmental Projects Ltd [2014] BCC 337, John Randall QC, sitting as a Deputy Judge of the High Court, at [92(b)]). Third, if a director receives a benefit from the company, the evidential burden is on him to prove that the payment was proper (Idessa (UK) Ltd v Morrison [2011] BPIR 957, Lesley Anderson QC, sitting as a Deputy Judge of the High Court, at [28]; GHLM Trading Ltd v Maroo [2012] 2 BCLC 369, Newey J at [149]).
- Mr Al-Attar further submitted that BFS was insolvent at the time when the total sum of £325,000 was paid to Mr Ellis. He referred to both of the tests of insolvency contained in section 123 of the IA, pursuant to which a company is deemed to be unable to pay its debts if it is proved to the satisfaction of the court either "that the company is unable to pay its debts as they fall due" (section 123(1)(e)) or that "the value of the company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities" (section 123(2)). These tests are frequently referred to as "cash-flow insolvency" and "balance-sheet insolvency". If my understanding is correct, Mr Al-Attar relied on balance sheet insolvency alone.
- In Bucci v Carman (Liquidator of Casa Estates (UK) Limited) [2014] BCC 269, Lewison LJ considered and explained how those tests operated by reference to the decisions of Briggs J in Re Cheyne Finance Plc [2008] BCC 182 (as to section 123(1)(e)) and the Supreme Court in BNY Corporate Trustee Services Ltd v Eurosail-UK-2007-3BL Plc [2013] BCC 397 (as to section 123(2)) at [27]-[29]:
"In my judgment the following points emerge from the decision of the Supreme Court in Eurosail (and in particular the judgment of Lord Walker):
(i) The tests of insolvency in s.123(1)(e) and 123(2) were not intended to make a significant change in the law as it existed before the Insolvency Act 1986 : [37].
(ii) The cash-flow test looks to the future as well as to the present: [25]. The future in question is the reasonably near future; and what is the reasonably near future will depend on all the circumstances, especially the nature of the company's business: [37]. The test is flexible and fact-sensitive: [34].
(iii) The cash-flow test and the balance-sheet test stand side by side: [35]. The balance sheet test, especially when applied to contingent and prospective liabilities is not a mechanical test: [30]. The express reference to assets and liabilities is a practical recognition that once the court has to move beyond the reasonably near future any attempt to apply a cash-flow test will become completely speculative and a comparison of present assets with present and future liabilities (discounted for contingencies and deferment) becomes the only sensible test: [37].
(iv) But it is very far from an exact test: [37]. Whether the balance sheet test is satisfied depends on the available evidence as to the circumstances of the particular case: [38]. It requires the court to make a judgment whether it has been established that, looking at the company's assets and making proper allowance for its prospective and contingent liabilities, it cannot reasonably be expected to meet those liabilities. If so, it will be deemed insolvent even though it is currently able to pay its debts as they fall due: [42]"
In the course of his judgment in Eurosail Lord Walker approved what he described as the "perceptive judgment" of Briggs J in Re Cheyne Finance plc (No 2) [2007] EWHC 2402 (Ch); [2007] 2 All ER 987. Two of the points that Briggs J made bear on our case:
i) Cash-flow solvency or insolvency is not to be ascertained by a blinkered focus on debts due at the relevant date. Such an approach will in some cases fail to see that a momentary inability to pay is only the result of temporary illiquidity. In other cases it will fail to see that an endemic shortage of working capital means that a company is on any commercial view insolvent, even though it may continue to pay its debts for the next few days, weeks, or even months:[51].
ii) Even if a company is not cash-flow insolvent, the alternative balance-sheet test will afford a petitioner for winding up a convenient alternative means of proof of a deemed insolvency: [57].
It is in my judgment clear from Eurosail and its approval of Cheyne Finance that the balance sheet test in section 123 (2) is not excluded merely because a company is for the time being in fact paying its debts as they fall due …Thus I agree with Warren J at [34] that the two tests feature as part of a single exercise, namely to determine whether a company is unable to pay its debts. In addition, even when applying the cash-flow test it is not enough merely to ask … whether the company is for the time being paying its debts as they fall due. As Briggs J said in Cheyne Finance a realistic examination may reveal that a company is on any commercial view insolvent, even though it may continue to pay its debts for the time being."
- Mr Al-Attar further relied on Byblos Bank SAL v Al-Khudhairy [1987] BCLC 232, Nicholls LJ at 247:
"In my view, in determining whether on 3 June 1985 Rushingdale was able to pay its debts within the meaning of section 223 of the Companies Act 1948, it is not correct to take into account, in addition to assets presently owned by it, any hope or expectation Rushingdale then had that it would acquire further assets in the future without any accompanying right to such further assets."
- Mr Al-Attar submitted that Byblos was affirmed in Eurosail and, therefore, the potential for future profits is to be excluded from the balance sheet test, unless as Lewison LJ noted in Bucci at [38] "there was credible evidence that the balance sheet would improve in the near future".
- Mr Al-Attar submitted that BFS was insolvent at the material time, for three principal reasons. First, BFS was in fact balance sheet insolvent in May to September 2014 to the following extent: £107,213, £496,577, £98,233, £1,186,401, and £868,165. Second, BFS' sales were 90% below its projected sales targets: £65,425 for May, £15,000 for June, £37,250 for July, £30,683 for August, and £32,875 for September, as compared to a forecast £398,750 per month in the Addendum to Hurst & Co's Final Due Diligence Report (whose projected figures were prepared by BFS and signed by Ms Thompson for herself and Mr Ellis). Third, BFS made monthly losses in May to September 2014 of £204,217, £389,354, £311,826, £378,007, and £391,924 (excluding the RGF Grant of £710,161 received in September 2014).
- Mr Al-Attar's overarching submissions were: first, that no reasonable director cognisant of his duty to manage the business and affairs of BFS with care and skill and to act in the best interests of BFS, having due regard to the interests of its creditors generally, would have caused £325,000 to be paid to Mr Ellis in instalments in May and September 2014; and, second, that any reasonable director in the position of Mr Ellis would have immediately repaid the amounts so received. He submitted that these conclusions were justified for the following principal reasons:
(1) As BFS was insolvent at the relevant time, the interests of BFS' creditors generally had priority over the interests of its members, and BFS' commercial interests lay in the productive use of its cash to generate sales revenues.
(2) Mr Ellis could not justify his receipt of the sum of £325,000 because all of BFS' indebtedness to him was governed by the £10.2m Facility and the indebtedness of £325,000 was neither (a) a debt that BFS was bound to pay; nor (ii) a debt that was not barred from payment under the terms of the ICD.
(3) The effect of Mr Ellis' receipt of £325,000 from BFS in the same period as drawings of £1,031,000 were made by BFS on the £10.2m Facility was to enable £750,000 of matched funding to be drawn under the RGF Grant for only £325,000 of private investment by Mr Ellis, whose net contribution to BFS's cash flow in the period of May to October 2014 was reduced by £325,000.
(4) There is no evidence that advice was taken from Mr Moseby, to the effect that Mr Ellis could lawfully be paid and retain the amount of £325,000, in light of the decision of Mr Ellis not to call Ms Thompson to give evidence.
- Mr Green did not make any detailed submissions on this aspect of Manolete's claim. In paragraph 147 of his opening written submissions, which remained unaltered in his closing written submissions, he pointed out that Manolete's pleaded case on breaches of duty relies on the same facts and matters as are alleged in support of its principal claims, and in each instance claims the same relief as is claimed in respect of the principal claim. He therefore wrote that he had nothing to add to what had been submitted in respect of the principal claims, save to deny all breaches of duty.
- In addition to other points which he addressed in his submissions concerning the principal claims, Mr Green addressed the question of BFS' insolvency in the context of the transaction at an undervalue and wrongful trading claims. He submitted:
(1) BFS' management accounts took into account BFS' long term liabilities, comprising loans from Mr Ellis and MFB which were not repayable until 2018 (as well as some far more modest sums in respect of hire purchase obligations). As stated by Lord Walker in BNY Corporate Trustee Services Limited v Eurosail-UK 2007-3BL plc and ors [2013] 1 WLR 1408, approving what Toulson LJ (as he then was) said in the Court of Appeal (emphasis added):
"Essentially, section 123(2) requires the court to make a judgment whether it has been established that, looking at the company's assets and making proper allowance for its prospective and contingent liabilities, it cannot reasonably be expected to be able to meet those liabilities. If so, it will be deemed insolvent although it is currently able to pay its debts as they fall due. The more distant the liabilities, the harder this will be to establish."
(2) BFS' balance sheets in fact show a substantial surplus of current assets over current liabilities, the relevant figures for the months of May to September 2014 being: £1,013,700, £623,603, £1,460,321, £330,611, and £657,159.
(3) "That is a far better indicator as to whether BFS was paying and able to pay its debts as they fell due. It was quite clearly doing so …"
(4) "It was always anticipated that BFS would show a deficiency of assets on its balance sheet for some time. There is nothing wrong in the circumstances with trading while insolvent, particularly where BFS was paying its debts as they fell due."
Discussion
- Applying the guidance contained in the authorities referred to above to the facts of this particular case, I consider that the following matters are important.
- First, Mr Ellis' entitlement to be repaid the sums amounting in total to £325,000 which he had loaned to BFS was not terminated or waived by the £10.2m Facility. On the contrary, it was the common intention of the parties to the £10.2m Facility that this entitlement should be preserved and should survive their entry into that Facility, and that is how that Facility should be interpreted and applied.
- Second, the effect of the £10.2m Facility was that Mr Ellis agreed to lend up to £10.2m to BFS. This was not an empty commitment, in light not only of the rights conferred on BFS under the £10.2m Facility but also the fact that Mr Ellis had the means to fulfil his obligations thereunder. In my opinion, the preservation of Mr Ellis' entitlement to be repaid the indebtedness of £325,000 falls to be viewed in that context. The overall nature of the bargain that was struck by the £10.2m Facility was greatly to the advantage of BFS, both because Mr Ellis made a commitment to lend up to £10.2m and also because that commitment unlocked funding from the RGF.
- Third, BFS' payment of the indebtedness of £325,000 to Mr Ellis was not barred in accordance with the terms of the ICD.
