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Case No: CHANI 2000/0065/3
CHANI 2000/0081/3
CHANI 2000/0093/3
CHANI 2000/5207/3
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
MR JUSTICE EVANS-LOMBE
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 22 June 2000
B e f o r e :
LORD JUSTICE ROCH
LORD JUSTICE WARD
and
LORD JUSTICE CHADWICK
- - - - - - - - - - - - - - - - - - - - -
|
ARROW
NOMINEES INC & ANR
|
Respondents
|
|
- and -
|
|
|
BLACKLEDGE
AND OTHERS
|
Appellants
|
-
- - - - - - - - - - - - - - - - - - - -
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040, Fax No: 0171 831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -
Mr Murray Rosen QC and Mrs J Giret (instructed by Messrs Berg & Co,
Manchester for the Respondents)
Mr Clive Freedman QC and Mr R Snowden (instructed by Messrs Eversheds,
Manchester for the Appellants)
- - - - - - - - - - - - - - - - - - - - -
Judgment
As Approved by the Court
Crown Copyright ©
Chadwick LJ:
1. Bodycare (Health & Beauty) Limited, to which I will refer as "the
Company", is a company incorporated under the Companies Act 1985. The holders
of the shares in the Company are (i) as to 24%, Arrow Nominees Inc, a company
incorporated in the British Virgin Islands, (ii) as to a further 24%,
Lorraine Blackledge, and (iii) as to the remaining 52%, GR & MM
Blackledge plc ("Blackledge plc"). The holders of all the shares in Blackledge
plc are Graham Blackledge and his wife, Margaret Blackledge. Lorraine
Blackledge is their niece. Arrow Nominees Inc is controlled by Nigel Tobias,
who, at the material times, was the partner and cohabitee of Lorraine
Blackledge. Nigel Tobias, Lorraine Blackledge, Graham Blackledge and Margaret
Blackledge were, at the material times, the directors of the Company.
2. On 6 November 1998, in circumstances to which it will be necessary to refer
in more detail, Arrow Nominees Inc and Lorraine Blackledge presented a petition
for relief under section 459 of the Companies Act 1985, alleging unfair conduct
by Blackledge plc, Graham Blackledge and Margaret Blackledge in relation to the
affairs of the Company. Graham and Margaret Blackledge, Blackledge plc and the
Company itself were the respondents to that petition. The hearing of that
petition was fixed for a trial beginning on 9 November 1999.
3. On 3 September 1999 Graham Blackledge, Margaret Blackledge and Blackledge
plc ("the Blackledge respondents") applied to strike out the petition on the
grounds that, by reason of an attempt by Nigel Tobias to pervert the course of
justice by the production, in the course of standard discovery, of documents
which he knew to be forged, a fair trial of the petition was impossible. That
application was heard by Mr Justice Evans-Lombe over three days at the end of
October 1999. By an order made on 2 November 1999 the judge dismissed that
application. He was not satisfied, on the material before him, that a fair
trial was impossible. But, in the concluding paragraph of his judgment, the
judge said this:
"I must emphasise, however, that I have dealt with this application on the
evidence before me at the moment. That is not the end of the matter. If in the
course of the trial further evidence emerges that there have been breaches of
the disclosure obligations by the petitioners and, in particular, that other
documents have been suppressed or fraudulently altered, the application to
strike out can then be renewed and is highly likely to be successful because it
will lead the Court to take the view that contrary to Nigel's denials he has
not made a clean breast of his fraudulent activities."
4. The trial commenced on 10 November 1999 before the same judge. The
petitioners' case was opened, their evidence was led and they and their
witnesses were cross-examined extensively. At the conclusion of the
petitioners' case, and at the invitation of the judge, the Blackledge
respondents led the evidence on which they wished to rely in connection with
the falsification and destruction of documents. Counsel for the parties then
addressed the judge on four questions: (i) whether the petitioners had shown a
prima facie case for relief under sections 459 and 461 of the Act of 1985, (ii)
if so, whether, in the light of the further evidence, the judge ought to hold
that that there was a substantial risk that there could not be a fair trial of
the issues raised by the petition, (iii) whether the petitioners had shown a
prima facie case for the form of relief which they claimed - namely, an order
that they buy out the majority shareholding of Blackledge plc in the Company
and (iv) whether the Blackledge respondents' cross-petition - seeking a buy-out
order of the minority shareholdings - was demurrable. Argument on those
questions concluded on the last day of the Michaelmas term.