- Fourth, as appears from the contemporary documents, advice was sought from Mr Moseby on 4 April 2014 as to whether BFS was entitled to repay Mr Ellis the sum of £325,000 (comprising "the loan that he provided BEFORE July 11 2013"). It is unclear from the evidence available at trial whether any specific answer was provided to that question by Mr Moseby before the £10.2m Facility was signed on 10 April 2014. In my judgment, however, it is clear from Mr Moseby's email to Ms Rawlinson dated 22 May 2014 that it was his understanding that the £10.2m Facility covered BFS' "post-11 July 2013 debt", that it was this debt that "was then rolled up into an aggregate £10.2m loan" and that loans made by Mr Ellis to BFS before 11 July 2013 could be repaid by BFS without seeking consent from RGF. Accordingly, any answer that may have been provided would have been affirmative.
- Fifth, I do not consider that Mr Al-Attar's "matched funding" point adds anything to the above points. Although it is true that the repayment of the indebtedness of £325,000 to Mr Ellis had the effect that BFS' cashflow was reduced accordingly, that result was inherent in the contractual structure of the £10.2m Facility and the ICD, which, as set out above, preserved his right to repayment and did not bar the same.
- Sixth, the fact that BFS was able to pay its debts as they fell due does not mean that it was not balance-sheet insolvent. As to whether the balance sheet test is satisfied on the facts of this particular case in respect of the period from May to September 2014, the question is whether, looking at BFS' assets and making proper allowance for its prospective and contingent liabilities, it could not reasonably be expected to meet those liabilities. I am not persuaded that this test is satisfied in all the circumstances, which include: BFS' operations were still at a relatively early stage; BFS had just secured substantial funding from Mr Ellis and the RGF; there was no imminent need to repay that funding; and BFS' expectations, as reflected in the Addendum that was produced in February 2014 to Hurst & Co's Final Confirmatory Due Diligence Report, were that BFS would only generate a profit by 31 March 2016, and would only achieve a positive balance sheet position by 31 March 2018, but that in the meantime it would be able to meet its liabilities as they fell due in accordance with its cash flow projections. The fact that BFS was doing far worse than had been forecast, together with the other points relied on by Mr Al-Attar, do not lead me to conclude that, considering the period between May and September 2014, BFS could not reasonably be expected to meet its liabilities. In particular, if, in spite of the fact that BFS was making operating losses and its sales performance was very disappointing, there was no credible basis for believing at that time that BFS would nevertheless be able to do better in future and trade its way out of financial difficulty, it is to be expected that Hurst & Co and/or the RGF would have expressed concerns.
- For the reasons and in the circumstances discussed above, I conclude: (1) that an intelligent and honest man in the position of Mr Ellis could reasonably have believed (and Mr Ellis did in fact believe) that the repayment of the indebtedness of £325,000 to him was for the benefit of BFS; and (2) that repayment was in no way improper.
- Accordingly, the claim for breach of duty in respect of the sum of £325,000 fails.
THE CLAIM FOR £188,769
Context
- This claim is based on three payments, in the sums of £152,769, £25,000, and £11,000, which were made by BFS to Mr Ellis on 17 March 2015 (Points of Claim, [38]). These payments are alleged to be preferences within the meaning of section 239 of the IA, and an order for their repayment is sought accordingly (Points of Claim, [39] and [40]). The payments are admitted, but it is denied that they constituted preferences (Points of Defence, [41] and [42]). Mr Ellis' pleaded case is that these sums "were previously drawn down from [him] in error. This funding should have been drawn down from MFB … The drawdown error was discovered by outside accountants and on discovery was corrected. BFS had no legal or beneficial entitlement to these funds" (Points of Defence, [43]). It is also pleaded that "BFS was solvent at the time when these payments were made" (Points of Defence, [44]).
- Section 239 of the IA provides:
"(1) This section applies as does section 238.
(2) Where the company has at a relevant time (defined in the next section) given a preference to any person, the office-holder may apply to the court for an order under this section.
(3) Subject as follows, the court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if the company had not given that preference.
(4) For the purposes of this section and section 241, a company gives a preference to a person if—
(a) that person is one of the company's creditors or a surety or guarantor for any of the company's debts or other liabilities, and
(b) the company does anything or suffers anything to be done which (in either case) has the effect of putting that person into a position which, in the event of the company going into insolvent liquidation, will be better than the position he would have been in if that thing had not been done.
(5) The court shall not make an order under this section in respect of a preference given to any person unless the company which gave the preference was influenced in deciding to give it by a desire to produce in relation to that person the effect mentioned in subsection (4)(b).
(6) A company which has given a preference to a person connected with the company (otherwise than by reason only of being its employee) at the time the preference was given is presumed, unless the contrary is shown, to have been influenced in deciding to give it by such a desire as is mentioned in subsection (5)."
- The provisions of section 240 also apply to section 239. The relevant time is therefore the period of 2 years ending with the onset of insolvency on 23 February 2016. However, unlike in relation to a transaction at undervalue, BFS is not presumed, at the material time, to have been unable to pay its debts as they fell due.
- Because Mr Ellis was a director, a desire to prefer is presumed. In this regard:
(1) In Re MC Bacon [1990] BCC 78, Millett J discussed "desire" at pp87-88:
"It is no longer necessary to establish a dominant intention to prefer. It is sufficient that the decision was influenced by the requisite desire. That is the first change. The second is that it is no longer sufficient to establish an intention to prefer. There must be a desire to produce the effect mentioned in the subsection.
… Intention is objective, desire is subjective. A man can choose the lesser of two evils without desiring either.
It is not, however, sufficient to establish a desire to make the payment or grant the security which it is sought to avoid. There must have been a desire to produce the effect mentioned in the subsection, that is to say, to improve the creditor's position in the event of an insolvent liquidation. A man is not to be taken as desiring all the necessary consequences of his action. Some consequences may be of advantage to him and be desired by him; others may not affect him and be matters of indifference to him; while still others may be positively disadvantageous to him and not be desired by him, but be regarded by him as the unavoidable price of obtaining the desired advantages … Under the new regime a transaction will not be set aside as a voidable preference unless the company positively wished to improve the creditors' position in the event of its own insolvent liquidation.
There is, of course, no need for there to be direct evidence of the requisite desire. Its existence may be inferred from the circumstances of the case just as the dominant intention could be inferred under the old law. But the mere presence of the requisite desire will not be sufficient by itself, it must have influenced the decision to enter into the transaction … [Sub-section (5)] requires only that the desire should have influenced the decision. That requirement is satisfied if it was one of the factors which operated on the minds of those who made the decision. It need not have been the only factor or even the decisive one. In my judgment, it is not necessary to prove that, if the requisite desire had not been present, the company would have entered into the transaction. That would be too high a test."
(2) In Re Exchange Travel Ltd [1996] BCC 933, Rattee J said, at p947, that a belief that at the date of the payments the company was not insolvent is not inconsistent with the application of the presumption of a desire to prefer.
(3) In Re Conegrade Ltd [2003] BPIR 358, Lloyd J said, at p374, that a well-intentioned but ill-founded belief that the present condition and future prospects of a company, which was in fact insolvent, would improve is not sufficient to rebut the presumption.
(4) In Re Oxford Pharmaceuticals Ltd [2009] EWHC 1753 (Ch), Mark Cawson QC (sitting as a deputy judge of the High Court), said at [76] that, in practical terms, rebutting the presumption of desire will require the court to be satisfied, on the balance of probabilities "that [the company] was acting solely by reference to proper commercial considerations in making the payments, and that a desire (i.e. a subjective wish) to better the position of [the defendant] did not operate on the directing mind or minds of [the company] at all".
Submissions
- Mr Al-Attar took as his starting point the contention that on 17 March 2015 BFS was insolvent for the purposes of section 239, for the following reasons. BFS had net liabilities of £3,267,131, even excluding the liability to repay the RGF Grant and the RGF Loan (discussed further in the context of Manolete's wrongful trading claim). BFS' monthly loss in March 2015 was £556,431 (continuing the sustained, heavy losses BFS had incurred since May 2014). Applying the test for insolvency explained by Lewison LJ in Bucci v Carman (Liquidator of Casa Estates (UK) Limited) [2014] BCC 269, BFS' liabilities exceeded its assets by a substantial margin, and there was no realistic prospect of BFS' fortunes being turned around in the near future.
- Mr Al-Attar submitted that the presumption of a desire to place Mr Ellis in a better position than he would otherwise have been in BFS' liquidation is confirmed by the following matters. First, although Mr Ellis had security, BFS had no substantial assets, or none that would have substantial value in an enforcement exercise or in a liquidation. Second, Mr Ellis had contributed nothing under the £10.2m Facility since 28 October 2014. He then contributed £36,000 on 3 March 2015, in time for the deadline for the RGF, and on the same day as Ms Thompson procured a representation from TCA (in the form of a snapshot) of the amount of £649,209.18 paid by TCA into its own account with Coutts & Co with a reference to BFS added (even though TCA was a lender to MFB). Both of these amounts were relied on by BFS to make up the total of £4,886,967 represented as private investment received in BFS' application to draw down on the RGF Loan. The RGF Grant and RGF Loan together totalled £4,882,000. Viewed objectively, these matters suggest that Mr Ellis was contributing £36,000 on 3 March 2015 because BFS would otherwise be 'short' of the required amount of cash received to represent as private investment to the RGF. Third, the payment to Mr Ellis of £188,769 on 17 March 2015 was made one day after BFS' receipt of the first instalment of the RGF Loan of £856,248. The natural and obvious inference from these facts is that Mr Ellis contributed a small amount in order to repay himself a larger amount once fresh funds were received.
- Mr Green's overall submission was: "Ms Rawlinson's intentions were not to prefer Mr Ellis". Instead, the objective was to improve BFS' position by reducing its liability for interest on the outstanding loans (Mr Ellis was charging 1% per month, whereas monies from MFB were interest free), which was in the interests of both BFS and BFS' creditors. The payment of £36,000 "was clearly an error that was corrected by Ms Rawlinson". The payment of £152,769 "was replaced by the loan from MFB which had already been paid to BFS on 30 January 2015". As to insolvency, BFS was neither cash-flow nor balance-sheet insolvent at the time.
- In the absence of evidence from Ms Rawlinson (who sadly died) or Ms Thompson, Mr Green could only rely on the evidence of Mr Ellis and what the documents show.
- In his first witness statement, Mr Ellis states with regard to the payments amounting to £188,769 "I was not a participator in the decision making process and the payments were made by Mel Rawlinson at BFS" ([73]). He continues (at [74]):
"Firstly, on 3 March 2015 the employee at BFS who had responsibility for making the drawing down funds [sic], Mel Rawlinson, drew £36,000 from me in error when the money should have been drawn from MFB. Furthermore, in January 2015 MFB paid BFS £152,000. The payment of £152,000 was supposed to be an advance by MFB to BFS to enable BFS to pay off part of my debt so that BFS would have exposure to a lower rate of interest. In error Mel (who I now understand was suffering from mental health problems at the time) did not pay the £152,000 to me in January 2015 as she should have done. The error once discovered was corrected and that is the reason that the payment of £188,769 was made to me on 17 March 2015. I was not involved in the decision to make this payment and do not believe that there was any intention to prefer me over other creditors. In any event the payment of £152,769 simply swapped a cheaper debt for a more expensive debt and therefore did not alter the position as regards creditors."
- Mr Green submitted that the following matters are apparent from the available records. With effect from October 2014, it was not intended that Mr Ellis would lend any further money to BFS, and it was intended instead to use MFB's monies as the further private investment needed because there was no interest payable to MFB. Contrary to that strategy, Ms Rawlinson drew £36,000 from Mr Ellis' facility on 3 March 2015. In addition, a sum of £152,000 had been paid by MFB to BFS as part of its private investment on 30 January 2015 which "was presumably intended to replace Mr Ellis's debt with MFB debt given the interest advantage". Ms Rawlinson sought to correct these errors on 17 March 2015 by making (a) two payments totalling £36,000 to reverse the drawdown from Mr Ellis' facility; and (b) another payment of £152,769 in respect of the replacement loan together with some interest.
- Mr Al-Attar submitted that these assertions make no sense, and that Mr Ellis was unable to answer the following points in cross-examination. First, the interest saving for BFS on £152,000 was trivial both in absolute terms and relative to BFS' monthly losses. Second, it made no sense for BFS to have refinanced the random amount of £152,000 of Mr Ellis's debt under the £10.2m Facility, or to have done so at that particular time. Third, MFB had no substantial lending capacity, and MFB ultimately had to borrow from TCA at an effective rate of 40.5% to make an advance of £649,209 to BFS in May and June 2015. There was also no commercial explanation for the alleged loan "swap" viewing matters from the perspective of MFB.
- Mr Al-Attar submitted that the reasons advanced, in particular with regard to the loan swap, are simply after-the-event excuses for a preference, as Mr Ellis acknowledged.
Discussion
- In my view, it is clear that Mr Ellis' explanation for the payments amounting in total to £188,789 is not based on any recollection of his concerning the events in question.
- His first witness statement (at [74]) begins by "refer[ring] the Court to comments made in [Ms Thompson's] statement" and states that what follows comprises the "gist of the matters raised in [Ms Thompson's] statement". During the course of his oral evidence, Mr Ellis said with regard to his payment of £36,000 "I suppose [Ms Rawlinson] initiated the transfer by asking me and then I, you know, keyed it in, or whatever, to make it happen"; and when asked about the words "drew £36,000 from me in error" he said that he could not recall what Ms Rawlinson had said to him.
- With regard to his evidence concerning the £152,000 loan replacement, Mr Ellis said that he did not think that he was aware at the time that BFS was going to be paying £152,000 of his lending back to him, and that the explanation that this sum was supposed to have been advanced to BFS by MFB and not by him "is probably sort of post-rationalisation, to try and explain it … I don't have a contemporary memory".
- Turning to the points which Mr Green submitted could be extracted from the available records, I am unable to find any support in the documents for the suggestion that Ms Rawlinson drew £36,000 from Mr Ellis' facility on 3 March 2015 in contravention of a strategy that borrowing should be sought from MFB instead of Mr Ellis after October 2014. The payment was inconsistent with any such strategy, and even if Ms Rawlinson did not have that in mind Mr Ellis would surely have done so and would have objected to making the payment accordingly. In my judgment, the more likely explanation is that this payment was sought from Mr Ellis and provided by him for the reason submitted by Mr Al-Attar, namely that BFS required it to make up the requisite amount of private investment to obtain payment from the RGF.
- Similarly, I am unable to find any support in the documents for the suggestion that the sum of £152,000 paid by MFB to BFS on 30 January 2015 was intended to replace that much of the debt owed by BFS to Mr Ellis. Again, I consider that there is force in Mr Al-Attar's submissions on this point. There is no explanation as to why anyone should have decided that this particular amount of the debt owed to Mr Ellis should be refinanced by borrowing from MFB instead in early 2015, especially as MFB did not have surplus cash and the interest saving for BFS was not significant.
- I also agree with Mr Al-Attar that on 17 March 2015 BFS was insolvent for the purposes of section 239, for the reasons that he gives. At this time, in contrast to the position as I have found it to be in the period of May to September 2014, I consider that looking at BFS' assets and making proper allowance for its prospective and contingent liabilities, it could not reasonably be expected to meet those liabilities.
- The payments amounting in total to £188,789 had the effect of putting Mr Ellis into a position which, in the event of BFS going into insolvent liquidation, was better than the position he would have been in if those payments had not been made to him.
- In these circumstances, the presumption that BFS was influenced in deciding to make those payments by a desire to produce that effect in relation to Mr Ellis has not been rebutted. However, I do not consider that it is right to draw the inference that Mr Ellis made the payment of £36,000 in order to repay himself a larger amount once BFS had received the next instalment of the RGF Loan of £856,248. In the absence of evidence from Ms Rawlinson or Ms Thompson, and with possible gaps in the records in light of the difficulties in accessing BFS' electronic documents, the picture is unclear. The fact that the sums paid to Mr Ellis equated to reimbursement of his payment of £36,000 plus payment to him of the sum of £152,000 earlier paid by BFS and a small sum which could well represent interest suggests that the payments to him were thought out. One possibility is that they were the product of a desire on the part of Ms Thompson to benefit him; another is that they were the product of misunderstanding, mistakes or confusion on the part of Ms Rawlinson; or they may have been the product of a combination of those, and maybe other, factors. At all events, Mr Ellis' inability to sustain or improve his defence under cross-examination impressed me for its candour. I do not consider that he was exposed as trying to provide an innocent explanation for payments which he knew to be a preference.
- These conclusions make it unnecessary to decide Manolete's alternative claim to recover £188,769 on the grounds of a breach of duty, which Mr Al-Attar advanced on the same basis as the like claim in respect of the sum of £325,000 and in reliance on GHLM Trading Ltd v Maroo [2012] 2 BCLC 369, Newey J at [168]:
"A director of a company has a duty to 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' (see s172 of the Companies Act 2006). Where creditors' interests are relevant, it will similarly, in my view, be a director's duty to have regard to the interests of the creditors as a class. If a director acts to advance the interests of a particular creditor, without believing the action to be in the interests of creditors as a class, it seems to me that he will commit a breach of duty. Whether or not s239 of the Insolvency Act 1986 (dealing with preferences) is in point cannot be determinative. A director responsible for a preference vulnerable under that section will not necessarily commit a breach of duty…Conversely, the fact that the conditions laid down by s239 are not all met should not, of itself, preclude a finding of breach of duty."
- For these reasons, the claim for £188,769 under section 239 of the IA succeeds.
THE WRONGFUL TRADING CLAIM
The law
- The law was helpfully summarised in the judgment of Snowden J in Re Ralls Brothers Ltd (In liquidation); Grant v Ralls [2016] Bus LR 555 at [166]-[179], which I gratefully reproduce word for word in the next 14 paragraphs. (I have not set out these paragraphs in quotations as that would involve using multiple quotations.)
- Section 214(1) of the Insolvency Act 1986 gives the court a discretionary jurisdiction to declare that a director of a company in insolvent liquidation is "liable to make such contribution (if any) to the company's assets as the court thinks proper". That power may be exercised where the court is satisfied in relation to the director that "at some time before the commencement of the winding up of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation".
- If section 214(1) is triggered, consideration must then be given to section 214(3) which contains a limitation on the circumstances in which the court can make a declaration under section 214(1). Section 214(3) provides that the court should not do so if it is satisfied that after the relevant time at which the director first knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation, the director "… took every step with a view to minimising the potential loss to the company's creditors as (assuming him to have known that there was no reasonable prospect that the company would avoid going into liquidation) he ought to have taken".
- As an initial observation, it is important to note that the fact that a company is insolvent (on a balance sheet or cash-flow basis) and carries on trading does not mean that a director – even one with knowledge of that fact - will be liable for wrongful trading if the company fails to survive. Many companies show a balance-sheet deficit from time to time, but nevertheless have every real prospect of trading out of that position or otherwise recovering from the deficiency and thereby avoiding an insolvent liquidation: see e.g. BNY Corporate Trustee Services Limited v Eurosail-UK2007-3BL PLC [2013] 1 WLR 1408. Likewise, trading companies often suffer cashflow difficulties and fail to pay their creditors on time, but are able to overcome that cash-flow insolvency by (for example) selling an asset or raising external finance on the security of their assets.
- In Hawkes Hill Publishing Co. Limited [2007] BCC 937 at [28], Lewison J made the point very clearly:
"It is important at the outset to be clear about the relevant question. The question is not whether the directors knew or ought to have known that the company was insolvent. The question is whether they knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation. As Chadwick J pointed out in Re C S Holidays Ltd [1997] 1 WLR 407 at 414:
"The companies legislation does not impose on directors a statutory duty to ensure that their company does not trade while insolvent; nor does that legislation impose an obligation to ensure that the company does not trade at a loss. Those propositions need only to be stated to be recognised as self-evident. Directors may properly take the view that it is in the interests of the company and of its creditors that, although insolvent, the company should continue to trade out of its difficulties. They may properly take the view that it is in the interests of the company and its creditors that some loss-making trade should be accepted in anticipation of future profitability. They are not to be criticised if they give effect to such view.""