5. The judge, for reasons which he was to give after the Christmas vacation,
answered the first of those questions in the affirmative and the second and
third questions in the negative. He gave his reasons in a judgment handed down
on 24 January 2000. At the same time he decided the fourth question against the
Blackledge respondents, as cross-petitioners. He made orders accordingly.
6. The judge's decision on the third question - that there was no case for a
buy-out order of the majority shareholding - led Graham and Margaret Blackledge
to convene a meeting of the directors of the Company for the purpose of
considering the dismissal of Nigel Tobias and Lorraine Blackledge as employees
of the Company, and led Blackledge plc to give notice requisitioning a general
meeting of the Company to consider resolutions for their removal from the
board. Nigel Tobias and Lorraine Blackledge applied for injunctions to
restrain the Blackledge respondents from voting on resolutions at a board or
general meeting of the Company which would have the effect of dismissing them
or removing them from office. On 26 January 2000 the judge dismissed that
application; although he gave limited relief to enable the matter to be brought
before this Court.
7. There are now before this Court (i) appeals (0065) by the Blackledge
respondents against the orders of 2 November 1999 and 24 January 2000 refusing
to strike out the petition on the grounds that a fair trial was impossible,
(ii) a cross appeal (0093) by Arrow Nominees Inc and Lorraine Blackledge
against the order of 24 January 2000 striking out their claim for an order that
they buy out the majority shareholding, (iii) an appeal (0081) by Nigel Tobias
and Lorraine Blackledge against the judge's refusal, on 26 January 2000, to
grant injunctions to restrain Graham and Margaret Blackledge and Blackledge plc
from taking steps to dismiss them as employees of the Company or to remove them
from its board of directors and (iv) an application (5207) for an order
restraining the holding of meetings pending the determination of appeal 0081.
There is no appeal by the Blackledge respondents against the order striking out
the cross-petition.
8. At the conclusion of the arguments in this Court we had reached the
conclusion that the petition should be struck out. In the circumstances that
the further hearing of the petition was awaiting our decision, we informed the
parties that the appeal against the judge's refusal to strike out the petition
would be allowed. In the circumstances that the petition was to be struck out
it followed that the cross-appeal must fail. We reached the conclusion, also,
that the appeal against the refusal of injunctions restraining the Blackledge
respondents from dismissing Nigel Tobias and Lorraine Blackledge, or removing
them for office, should be dismissed. We indicated that we would give our
reasons in written judgments.
9. This judgment contains the reasons which led me to the conclusions that the
petition should be struck out and that no injunctions should be granted.
The underlying facts
10. The underlying facts, in so far as they are not in dispute, can be stated
shortly. I take the following account from the judgment of 2 November 1999,
with some additional input from the judgment handed down on 24 January 2000:
(1) Blackledge plc has a long established and very successful wholesale and
retail business in the sale of toiletries. In the early 1990's it opened a
small number of stores under the name "Bodycare" in the north west of England
through which it sold a range of its own brand products under the Bodycare
name.
(2) In or about 1993 Graham Blackledge, on behalf of Blackledge plc, was
considering proposals for a chain of franchised retail outlets, selling
toiletries under the Bodycare name and in accordance with what was to be
described at the trial as "the Bodycare concept". The shops were to have a
common, minimalist, décor and fittings and were to sell only toiletries,
perfumes and associated goods. Most of the stock was to be "branded" goods,
which were to be sold at a discount on the prices at which those goods were for
sale by the major retailers.
(3) In 1994 the proposals for a chain of franchised retail outlets were
abandoned in favour of the exploitation of the Bodycare concept through a
chain owned by a single company. The Company, which had been formed by Graham
Blackledge (or Blackledge plc) in 1990 but which was then dormant, was chosen
for this purpose.