- One other obvious difference between the test for insolvency and that for wrongful trading is illustrated by the fact that for the purposes of assessing whether a company is balance-sheet insolvent under section 123(2) of the 1986 Act, the prospects of the company obtaining further assets which it does not already own cannot be taken into account: see Byblos Bank v Al-Khudhairy [1987] BCLC 232 at 247g-h per Nicholls LJ. But for the purposes of determining whether section 214 is triggered, it may well be relevant to consider the company's prospects of raising additional capital from an external investor to restore its solvency.
- Whilst the question of whether a director knew that there was no reasonable prospect of the company avoiding an insolvent liquidation is a question of (subjective) fact, the question of whether the director ought to have concluded that this was so is an objective question. In that respect, section 214(4) of the 1986 Act provides that the facts which the director ought to know, the conclusions which he ought to reach, and the steps which he ought to take, are those which would be known, reached or taken by a reasonably diligent person having the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as those of the director, and the general knowledge, skill and experience that that director in fact has.
- In that regard, in Hawkes Hill, Lewison J observed, at [41]:
"Accepting as I do that the directors ought to have known that the company was insolvent, it still leaves open the question: did they know (or ought they to have concluded) that there was no reasonable prospect that the company would avoid an insolvent liquidation? The answer to this question does not depend on a snapshot of the company's financial position at any given time; it depends on rational expectations of what the future might hold. But directors are not clairvoyant and the fact that they fail to see what eventually comes to pass does not mean that they are guilty of wrongful trading."
- This emphasises that the court does not approach the question of whether a director ought to have concluded that his company had no reasonable prospect of avoiding an insolvent liquidation with the benefit of 20:20 hindsight. As Lewison J concluded his judgment dismissing the liquidator's case in Hawkes Hill:
"Of course it is easy with hindsight to conclude that mistakes were made. An insolvent liquidation will almost always result from one or more mistakes. But picking over the bones of a dead company in a courtroom is not always fair to those who struggled to keep going in the reasonable (but ultimately misplaced) hope that things would get better."
- In contrast, the type of situation in which liability has been held to attach are cases where the director has been held to have had no rational basis for believing that the event that they hoped would save the company would come about. So, for example, in Re Kudos Business Systems [2011] EWHC 1436 (Ch), one of the issues was whether the director had a reasonable expectation that his co-director would fulfil various contracts to which the company had been committed by that co-director. Sarah Asplin QC found that:
"Furthermore, save for a couple of informal meetings with friends of Mr Ramsden's from the DX, there is no evidence of any arrangement having been entered into with the DX at any time. Accordingly, in my judgment there is nothing upon which Mr Stevenson could properly have based a belief that arrangements had been entered into in order to fulfil the DX Contracts at the outset. Furthermore, there is no evidence whatever that after the complaints began to come in, Mr Stevenson or anyone else on behalf of the Company ever contacted any DX provider in order to ascertain whether in fact, it would be possible to provide the services which the DX Creditors had contracted for and paid."
On that basis Sarah Asplin QC concluded:
"However, given the state of the Company's finances of which he ought to have been aware, the fact that I am unable to accept his evidence that he understood the DX Contracts to be otherwise than with the Company and my finding that there was nothing upon which Mr Stevenson could properly have based a belief that arrangements had been entered into in order to fulfil the DX Contracts at the outset, in my judgment, the rational expectation on 17 March 2006 could not have been other than that there was no reasonable prospect of avoiding insolvent liquidation."
- Likewise, in Roberts v Frohlich [2011] EWHC 257 (Ch), Norris J held directors liable for wrongful trading in circumstances in which their property development company (ODL) was balance sheet and cash-flow insolvent, it could not meet the conditions imposed by its bank for the additional funding necessary in order to be able to employ a building contractor to develop its only piece of land, there was therefore no prospect of entering into a fixed price contract with the contractor, talks with a prospective co-venturer had collapsed, and there had been no pre-sales of units on the site. Norris J held, at [111]-[112]:
"111. In my judgment each [of the directors] ought to have concluded at or about September 1, 2004, (certainly by (say) September 14, 2004) that there was no realistic prospect of avoiding an insolvent liquidation. By this date ODL was in fact insolvent on a balance sheet basis …[and]… on a "cash flow" basis ... The bank was adopting a highly restrictive approach to funding. There was no hope of a fixed price or "capped" contract being offered by [the building contractor]. There was no hope of satisfying that funding condition. The Easier deal had collapsed. The attempt to interest a co-venturer collapsed. The cash flow which purported to demonstrate the viability of the project simply did not hold good on any reading in the events which had happened. With their actual skill and experience as property developers, and employing the general analytical and assessment abilities to be expected of directors participating in financial oversight and project management of a new build development, they ought to have concluded that there was no reasonable prospect of avoiding entering insolvent liquidation. Their continuation with the development after (say) September 14, 2004, constitutes wrongful trading.
112 What drove Mr Frohlich and Mr Spanner at this stage was wilfully blind optimism; the reckless belief that, provided they did not enquire too deeply into the figures, provided ODL did not let on to [the building contractor] that there was no funding and did not let on to [the bank] that there was no fixed price contract, then something might turn up (if only because [the building contractor and the bank] could be sucked into the development to such a degree that, in order to salvage something, they would crack under pressure and would "share the pain"). But the hope that "something might turn up" was on any objective view groundless and forlorn. Insolvent liquidation was all but inevitable."
- In deciding what conclusion a director ought to have come to as regards the prospects for his company, the courts have been prepared to place some weight upon the evidence as to whether the directors took professional advice, and if so, what that advice was. So, for example, in Hawkes Hill at [45], Lewison J placed some weight upon the fact that the company's auditor did not advise the directors that the position was hopeless, but in fact told them that the business had a promising future, albeit that he also told them that they needed to find a capital injection or sell the business.
- Likewise, in Continental Assurance [2001] BPIR 733 Park J introduced his analysis of the issues in the case as follows:
"106. In my opinion it would be an extraordinarily harsh result if the directors in this case were liable for wrongful trading. None of the previous cases in which directors have been held to be liable has been remotely like this one. Typically, they have been cases in which the directors closed their eyes to the reality of the company's position, and carried on trading long after it should have been obvious to them that the company was insolvent and that there was no way out for it. In those cases the directors had been irresponsible, and had not made any genuine attempt to grapple with the company's real position….
107. In the present case the directors, in my opinion, took a wholly responsible and conscientious attitude, both to Continental's position and to their own responsibilities as directors, at all times from and after the first crisis board meeting on 4 June 1991 when major and unexpected losses were reported to them. At the adjourned continuation of that meeting on 14 June 1991 Mr Burrows expressly raised the question of whether Continental could properly continue to trade. The directors did not ignore that question (like the directors in many of the other wrongful trading cases). On the contrary, they considered it directly, closely and frequently….
108. When it was reported to the directors on 20 December 1991 that newly reported losses meant that Continental had become insolvent they gave instructions that it should not do any more business, and took advice from insolvency practitioners (Buchler Phillips, in the persons of Mr. Wacey and Mr. Buchler). The commencement of a formal liquidation did not happen until 27 March 1992, but that was in order to keep open as long as possible the chance of selling the company. Mr. Wacey and Mr. Buchler were aware of that at the time and raised no objections. They both confirmed in their evidence that they made no criticisms of the time which passed from December 1991 to March 1992 before the liquidation commenced."
- Park J later returned to this issue at [263]-[264] of his judgment in the context of considering whether there was ever a realistic prospect of selling the company:
"The question of whether Continental was ever a realistically saleable company has arisen from time to time in the evidence, and all the parties have made submissions about it. One matter to which it might be relevant is one of the elements in the board's thinking which, in its collective mind, justified the decision on 19 July 1991 that Continental should trade on. That element was that, if Continental was to survive in the long term, it would need an injection of new capital from its owners, replacing the capital which had been lost already. If the existing owners would not inject new capital (as it was soon established that they would not) the only possibility was to sell the company to an outside purchaser which would. The liquidators say that there never was any realistic prospect that Continental could be sold…. The respondents say that there was, and that it was simply bad luck, not an inevitability, that in the event Continental was not sold."
- In answering that question in favour of the directors, Park J placed some reliance on the attitude of the insolvency practitioners involved at the time. In particular Park J commented, at [269]:
"Two other witnesses whom I ought to mention in this connection are Mr. Wacey and Mr. Buchler. They did not say that they considered that Continental could be sold, but they were advising the company during the time from December 1991 to late March 1992 while the liquidation was being delayed. They knew that the only purpose of the delay was to enable the receiver to pursue prospects of selling the company. They did not at any stage then suggest that the delay was pointless, and that there was no realistic chance of ever finding a buyer. Mr. Buchler is now one of the liquidators who are suing the directors, and part of whose case is that the directors ought to have realised, not just in early 1992, but back in July 1991, that there was no chance of finding a buyer for the company."
- Moving on from these citations to the outcome on the facts in Re Ralls Brothers Ltd, in that case Snowden J held the directors liable for wrongful trading in circumstances in which they were aware of the company's insolvency and "at no relevant time was there any realistic basis for concluding that the Company could, by trading alone, eliminate the huge hole of about £1.4 million in its balance sheet" (see [187]). At [189], Snowden J said "the Directors and others involved in the efforts to save the Company knew that the only realistic prospect of salvation was if Mr James could be persuaded to complete a transaction that would introduce a substantial amount of new money … so as to facilitate the recapitalisation of the Company" and "the critical question under section 214(1) is whether, either by 31 July or 31 August 2010, the Directors knew or ought to have concluded that there was no reasonable prospect of a suitable deal being concluded with Mr James". At [216], he said: "I caution myself against the application of hindsight, and remind myself that I should not too readily criticise the Directors' contemporaneous actions from the comfort of a courtroom. Nonetheless the lack of any progress with Mr James and his repeated failures to produce the monies that he indicated would be available during August ought in my judgment to have led the Directors to conclude by the end of August 2010 that there was no longer any reasonable prospect of Mr James providing the necessary funding in time to save the Company". In principle, therefore, the directors were liable for the losses occasioned by the continuation of trading between 31 August 2010 and 31 October 2010, when the company went into administration. However, Snowden J concluded (see [279]) that it was "entirely plausible that such continued activity did not cause loss to the Company overall or worsen the position of the creditors as a whole" and (see [280]) that he would not make a declaration under section 214(1) requiring the directors to make any contribution to the assets of the company in respect of any losses said to have been occasioned during that period.