(4) Lorraine Blackledge had been employed by Blackledge plc since leaving
school in 1985. She had attained a position of considerable responsibility.
Nigel Tobias was described by the judge as a family friend of the Blackledge
family. Until 1993 he had been engaged in the Tobias family wholesale food
business. He first became interested in the Bodycare concept through the
interest of his brother, Peter, in becoming a retail franchisee.
(5) In the latter months of 1993, or in early 1994, Graham and
Margaret Blackledge agreed that Nigel Tobias and Lorraine Blackledge should
become involved in the exploitation of the Bodycare concept through the
Company. They were to manage its affairs on a day to day basis, with support
and funding from Blackledge plc. Save that they were to be directors and
shareholders (in the case of Nigel Tobias through Arrow Nominees Inc) the
arrangements for their participation are in dispute. It is, however, common
ground that those arrangements were not set out in any formal documentation.
(6) In practice Nigel Tobias and Lorraine Blackledge acted as joint
managing directors of the Company. It is common ground that Graham and Margaret
Blackledge, although themselves directors of the Company, took no active part
in its affairs. There appear to have been no formal board meetings.
(7) In or about 1997 there was a proposal for a public flotation of
Blackledge plc. The proposal did not proceed; but thereafter the relationship
between Graham and Margaret Blackledge on the one hand and Nigel Tobias and
Lorraine Blackledge on the other hand deteriorated progressively. As the judge
put it, in his judgment of 2 November 1999:
"There has developed between them a fundamental dispute as to the basis on
which Bodycare was established and as to what Nigel and Lorraine's expectations
in respect of Bodycare were. Nigel and Lorraine claim that they are, as its
managing directors, free to make decisions as to its affairs without reference
to Graham and Margaret, whom they say have a conflict of interest as directors
of both PLC and Bodycare. Graham and Margaret for their part accept that the
day to day operation of Bodycare's business has been, and is, under Nigel's and
Lorraine's control, but they claim that PLC has always been entitled to a high
degree of control over the sales and supply side of Bodycare's business. There
is, in particular, dispute as to the terms on which PLC ought to be supplying
Bodycare, the particular issue being as to the profit margin which Bodycare
should be able to enjoy."
The allegations in the petition as presented
11. The primary relief sought in the petition, as presented on 6 November
1999, was an order that Blackledge plc sell its shares to the petitioners at a
fair value to be determined by the court. It is necessary to set out in some
detail (as the judge did) the allegations upon which that claim to relief was
founded.
12. Paragraph 5 of the petition, as originally presented, contained the
allegation that the petitioners and the respondents had become involved in the
business of the Company in or about 1994 "as a quasi-partnership on the basis
that their relationship would proceed as follows: . . .". There followed eight
numbered sub-paragraphs, of which the following are material:
"(iii) that the First Respondent [Graham Blackledge] (acting on
behalf of the Third Respondent [Blackledge plc]) would transfer six
of his existing stores which used the Bodycare name into the
company to give it a start but there would be an agreed
formula for the company to pay for these stores in relation to
stock at cost, fixtures and fittings reduced by 25% p.a. up to 3 years.
(iv) that the Petitioners would draw through the Third Respondent a loan
for the company of £1 million which would be interest free for 3 years
which would enable the company not only to purchase the 6
stores but also then to go on and set up more stores.
(v) that the supply of toiletries from the Third Respondent to the
company would be at a starting margin/discount of 15% (on the method of
calculation used by the Respondents) which would rise at 6 monthly intervals
at ½ % to a total of 17.5%.
(vii) that the company should pursue a policy of expansion and after a
period of 3 years consideration should be given to how and when
repayment to the Third Respondent of the £1 million would
be made. At that stage the parties would also discuss the margin to be
applied on sales thereafter. It was never envisaged that the margin would be
reduced however it was envisaged that the company might be floated or
offered to investors in this timescale or that it might acquire the Third
Respondent.
(viii) that the company would pursue its expansion on the basis that it
would thereby gain considerable trade and goodwill in its operations and
in the Bodycare name and trading style and that ultimately the continuing
use of such name and trading style would be that of the company. . . ."
13. In paragraph 7 of the petition, as originally presented, there were
set out, again under numbered sub-paragraphs, what were alleged to be "the
reasonable and legitimate expectations of the parties and/or are to be treated
as such having regard to the nature of the quasi partnership". Those
included:
"(i) that the expansion of the business of the company would be with a
view to the trading as Bodycare being through it and acquiring the benefit of
such trading name or style and expansion would be pursued with regard to
the interests of the company (rather than with regard to any
conflicting or potentially conflicting interests of the Third
Respondent)
(ii) that the monies loaned to the company would be repaid as and when the
company was in a position to obtain bank finance to replace the
same, alternatively upon the company being given a reasonable
opportunity to obtain such finance (for which purpose sufficient time
was required to allow a written supply agreement to be entered into
and bank finance be sought thereafter). . . .
(iii) that the supply of toiletries from the Third Respondent to the
company would after the expiry of the three year period be at a market rate
margin which would be greater and not less than 17.5%
(iv) that the expansion of the Bodycare business would continue and would be
pursued through the company
(v) that the company would be not less favourably treated by the
Third Respondent than other companies to which it supplied such goods
at arm's length
(vi) that the finance provided would be on terms not less favourable
than those a bank would provide
(vii) that the parties, including the Respondents and each of them,
would act bona fide in the interests of the company and would in
consequence cause or procure that the company assumed those matters and
opportunities best in its commercial interests"
14. Paragraph 8 of the petition, as originally presented, contained the
allegation that "the Respondents had acted contrary to the legitimate
expectations of the parties aforesaid in causing or procuring matters hereunder
complained of . . ." The matters of which complaint was made included:
"(i) they have prevented the proper expansion of the business of the company
with a view to the trading as Bodycare being through it and it acquiring the
benefit of such trading name or style. In or about March 1998 the
Respondents approval for following the said programme [of expansion by the
acquisition of further retail outlets] was withdrawn . . . The Respondents
furthermore alleged . . . by letter dated 11 March 1998 that the company was
unable to open any more stores without the express permission of the Third
Respondent. . . .
(ii) they have purported to increase the interest rate payable by the
company [on inter-company borrowing] unilaterally to 10.5% and have given
no reasonable or proper opportunity to the company to obtain finance from
elsewhere . . .
(iii) they have purported to reduce the profit margin to 15% when the
same should be a margin which would be not less than 17.5% (and indeed
after the expiry of the three year period was initially continued at a
rate of 17.5%) and in so doing have treated the company less
favourably than other parties with whom the Respondents trade. . . ."
The allegations of unfair conduct relied upon are summarised in a passage at
paragraph 8(v):
"The Respondents are unwilling to allow the company to take any steps in its
best interests and wish to prevent it obtaining supplies from elsewhere,
obtaining supplies at a proper price, or obtaining long term written supply
agreement (whether from the Third Respondent or elsewhere) and opening further
stores so as to avoid the company being able to put its operation on a stable
footing and obtaining finance from elsewhere. The aim of the Respondents in
their said acts and omissions is to render the trade and profitability of the
company precarious so that the Third Respondent can appropriate to themselves
the entire benefit therefrom."
Section 459 of the Companies Act 1985
15. Section 459(1) of the Companies Act 1985 (as amended by the Companies Act
1989) is in these terms:
"A member of a company may apply to the court by petition for an order under
this Part on the ground that the company's affairs are being or have been
conducted in a manner which is unfairly prejudicial to the interests of its
members generally or of some part of its members (including at least himself)
or that any actual or proposed act or omission of the company (including an act
or omission on its behalf) is or would be so prejudicial."