- Mr Al-Attar submitted that section 214(4) reflects the duty of care owed by directors at common law (see Re D'Jan of London Ltd [1994] 1 BCLC 561, Hoffmann LJ at 563D-E) and under section 174 of the Companies Act 2006.
- As to the requisite standard of care:
(1) "The office of director has certain minimum responsibilities and functions which cannot be discharged by leaving all management functions and consideration of the company's affairs to another director without question, even in the case of a family company like this" (Re Brian D Pierson (Contractors) Ltd [2001] 1 BCLC 275, Hazel Williamson QC, sitting as Deputy Judge of the High Court, at 309-310).
(2) "[The] collegiate or collective responsibility [of the board of directors] must however be based on individual responsibility. Each director owes duties to the company to inform himself about its affairs and to join with his co-directors in supervising and controlling them. A proper degree of delegation and division of responsibility is permissible, and often necessary, but not total abrogation of responsibility" and "It is of the greatest importance that any individual who undertakes the statutory and fiduciary obligations of being a company director should realise that these are inescapable personal responsibilities" (Re Westmid Packing Services Ltd (No 3) [1998] BCC 836, Lord Woolf MR at 842A-B, 843C-D).
(3) In Re Barings plc (No 5) [1999] 1 BCLC 433, Jonathan Parker J said at 489:
"(i) Directors have, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company's business to enable them properly to discharge their duties as directors. (ii) Whilst directors are entitled … to delegate particular functions to those below them in the management chain, and to trust their competence and integrity to a reasonable extent, the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions."
(4) In Equitable Life Assurance Society v Bowley [2003] EWHC 2263 (Comm), Langley J at [41], in the context of dismissing an application for summary judgment, doubted that it accorded with the modern law that a non-executive director could "place unquestioning reliance on others to do their job", and while commenting that "the role of non-executive directors in corporate governance has been the subject of some debate in recent years" held that it was "plainly arguable" that "a company may reasonably at least look to non-executive directors for independence of judgment and supervision of the executive management".
(5) In Brumder v Motornet Service and Repairs Ltd [2013] EWCA Civ 195, Beatson LJ referred to a number of these earlier authorities at [55], and said "Directors are not, however, permitted to escape from being in a position to guide and monitor management and from "the duty to supervise the discharge of the delegated functions"" and "the law as to the extent to which non-executive directors may be able to rely on the executive directors and other professionals to perform their duties is in a state of development and is "fact sensitive"".
(6) In Madoff Securities International Limited v Raven [2013] EWHC 3147 (Comm), Popplewell J said at [189]-[193] (omitting citation):
"… the duty is to act in what the director believes, not what the court believes, to be the interests of the company. The test is a subjective one …
… [each director] owes duties to the company to inform himself of the company's affairs and join with his fellow directors in supervising them. It is therefore a breach of duty for a director to allow himself to be dominated, bamboozled or manipulated by a dominant fellow director where such involves a total abrogation of this responsibility …
… In fulfilling this personal fiduciary responsibility, a director is entitled to rely upon the judgment, information and advice of a fellow director whose integrity skill and competence he has no reason to suspect …
… Where a director fails to address his mind to the question whether a transaction is in the interests of the company, he is not thereby, and without more, liable for the consequences of the transaction. In such circumstances the Court will ask whether an honest and intelligent man in the position of a director of the company concerned could, in the whole of the existing circumstances, have reasonably believed that the transaction was for the benefit of the company … If so, the director will be treated as if that was his state of mind."
- In support of the submission that there is no different standard applicable to non-executive directors, as distinct from executive directors, Mr Al-Attar relied on the views of the editors of Mortimore, Company Directors: Duties, Liabilities and Remedies, 3rd Ed. They state that a non-executive director is merely a director who is not employed under a contract of service (see [3.54]); "[T]he contention that the modern director is entitled to place unquestioning reliance upon others to do their job" has been "decisively rejected" (at [14.40]); "The duty to supervise is thus a continuing duty, which cannot be avoided" (at [14.41]); "In modern times, the company may reasonably look to non-executive directors for independence of judgment and supervision of the executive management" (at [14.47]); as stated in the UK Corporate Governance Code April 2016, "Non-executive directors should scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance" (at [14.48]); and "It is no part of the non-executive director's function, for example, to accept without question the reliability of management accounts and financial information presented to him. In order to properly supervise the executive management, it is to be expected that he would probe the financial information provided in order to tests its reliability, deploying the care and skill reasonably to be expected of him, both subjectively and objectively ascertained in accordance with the requirements of the 2006 Act, s 174" (at [14.50]).
- I did not understand Mr Green to take issue with any of these propositions. Nevertheless, he contended as follows: Mr Ellis was a non-executive director; he was wholly dependent on Ms Thompson for information as to BFS' financial situation and prospects; both the subjective and objective elements of the test of knowledge in subsection 214(4) involve taking into account the fact that Mr Ellis' functions in BFS were limited to that of non-executive director; Mr Ellis could not possibly have had greater knowledge than Ms Thompson or have been in a better position than her to conclude, against what he was being told, that there was no reasonable prospect of BFS avoiding an insolvent liquidation; there is no point in the history of BFS when it can reasonably be said that Mr Ellis ought so to have concluded; further, Mr Ellis knew that the RGF was wholeheartedly supporting BFS and that advice and assistance was being given by KPMG; and Mr Ellis was entitled to rely on the fact that no one, whether inside or out of BFS, ever said that BFS should cease trading.
Pleading issues
- Mr Al-Attar submitted that all the points raised by him in argument were available to him on Manolete's pleaded case, alternatively, even if that was wrong, because Manolete's case emerged sufficiently from the material it had served, including witness statements (see Brooks v Armstrong [2016] EWHC 2893 (Ch), David Foxton QC sitting as a Deputy Judge of the High Court at [114], in which reference was made to McPhilemy v Times Newspapers Ltd [1999] 3 All ER 775 at pp792-793, Guild v Eskander Ltd [2003] FSR 3, and Jones v Environcom Ltd [2012] PNLR 5).
- At the end of the day, the main, if not the only, point that I understood Mr Green to dispute in this regard concerned Mr Al-Attar's argument that monies provided to BFS by MFB did not comprise "private investment" because MFB was funded by public money. Mr Green submitted that this was not only a bad argument but also a point that had not been pleaded. Mr Al-Attar submitted that the Points of Claim made clear that it formed part of Manolete's case that payments by MFB to BFS did not constitute "private investment" approved by the RGF, by pleading (i) the conditions for RGF Support (at [8]), (ii) that investment from MFB was not approved private investment (at [23]), and (iii) that Mr Ellis was the sole private investor approved by the RGF (at [28]). Mr Al-Attar further submitted that discussions which occurred prior to the RGF Offer Letter became important following Mr Ellis' change of case in his and Ms Thompson's second witness statements, in which it was claimed for the first time that MFB had been approved by the RGF as a "Private Investor" from the "outset", as opposed to in 2015, and in which reliance was placed on these discussions as part of that case. Accordingly, it was submitted, Manolete's focus on these discussions was responsive to this change of case, and Manolete was entitled to test that claim by reference to the documents, which, it claimed, contradicted it.
- Mr Al-Attar raised similar arguments with regard to the December Board Meeting, submitting that its relevance was not clear until service of Ms Thompson's first witness statement and the disclosure of the relevant board minute. This suggests that the December Board Meeting formed no part – either explicit or implicit – of Manolete's pleaded case. However, the guidance provided by the authorities is to the effect that, while it is important that each party's case should be clearly pleaded so as to enable the opposing party to know what case it has to meet, the court is also concerned to try the real issues between the parties where that can be done without causing unfairness to either side, and it will not allow a focus on the contents of the pleadings to prevail in respect of points notified to the opposing party and which that party has had a fair opportunity to address. That seems to me to be the case in this instance, especially as there is no tension between Manolete's reliance on the December Board Meeting and the significance that it attaches to 31 January 2015.
- I do not consider that Manolete was precluded by the way its case was pleaded from raising these points, or indeed any of the arguments which Mr Al-Attar advanced. In particular, with regard to the "private investment" issue, I consider that Manolete's case is further supported by other parts of the Points of Claim, which plead that "MFB made payments to BFS in the period between 1 May 2013 and 6 March 2106 in the amount of £1,957,864.61 "the MFB Payments"" (at [22]) and that "The MFB Payments were not external funding from Private Investors for the purpose of the RGF Support, because MFB was not an approved Private Investor" (at [30]).
Submissions
- Manolete's pleaded case (see Points of Claim, [41]) is that, as at 31 January 2015, Mr Ellis knew or ought to have known that there was no reasonable prospect that BFS would avoid going into insolvent litigation because he knew or ought to have known the following eight matters:
(1) as at that date, BFS had received the full amount of the RGF Grant;
(2) BFS was in breach of the RGF Offer Letter and entitled to claim only £833,574.04 under the terms of the RGF Loan because BFS had failed to secure investment from Private Investors in the amount of £4,882,000;
(3) BFS had been balance sheet insolvent since (at least) May 2014, and the deficiency of assets compared to liabilities had been increasing continuously since September 2014;
(4) in the period since (at least) May 2014, BFS had made a loss in every month save for the two months when it received monies under the terms of the RGF Grant;
(5) BFS' sales were grossly inadequate to enable it to trade out of its insolvency;
(6) BFS had been in arrears with its payments to HMRC since 9 December 2013;
(7) there was no prospect of BFS' sales improving such that BFS could trade out of its insolvency; and
(8) it was inherently unlikely that BFS would be able to obtain any further external funding.
- Mr Al-Attar's closing submissions approached matters rather differently. His core submissions were as follows:
(1) As Mr Ellis failed sufficiently to inform himself of BFS' business and affairs, his failure to act has to be judged on the basis of what he should have known and should have done. The Court is bound to proceed on this basis because Mr Ellis entirely failed to discharge his duties as a director of BFS.