16. The scope of the phrase "unfairly prejudicial" was considered by the House
of Lords in the recent appeal in In re a Company (No 00709 of 1992), O'Neill
v Phillips [1999] 1 WLR 1092. Lord Hoffmann, with whom the other members of
the House agreed, said this, at pages 1098G-1099B:
"In the case of section 459, the background [against which the concept of
`fairness' has to be applied] has the following two features. First, a company
is an association of persons for an economic purpose, usually entered into with
legal advice and some degree of formality. The terms of the association are
contained in the articles of association and sometimes in collateral agreements
between the shareholders. Thus the manner in which the affairs of the company
may be conducted is closely regulated by rules to which the shareholders have
agreed. Secondly, company law has developed seamlessly from the law of
partnership, which was treated by equity, like the Roman societas, as a
contract of good faith. One of the traditional roles of equity, as a separate
jurisdiction, was to restrain the exercise of strict legal rights in certain
relationships in which it considered that this would be contrary to good faith.
These principles have, with appropriate modification, been carried over into
company law.
The first of these two features leads to the conclusion that a member of a
company will not ordinarily be entitled to complain of unfairness unless there
has been some breach of the terms on which he agreed that the affairs of the
company should be conducted. But the second leads to the conclusion that there
will be cases in which equitable considerations make it unfair for those
conducting the affairs of the company to rely on their strict legal powers.
Thus unfairness may consist in a breach of the rules or in using the rules in a
manner which equity would regard as contrary to good faith."
17. Lord Hoffmann went on to point out, at page 1102B-F, that an appeal to the
"legitimate expectations" of a party - a phrase which he had used in In re
Saul D Harrison & Sons Plc [1995] 1 BCLC 14, at page 19, as a label for
the "correlative right" to which a relationship between company members may
give rise when, on equitable principles, it would be regarded as unfair for a
majority to exercise a power conferred upon them by the articles to the
prejudice of another member - must not be allowed to enlarge the concept of
"unfairness" beyond that justified by the application of traditional equitable
principles. He said this, at page 1102E-F:
"In saying that it was "correlative" to the equitable restraint, I meant that
it could exist only when equitable principles of the kind I have been
describing would make it unfair for a party to exercise rights under the
articles. It is a consequence, not a cause, of the equitable restraint. The
concept of legitimate expectation should not be allowed to lead a life of its
own, capable of giving rise to equitable restraints in circumstances to which
traditional equitable principles have no application. This is what seems to
have happened in this case."
18. In O'Neill v Phillips the petitioner failed in the House of Lords
because it had not been established that the respondent had agreed to the
allotment of additional shares when certain targets were met. It was not enough
that the petitioner had a legitimate expectation that additional shares would
be allotted to him. The respondent was not acting unfairly in declining to give
effect to a proposal to which he had never agreed. The same reasoning applied
to the petitioner's expectation that he would continue to share equally in the
profits of the business. The respondent had never agreed to an equal sharing of
profits in circumstances in which the petitioner was no longer managing the
business; and had never agreed to surrender his right, as controlling
shareholder, to decide who should manage the business.
The amendments to the petition
19. The speeches in the House of Lords in O'Neill v Phillips were
delivered on 20 May 1999. It seems likely that that led to a re-consideration
of the allegations which needed to be made in the petition in the present case.
The petition was amended in the following respects:
(1) The allegation, in paragraph 5, that "The Petitioners and the Respondents
became involved in the business of the company . . . as a quasi-partnership . .
." was reinforced by a new allegation, at the end of that paragraph, that:
"The above terms were agreed orally between Mr Tobias and the Second Petitioner
[Lorraine Blackledge] and the First Respondent [Graham Blackledge] in or about
April/May 1994 expressly save for the first sentence of sub-paragraph (viii)
which was a natural consequence of the agreed terms and/or implied as necessary
to give efficacy to the agreed purpose of and participation by the parties in
the company."
It is important to appreciate that that amendment (read in conjunction with
paragraphs 5(v) and (vii)) introduces an allegation that it was agreed, in
1994, that the margin or discount at which toiletries would be supplied by
Blackledge plc to the Company would not, at the end of the initial three year
period, be reduced below 17.5%.
(2) The allegation, in paragraph 7, as to what were the "reasonable and
legitimate expectations of the parties" or were to be treated as such "having
regard to the nature of the quasi-partnership" was reinforced by the allegation
that regard was also to be had to "the said basis for the parties'
participation in the company and what was in any event fair as between them".
The obvious purpose of that amendment is to link "reasonable and legitimate
expectations" to the agreement alleged by the amendment to paragraph 5.
(3) Two new sub-paragraphs were added to the allegations under
paragraph 7:
"(vii) that after the initial period of 3 years the company would (a)
continue to trade with the benefit of the supply of goods at a margin of at
least 17.5% and to pursue its policy of expansion or (b) would be sold or the
subject of a flotation or would take over the Third Respondent: . . . subject
to any sale or flotation, the company would continue to be managed by Mr Tobias
and the Second Petitioner without unfair or unreasonable restrictions on its
profits or growth through the actions of the Respondents
(ix) that the Respondents would not use their position in
the company or interfere with its management so as to prevent or
obstruct it in seeking to obtain working capital or outside finance by
way of flotation or otherwise in order to continue its profitability and
growth"
(4) The allegation, in paragraph 8, that the respondents had acted contrary
to the legitimate expectations of the parties was amended to read:
"The Respondents have acted contrary to the agreement between and/or
legitimate expectations of the parties aforesaid and in any event unfairly
in the conduct of the company's affairs so as to prejudice the Petitioners
. . ."
(5) Three further allegations of unfair conduct in relation to the Company's
affairs were introduced under paragraph 8:
(x) by the said actions including (a) the unilateral reduction of
the company's gross profit margin to 15% from February 1998 (b) the
increase in its interest rate (c) the prevention of further expansion
by the company and (d) their diversion of the company's opportunities
by opening their own competing Bodycare shops, the Respondents
attempted, through their control of the company and contrary
to the legitimate expectations of the parties and the company's interests,
to impose unfair and unreasonable restrictions on it and extract unfair and
unreasonable profits, assets and opportunities from it so as to prejudice the
Petitioners as shareholders
(xi) in particular a reduction of the company's gross profit
on toiletries to 15% meant that it would be paying and the
Third Respondent would be receiving far more than would obtain
otherwise in the market (especially since the company was providing
by 1998 about half of the Third Respondent's turnover): . .
(xii) Contrary to paragraph 7 (ix) above, the Respondents used
their position in the company to obstruct it seeking outside finance. In
addition to the said matters (see in particular paragraph 8 (ii) above),
on or about 22 December 1997 the Respondents refused to accept proposals
(including an offer of Natwest Equity Partners to purchase a 30%
stake) in respect of "Newco" (a proposed vehicle merging the company
and the Third Respondent) unless (i) the proposed shareholdings
of the Petitioners were reduced from 7.5% to 5% and (ii) in the event that
Mr Tobias or Second Petitioner were to leave Newco for any reason,
their respective shares would be relinquished. Those were
unreasonable and unfair requirements . . . and prevented funding by way of
a capital injection by Natwest, with a view to the continuing success and
growth of the company.
20. I have set out the amendments to the petition at some length because they
indicate: (i) how far the allegations of "unfair prejudice" are founded on the
terms said to have been agreed orally between Nigel Tobias and Lorraine
Blackledge, on the one hand, and Graham Blackledge, on the other hand, in April
or May 1994; and (ii) the extent to which those allegations are founded on
decisions by Blackledge plc which (if taken at all) were, on their face,
referable to its own interest as supplier or lender.
21. It is important to keep in mind that the basis upon which the court
grants relief on a petition under section 459 of the Companies Act 1985 is that
"the company's affairs" are being or have been conducted in a manner which is
unfairly prejudicial to its members or to some part of its members. The fact
(if it be established) that the affairs of some other company (say, company B)
which is a member of the company (company A) in respect of which the petition
is presented and which is, for example, a supplier or a lender to company A are
being conducted in a way which is prejudicial to company A is, of itself, no
basis for relief. It is necessary to show that company B is using its position
as a member of company A to obtain some advantage for itself; and that, in
doing so, it is acting contrary to the articles of association or to some
collateral agreement on the basis of which it (or others) became a member (or
members) of company A, or is using its powers as a member of company A in a way
which equity would regard as contrary to good faith.