(2) In fact (and possibly in partial contradiction to (1) above) Mr Ellis downplayed his involvement with BFS. In particular: (a) the Subscription Agreement dated 23 April 2012 entitled him to access better information than would otherwise have been available to a shareholder or a lender who was not also a director and conferred on him substantial rights of consent in respect of a wide range of corporate activity, including additional borrowing, and (b) having bargained for rights which enabled him to keep under review his investment in BFS, which became substantial, it is implausible that he did not take a real interest in the financial affairs of BFS, and (c) this implausibility is supported when the amount of his financial commitment to BFS is compared to his net worth.
(3) Of relevance are the account contained in Mr Ellis' first witness statement (at [24], [28], [29], [33], [47] and [49]) and his oral evidence to the effect that he was "an interested observer, rather than a participant in some sort of accounting or sales analysis". (To this, however, I would add Mr Ellis' evidence that "I thought I was performing the correct function as a non-executive director, to assist where I could in those areas where I knew things that might be thought or were useful and that sort of thing really" and "from the limits of my knowledge and any input I felt I could make on financial things, financial affairs, it seemed to me that the information I was getting was sufficient because in my mind [of] the arrangements that existed with bookkeepers and accountants and indeed various reporting mechanisms to [the RGF]" and "I thought it was important that one of my roles was to be objective to some degree and take an overview and to offer some differing experience to what they were doing. And one of those things is to make sure that everything seemed to be done properly and, as far as I could tell, it was.")
(4) Had Mr Ellis sufficiently informed himself about BFS' financial affairs he should have concluded in December 2014 that BFS could not, realistically, avoid insolvent liquidation, and should have initiated an orderly winding up which would have had effect from 31 January 2015. In particular: (a) the premises of Hurst & Co's Final Due Diligence report in January 2014 and its Addendum in February 2014 were that BFS' insolvent and loss-making trading was justified by (i) BFS' sales performance being at, or about, the level forecast in BFS' projections, and (ii) BFS' receipt of both drawdowns under the £10.2m Facility on the one hand and the RGF Grant and RGF Loan on the other hand, and (b) these opinions constitute relevant professional advice to which Mr Ellis (and Ms Thompson) should have had regard.
(5) Mr Ellis and Ms Thompson, instead, focussed on the limited and specific advice of KPMG given in December 2015 on partial information. That advice is irrelevant to the issue of liability under section 214(1), in circumstances where it cannot be said that KPMG retrospectively expressed a view as to the entirety of BFS' trading down to that date. The evidence of Mr Ellis and Ms Thompson does not address these aspects of the opinions delivered by Hurst & Co.
(6) Had Mr Ellis sufficiently informed himself of BFS' business and affairs, he would have known, as at the time of the December Board Meeting, that: (a) BFS was heavily balance sheet insolvent and, on its original projections in February 2014, forecast to be so until 2018, (b) BFS was heavily loss-making and, on its original projections in February 2014, forecast to be so until mid-2016, (c) BFS' performance in the eight or nine months to December 2014 had been 90% below the projected sales forecast in February 2014, (d) in consequence, BFS required more financial support than had been projected in February 2014, at which time scheduled drawdowns of £5.994m from the £10.2m Facility in the financial years 2014, 2015 and 2016 had been forecast, and this further financial support had to be adequate to sustain a negative cash flow of around £500,000 per month, which BFS could do little to curtail given the contractual framework which bound BFS to sustain around 356 full time employees, (e) MFB was wholly unable to provide such financial support, (f) in addition, MFB could not act as an investor in BFS without adverse consequences for BFS, because MFB was not a "Private Investor" approved by the RGF, and the consequences of accepting investments from a non-approved investor were significant, in that the RGF Grant became repayable, and the RGF Loan was not payable, (g) MFB's payments to BFS in respect of the management re-charge was not an investment in BFS, (h) at this time, about £7.3m of the £10.2m Facility remained available to draw in theory, and this would be reduced to around £4.4m in the event of liability to repay the RGF Grant of £2.882m, and any reasonable director would have concluded that this Facility could only sustain BFS for a few more months, even assuming that the rate of losses did not increase and that the Facility would be drawn in full.
(7) In these circumstances, any reasonable director would have asked himself what, rationally, was the prospect of BFS turning a profit in that period of a few months and/or of other investors coming in to allow BFS to trade beyond that time. The only rational answers on the evidence are (a) that having regard to the actual results to date, there was no realistic prospect of a sufficient turnaround in sales in the time that Mr Ellis' theoretical funding capacity permitted, and instead Mr Ellis' monies would have been burnt up in losses in a matter of months, and (b) that no reasonable director could have concluded that BFS should continue to trade in the hope that other investors might come in to fund BFS, in particular because no such investors were in prospect, and, in circumstances where Mr Ellis had ceased to put monies into BFS (notwithstanding that he was a secured creditor who would have enjoyed an attractive rate of return if BFS did well) there was no rational basis on which a reasonable director could have concluded that any other investor would do so, especially as any other investor would have to invest on disadvantageous terms in comparison to Mr Ellis, given his (and the RGF's) security.
(8) The theoretical availability of the £10.2m Facility in December 2014 does not warrant the conclusion that BFS could have avoided insolvent liquidation. The prospect that Mr Ellis might have fully funded a few months of further trading, paying all creditors in full, and then waived his debt so as to achieve a wholly solvent liquidation is entirely fantastic. In particular, any reasonable director looking at what remained to draw on the £10.2m Facility would have concluded that BFS' sales performance was so bad that BFS would simply burn through any further investment within a matter of months without making a profit. The fact that Mr Ellis had not formally cancelled the £10.2m Facility makes no difference to this commercial assessment, which is the only reasonable assessment of BFS' position on the basis of the contemporaneous financial information. Further (says Mr Al-Attar): "Any other assessment – and that offered by Mr Ellis in his oral evidence – is entirely reliant on vague expressions of hope and goodwill. Mr Ellis might well have truly believed these matters; however, given his duties as a director, none can provide a rational basis for BFS having continued to trade beyond 31 January 2015."
- Mr Al-Attar further submitted that although Mr Ellis denied that he ceased to invest further monies from October 2014 because of "investor fatigue", it was appropriate to draw an adverse inference from his decision not to call Ms Thompson, who was accordingly not able to explain what she had told Ms Blackwell in that regard, or why she had not answered Ms Blackwell's repeated written enquiries in that regard. In these circumstances, the Court is entitled to find that although the £10.2m Facility remained available in theory, it was not a commitment that the board of BFS could have called on without taking enforcement action against Mr Ellis. The fact that BFS would have had to enforce against Mr Ellis to secure further drawdowns is a further matter which would have caused any reasonable director to have concluded in December 2014 that BFS had no prospect of avoiding insolvent liquidation.
- Mr Green concentrated on the eight matters pleaded in the Points of Claim, in respect of which he made the following principal submissions:
(1) BFS had received the full amount of the RGF Grant as at 31 January 2015.
This is not in dispute. In fact, the RGF Grant was paid in full by 15 December 2014. Mr Green submitted that the RGF had paid the full amount of the RGF Grant knowing that part of the private investment used to match the RGF Grant had come from MFB. I do not consider that is correct. However, the RGF plainly knew in October 2014 that BFS was seeking to secure private investment from a source or sources other than Mr Ellis, and stated, through Ms Rogerson, who copied in Mr Hart, that this "was expected". Further, when, in May and June 2015 respectively, the RGF was informed that TCA was being considered as an investor in BFS, and, later, that TCA had become an investor in BFS, the RGF made no complaint, whether in reliance on the terms of the RGF Offer Letter or at all. I consider that Mr Green was right to submit that as at 31 January 2015 and thereafter the RGF continued to support BFS and the Project, having all the opportunity it wanted to scrutinise the claims and figures that were presented to it by BFS, through monitoring and Hurst & Co's reports.
(2) As at 31 January 2015 BFS was in breach of the RGF Offer Letter and entitled to claim only £833,574.04 under the RGF Loan because it had failed to secure investment from Private Investors in the amount of £4,882,000.
The first claim in respect of the RGF Loan was made on 12 February 2015, and was for payment of £856,248, which was paid on 16 March 2015. Mr Green submitted that as any breach would only have occurred when the claim was made, and that as this was after 31 January 2015 it could not be a relevant factor as to Mr Ellis' alleged knowledge. He further submitted that Manolete's reliance on the December Board Meeting involved an attempt to convert this allegation into a claim of prospective breach based on the decision that BFS would source investment from MFB. Mr Green submitted that, whether framed in terms of breach or prospective breach, the allegation is without foundation, because (he argued) the RGF approved MFB as a private investor, and this approval related back to, at least, the December Board Meeting. Further, he submitted: "Even if, which is denied, BFS was in breach of the RGF Offer Letter, that cannot affect whether Mr Ellis should have concluded in January 2015 that there was no reasonable prospect of BFS avoiding insolvent liquidation. He was entitled to assume that BFS would be receiving the full amount of the grant and loan from the RGF and that everyone was fully supportive of BFS continuing to trade and hopefully become a profitable and thriving business providing employment to many deprived young people … So far as Mr Ellis was concerned, BFS had the enthusiastic support of the RGF, it was hitting its targets for receipt of the full grant and loan and there was no indication at all that BFS had no reasonable prospect of avoiding insolvent liquidation." Mr Green placed reliance on Mr Ellis' evidence as follows:
"And there was an enormous amount of discussion as to what was and was not eligible. Peel fit out costs, for example, on the first floor which Peel paid for; there was some debate as to whether or not that could be included and types of finance and things of that sort…
It was my understanding that it was all being done. I didn't know what "all" was, but it was my understanding that the necessary evidence to demonstrate whatever was required was being complied with and my understanding was that that was a complex and involved process which involved presenting lots of evidence to demonstrate that the money had been correctly spent and deployed.
That was my understanding and that – actually I will go on to say just a little bit more – the recipients of that information were happy with it and raised no questions. I mean it all seemed to be in order, if I can put it that way. That was my observation, my understanding."
Mr Green also submitted that even if the RGF did not approve MFB as a "Private Investor", the RGF nevertheless never complained about BFS sourcing investment otherwise than from Mr Ellis; and that, even if investment from other sources was not approved by the RGF, Mr Ellis had no way of knowing this. Accordingly, BFS did not jeopardise the funding provided by the RGF; and, even if it did jeopardise that funding, this was unknown to Mr Ellis.
(3) BFS had been balance sheet insolvent since (at least) May 2014, and the deficiency of assets compared to liabilities had been increasing continuously since September 2014.
Mr Green's first point under this heading was that BFS was able to pay its debts as they fell due. Second, he submitted that BFS was "balance-sheet insolvent" when regard was had to long term liabilities, essentially comprising loans from Mr Ellis and others, which were not repayable until 2018. In fact, BFS enjoyed a substantial surplus of current assets over current liabilities throughout the whole period, and as at 31 January 2015 there was a surplus of £762,091. In any event, it had always been expected that BFS would show a deficiency of assets on its balance sheet for some time, and there was nothing wrong in all the circumstances with BFS continuing to trade as it did.
(4) In the period since (at least) May 2014, BFS had made a loss in every month save for the two months when it received monies under the RGF Grant.
Although losses were being made in this period, Mr Green submitted that was not at all unusual in a start-up where the costs of employing hundreds of young people to train to become software developers would outweigh the sales that could be achieved at that stage. Hurst & Co were happy to sign off BFS' audited accounts in October 2014 on a going concern basis; and they did not express any concern at any time, and certainly not before 31 January 2015, that BFS should consider ceasing to trade. The RGF were also fully aware of the figures and of the losses being incurred and remained fully supportive.
(5) BFS' sales were grossly inadequate to enable it to trade out of its insolvency.
In so far as this adds anything to (4) above, it appears to be based on a comparison between the projections which were made to the RGF prior to the RGF Offer Letter with the actual sales which were achieved a few months later up to the end of 2014. Mr Green submitted, however, that the RGF were fully aware of those figures, as were BFS' executive management, and no one considered that BFS had such bad sales figures that consideration should be given to winding it up. Nor did KPMG consider that to be the case a year later.
(6) BFS had been in arrears with its payments to HMRC since 9 December 2013.
Mr Green described this point as "extremely weak". It is the only factor relied on concerning a creditor. Mr Abdulali confirmed in evidence that there is no evidence of any creditor other than HMRC pressing for payment in December 2014. As a non-executive director, Mr Ellis could not be expected to have to focus on one particular creditor if a problem was not identified to him. During 2015, the management of this was being dealt with by Mr Carter. In fact, the letter from HMRC dated 14 November 2014 confirmed an arrangement to pay the sum then due to HMRC by two instalments on 13 November 2014 and 17 December 2014. This appears to have been complied with because the next letter from HMRC dated 18 February 2015 refers to a new instalment agreement for payment of new amounts. The fact that agreements were being reached with HMRC shows BFS engaging with its creditors, not hiding from them. As at 31 January 2015, there is no evidence that BFS was in arrears with its payments to HMRC. It was paying all its debts as and when they fell due.
(7) There was no prospect of BFS' sales improving such that BFS could trade out of its insolvency.
Mr Green submitted that "[i]t is difficult to understand how such a sweeping statement can be made" and described it as "nonsense" to say that Mr Ellis should have realised these matters as at 31 January 2015. This was not the appraisal of the RGF (as appears, for example, from the Project Monitoring Visit Report dated 3 February 2015). Nor does it accord with the appraisal of KPMG in the latter part of 2015. Mr Green submitted that KPMG could see that there was a strong business and a product that could be sold, and in fact was willing to consider its own investment into BFS.
(8) It was inherently unlikely that BFS would be able to obtain any further external funding.
This is demonstrably wrong, as BFS did, in fact, obtain external financing, in the form of the monies sourced ultimately from TCA (enabling BFS to obtain payments under the RGF Loan of £856,248 and £1,143,752 on 16 and 30 March 2015 respectively). Mr Green further submitted that when further external investment was being sought by KPMG towards the end of 2015, the RGF showed that it would be willing to consider amending the terms of the RGF Offer Letter to accommodate that potential new investment. Accordingly, it is not correct to say that Mr Ellis would have or should have realised this as of 31 January 2015. In any event, Mr Ellis was liable to lend up to £10.2m under the £10.2m Facility, and this Facility was available, at all times, to BFS.
- In addressing the fact that the Points of Claim (at [42]) deal with the potential defence under section 214(3) of the IA that Mr Ellis took every step that he ought to have taken to minimise the potential loss to BFS' creditors, Mr Green confined himself to submitting that this only comes into play if Manolete proves that Mr Ellis knew or ought to have concluded as of 31 January 2015 that there was no reasonable prospect of BFS avoiding insolvent liquidation, and that Manolete could not prove that. My understanding from this is that no reliance was placed on section 214(3).
- Mr Green did, however, rely on a different point, namely that Mr Abdulali's evidence reduced the wrongful trading claim from £6,569,168 to under £3m.
Discussion
- It is a particular feature of the present case that BFS relied on substantial funding from the RGF, which in turn imposed a number of stringent requirements as conditions of that funding being made available. These requirements included the provision of matched private investment (in a ratio of a little over 2:1 to the RGF funding), the provision of input from Hurst & Co, and regular monitoring of BFS. The input from Hurst & Co involved the production of a Final Confirmatory Due Diligence Report and Addendum in January and February 2014 and the production of a series of Independent Accountant's Reports. In addition, Hurst & Co acted as the independent auditors of BFS, and copies of BFS' audited accounts were provided to the RGF. The provisions for monitoring on behalf of the RGF which were spelled out in paragraphs 7 and 8 of the RGF Offer Letter included quarterly reports "to update [the RGF] on progress … with the achievement of [BFS'] financial projections and with Your Project Delivery Plan", and the requirement in paragraph 9 was for "a report confirmed by an independent accountant confirming that [for a stipulated period of 3 years] the conditions of this Offer Letter have been complied with".
- From the outset of the involvement of the RGF, it was envisaged that BFS would be unprofitable for some time. Indeed, funding was sought from the RGF on this basis. Mr Ellis' letter of support for the application for funding stated that the monies sought represented "just under one third of the total investment necessary to achieve an initial level of profitability in year 3 of the project". Hurst & Co's Addendum included reference to BFS having a projected negative operating cash flow of £4.925m, arising from a loss of £5.465m, in the year-ended 31 March 2015; and stated that BFS was not expected to generate a profit until the year-ended 31 March 2016 and a positive balance sheet position until the year-ended 31 March 2018.
- It was recognised by both the RGF and Hurst & Co at the time that this gave rise to concerns about BFS trading while insolvent. Mr Hart's email to Hurst & Co dated 11 February 2014 referred to "[the] case that [BFS] would be trading whilst balance sheet insolvent and therefore clearly dependent on the continued financial support of shareholders/investors" and Hurst & Co's Addendum stated that BFS would not be trading from an insolvent position because "although the projections record a negative balance sheet position until the year ended 31 March 2018, cash-flow projections forecast that [BFS] will be able to meet its liabilities as they fall due."
- It is clear not only that BFS performed dramatically less well than it had been expected to do (in accordance with the Hurst & Co Addendum) when the RGF offered to provide funding, but also that external private investment was not made in accordance with the schedule prepared by BFS and summarised in the Hurst & Co Addendum (which referred to external private investment in the sums of £2.149m in the period ending 31 March 2014 and £3.271m in the year ending 31 March 2015).
- In particular, as set out above, Mr Al-Attar (a) contrasted BFS' aggregate total sales of £237,605 in the period May to December 2014 with the figures contained in BFS' application to the RGF, which projected sales of £4.785m by 31 March 2015, equal to an average of £398,000 per month, (b) submitted that BFS would have had to generate sales in excess of £4.524m per annum in order to break even having regard to the wage bill alone, which would have required a manifold increase in sales, and (c) submitted that funding had not been provided by Mr Ellis (or indeed at all) in accordance with the statements made to the RGF as part of the due diligence process. For these reasons, and in light of BFS' deteriorating balance sheet position, which included that its management accounts showed that as at the end of December 2014 it had net liabilities, after a reduction in management charges, of £1,591,527, Mr Al-Attar submitted that it was in fact the case, and should have been clear to Mr Ellis by December 2014, that (i) BFS did not have a viable business model, (ii) the growth forecasts developed to obtain RGF funding had proved over-optimistic and unreliable at best, and (iii) BFS should have been wound up as soon as practicable.
- Nevertheless, these matters did not cause either Hurst & Co or the RGF to express concern at any time down to 31 January 2015 (or, for that matter, at all) that BFS was continuing to trade when it should instead be wound up, or to suggest that the terms of the RGF Offer Letter had been breached or that the RGF funding was in jeopardy.
- In particular, the RGF Project Monitoring Visit Report dated 3 February 2015 records: "Sales - the sales pipeline is really positive and it was agreed that a copy of the pipeline will be sent with the claim documentation. There are five full time Sales Directors in place and one sector related. The number of sales is forecasted to increase by double within a year and it is planned that it will be £5m during 2015/2016". The date of that Report is only three days after the date of 31 January 2015 by which, according to its pleaded case, and only about 6 weeks after the date of the December Board Meeting by which, according to the arguments presented at trial, Manolete contends that Mr Ellis knew or ought to have concluded that there was no reasonable prospect that BFS would avoid going into insolvent liquidation.
- Considering matters by reference to the internal affairs of BFS as opposed to external appraisal by the RGF and Hurst & Co, that Project Monitoring Visit Report reflects the fact that BFS had personnel who were actively engaged in sales efforts. Mr Ellis' evidence, which I accept, is that the consistent message that was being conveyed to him in December 2014 and January 2015, including from Ms Thompson, his visits to BFS' premises, and those within BFS who had knowledge of actual and prospective sales, was in line with the conclusions that were expressed some time later in the Sales Directors Report for May 2015 of being "confident of meeting and exceeding the targets we have set" and of "fully expect[ing] our sales to continue to grow".
- I am prepared to accept that, even as a non-executive director, the duties which Mr Ellis owed to BFS to inform himself of BFS' affairs and to join with Ms Thompson in supervising those affairs extended not only to familiarising himself with the contents of Hurst & Co's Final Due Diligence Report and its Addendum but also to understanding the differences between the expected and realised levels of BFS' sales performance and BFS' receipt of investments. I also accept that it would have been a breach of duty for Mr Ellis to allow himself to be dominated, bamboozled or manipulated by Ms Thompson in a way which involved a total abrogation of his responsibilities. Nevertheless, in my judgment, when considering whether there was any reasonable prospect that BFS would avoid going into insolvent liquidation Mr Ellis was entitled to rely on the fact that Hurst & Co and the RGF were both in their different ways monitoring the performance and prospects of BFS (as it happens with potential insolvency issues well in mind from the outset), as well as all the information that he was being provided with by those within BFS who were in a better position than he was to know about BFS' actual and prospective trading and profitability. I have little doubt that Mr Ellis did not, as a matter of subjective fact, know that there was no reasonable prospect of BFS avoiding an insolvent liquidation. Furthermore, I do not consider that, looking at the matter objectively, and without the application of hindsight, Mr Ellis ought to have concluded that this was so.
- It would, in my judgment, be very harsh on Mr Ellis if he was held liable for wrongful trading on the facts of this case. He was not irresponsible, and nor did he close his eyes to the reality of BFS' position, or allow BFS to carry on trading after it was or should have been obvious to him that BFS was insolvent and had no reasonable prospect of trading out of difficulty. On the contrary, as Mr Ellis said over and again, his understanding of everything that was going on and everything that he was being told was, in the words of the RGF Project Monitoring Visit Report dated 3 February 2015, "really positive". The basis of this understanding included the monitoring which was being carried out by the RGF and the input which was being provided by Hurst & Co. Accordingly, Mr Ellis' approach cannot be stigmatised, for example, as wilfully blind optimism or as being based on reckless belief. On the contrary, it was founded on rational expectations of what the future might hold.
- The significance of KPMG's involvement and views in the autumn of 2015, including and in particular the statement in Mr Muir's email to Ms Thompson dated 18 December 2015 that "To say at this point my business is insolvent and I should wind it up would not necessarily be the correct treatment, and you may be criticised further were you to take this route", is that by that time BFS' financial and trading position was plainly worse than it had been in December 2014 and January 2015. For example, as at the end of December 2015, BFS' management accounts recorded sales of £50,851, a loss for that month of £610,055, and net liabilities of £5,852,328. However, even at that time, these highly reputable external advisers do not appear to have concluded that there was no reasonable prospect that BFS would avoid going into insolvent liquidation, and so should be wound up. Mr Al-Attar's submission that KPMG's views were based on partial information could not be fully explored in circumstances where the material documents are or may be incomplete, and neither Ms Thompson nor any witness from KPMG was called to give evidence. If and in so far as that submission is premised on the notion that KPMG were not informed of the irrevocable nature of Mr Ellis' obligations under the £10.2m Facility, however, that merely serves to bolster the argument that KPMG's views support Mr Ellis' case. The reason for this is that the availability of the £10.2m Facility plainly operated to enhance the prospect that BFS would avoid going into insolvent liquidation; and Mr Ellis could take account of that Facility in December 2014 and January 2015.
- In making the above findings, I have not overlooked Mr Al-Attar's arguments concerning the other side of BFS' finances, relating to the support which it required.
- I have already dealt with a number of these points above. I agree with Mr Al-Attar that the logical consequence of BFS' sales underperformance is that BFS required more financial support than had been projected in February 2014, and that this had to be adequate to sustain a very substantial negative cash flow. I also agree that MFB was unable to provide such financial support: this is borne out by the convoluted process by which MFB obtained £649,209 to invest in BFS, which involved MFB borrowing from TCA what translated to a net sum of £581,155 at what Ms Thompson herself described as "a very punishable rate". For reasons already given, however, I do not accept Mr Al-Attar's further submission that MFB could not act as an investor in BFS without adverse consequences for BFS, and in any event I consider that at the time of the December Board Meeting a reasonable director of BFS could have thought that the RGF would not withhold or require early repayment of the RGF Grant or the RGF Loan in circumstances where a substantial part of the investment into BFS was provided by MFB and not Mr Ellis. It follows from this, and from my acceptance of Mr Ellis' evidence that he remained willing to make further investments in BFS, and only did not do so to any material extent after October 2014 because (at the instigation of Ms Thompson) investment was sourced elsewhere for what seemed to him to be sensible reasons, that, in December 2014 and January 2015, BFS had or could expect to have available by way of financial support (a) over £7m of the £10.2m Facility and (b) the RGF Loan of up to £2m. Whether those sums would sustain BFS for no more than a few more months depended on BFS' trading prospects, as to which, as indicated above, I consider that a reasonable director could have concluded, and (as I think Mr Al-Attar effectively accepted) that Mr Ellis did in fact genuinely believe, that BFS' sales performance was not so bad that BFS would use up the available funding before it began trading profitably.
- For the avoidance of doubt, I decline to draw the inference that Mr Ellis would not have made further payments under the £10.2m Facility unless enforcement action was taken against him, on the basis of the exchange of emails between Ms Blackwell and Ms Thompson in December 2015, including the reference to "investor fatigue". This exchange took place approximately 12 months after the time which is material for the purposes of the wrongful trading claim, and by that later time Ms Thompson had grounds for concern that BFS would not avoid going into insolvent liquidation. If that is right, it is probable that she wanted to protect Mr Ellis from throwing good money after bad pursuant to the £10.2m Facility. This would explain why Ms Thompson did not flag up either to Ms Blackwell or to KPMG the fact that the £10.2m Facility contained no right on the part of the lender to override a draw down request, although another possibility is that she (and the RGF) had forgotten this.
- In so far as Manolete's case as originally pleaded by reference to eight matters is not covered by these findings, I broadly accept Mr Green's submissions in relation to those matters. Where I do not accept those submissions, I have either indicated that above or else the points of difference are too insignificant to be worth addressing.
- The extent to which BFS' difficulties were the product of the ex hypothesi unforeseeable "denial of service attack" in March 2015 did not feature prominently in either side's closing submissions. For completeness, however, I should say that in light of the contents of the Memorandum dated December 2015 concerning the consequences of that attack, I do not consider that it was a major cause of difficulty.
- These findings make it unnecessary to address conclusively Mr Green's further submission that Mr Abdulali's evidence reduced the wrongful trading claim from £6,569,168 to under £3m. In brief, however, the claim is based on an increase in net deficiency figure calculation of the figure of £6,569,168 which includes management charges receivable from MFB in the sums of £2,557,891.54 as at 31 January 2015 and £3,117,270 as at 23 February 2016. In his second witness statement (at [47] to [51]) Mr Abdulali gives different figures. For example, [51] of that witness statement ends as follows: "As at 31 January 2016, the debt due from MFB to [BFS] in respect of unpaid management charges was £6,770,402 (or £5,520,265 based on the adjusted management charges)". In answer to a question from me, Mr Abdulali said "I think that the figure of the deficiency was prepared very early on and … as things have moved on and we have looked at the figures correctly, we have not corrected that". A little later, when I explained that I needed to be satisfied of what figure was being claimed and what was the basis of it, Mr Abdulali said, by reference to his second witness statement at [51] and [52] "if you look at the totality of the management charges for the three years and then you compare [that] to the amount of funds that have been invested, then as far as I can sort of see, BFS ends up being a creditor of MFB, rather than the other way round". In cross-examination, Mr Abdulali agreed or appeared to agree that the increased deficiency of £10,962,916.44 shown as at 23 February 2016 on the calculation of the claim should be less by the difference between the sum of £6,770,402 given in [51] of his second witness statement and the sum of £3,117,270 given in that calculation (i.e. less by the amount of £3,653,132); and this would reduce the claim from £6,569,168 to £2,916,036.
- Mr Al-Attar produced an Appendix to his closing submissions in which he sought to explain the calculation of the wrongful trading claim. His principal submission was that the figure of £6,569,168 is correct, and that under the pressure of cross-examination Mr Abdulali had wrongly compared (a) the management recharge as at 31 January 2015 and (b) the management recharge as at 23 February 2016, when the latter was in fact created by reference to the cumulative balance sheet figures for three different balance sheet dates. Mr Al-Attar also produced an alternative calculation, yielding a claim for £5,463,762.44, on the basis that the management charges receivable from MFB should be not £2,557,891.54 but instead £1,856,976.75 as at 31 January 2015 and not £3,117,270 but instead £3,383,214.54 as at 23 February 2016. This alternative calculation also, at my request, adjusted the sums shown as being owed to Mr Ellis and MFB, on the basis that Manolete is right in contending that the £10.2m Facility had the effect of making BFS indebted to Mr Ellis in the sum of £1,535,602 (i.e. a sum which includes the £591,855 which had, in fact, been paid by MFB to BFS). This adjustment does not affect the claim, but would affect the distribution of any recoveries as between creditors. This Appendix was supported by a small number of documents which were not in the trial bundles.
- I do not consider that it is right to say that any confusion on the part of Mr Abdulali was the result of pressure of cross-examination, not least because the problems concerning the figures can be traced back to his second witness statement, and also because I asked very few questions in the course of the trial, and his answers to me were not produced under any such pressure. Beyond that, I am not inclined to attempt to resolve these issues, where there is no need to do so in light of my earlier findings. That would extend this already lengthy judgment, and give rise to questions of fairness because Mr Green had no opportunity to address Mr Al-Attar's Appendix or the additional documents in his closing submissions, which were exchanged simultaneously with those of Mr Al-Attar.
- For these reasons, the claim under section 214 of the IA fails and must be dismissed.
CONCLUSION
- For these reasons, in summary: (1) the claim for £325,000 fails; (2) the wrongful trading claim for £6,569,168 also fails; and (3) the claim for £188,769 succeeds.
- I ask Counsel to agree an order which reflects this determination of these proceedings. I will deal with 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 (if both Counsel agree to this) on the basis of written submissions alone, or else on an adjourned hearing on some convenient date. It is my intention that the time for seeking permission to appeal should not start running in the meantime.