22. The point can be illustrated by reference to two of the principal
grounds of complaint in the present case. First, it is alleged in paragraph
8(ii) that Blackledge plc purported to increase the interest rate payable by
the Company on the initial interest free loan of £1 million, and on a
further loan of £2 million (referred to in paragraph 6 of the petition),
to 10.5%. But, in the absence of some commitment to lend at a lesser rate, it
was for the lender to determine the rate of interest at which it was willing to
lend; and for the Company, as borrower, to decide whether to continue to borrow
at that rate. It is not alleged that Blackledge plc had agreed to lend at a
lesser rate after the end of the first three year period. The decision to lend
(if at all) at a rate of 10.5% cannot, of itself, be unfair conduct "of the
Company's affairs". What would be unfair conduct of the Company's affairs would
be the use by Blackledge plc of its position as majority shareholder, or the
use by Graham and Margaret Blackledge of their powers as directors, to compel
the Company to accept funding from Blackledge plc at the rate of 10.5% by
preventing it from seeking other, more favourable, sources of finance.
23. Second, it is alleged in paragraph 8(iii) of the petition that Blackledge
plc purported to reduce the margin or discount at which goods were supplied
from 17.5% to 15%. But, again in the absence of some commitment to supply goods
at a minimum margin or discount, it was for the supplier to determine the terms
at which it was willing to supply; and for the Company, as purchaser, to decide
whether or not to purchase the goods on those terms or to seek its supplies
elsewhere. The decision to offer to supply goods at a margin or discount of
15% cannot, of itself, be unfair conduct of the Company's affairs. What would
be unfair conduct of the Company's affairs would be the use by Blackledge plc,
or by Graham and Margaret Blackledge, of their powers of control either (i) to
prevent the Company enforcing an agreement (if there were an agreement) for the
supply of goods at a discount or margin of not less than 17.5% or (ii) to
compel the Company to accept the supply of goods at a discount or margin of 15%
from Blackledge plc by preventing it from seeking other, more favourable,
sources of supply. In the present case it was, of course, alleged by amendment
that there was an agreement, made in 1994, that Blackledge plc would continue
to supply goods at a discount or margin of not less than 17.5% after the end of
the initial three year period. As alleged, the obligation to supply at that
minimum margin or discount was to continue indefinitely.
The falsification of documents
24. Directions were given for the proceedings on the petition and
cross-petition to continue with pleadings. Pleadings were delivered. The
existence of the oral agreement alleged to have been made in April or May 1994
was put in issue. Discovery by list took place in June and July 1999. The
documents disclosed by the petitioners included six letters purportedly written
by Nigel Tobias on dates between 29 September 1993 and 30 May 1994 and what
purported to be extracts from his diaries for 1995 to 1998. By a letter dated 3
August 1999 the solicitors instructed by the Blackledge respondents, Messrs
Eversheds, expressed their concern as to the authenticity of those letters. The
letters were written on the headed paper of Tobias Wholesale Food Distributors
Ltd - a company in which Nigel Tobias had been involved in 1993 and early 1994
- but the printed heading to that paper showed an "0161" telephone area code.
Eversheds pointed out, as was the case, that the area code for Manchester did
not change from "061" to "0161" until some time after the end of 1994; so that,
on their face, the letters could not have been written on the dates which they
purported to bear.
25. The solicitors then acting for the petitioners, Messrs Linder Myers, drew
the allegation of forgery to the attention of Nigel Tobias. His response
appears from two file notes disclosed by Linder Myers in the course of the
trial. The first is dated 3 August 1999:
"Telephone call to Nigel Tobias via my mobile phone. I said to him I was still
thinking about the facts [quaere fax] from Eversheds claiming that the
letters on the Lambert Smith Hampton and Gruber Levinson file were forged. He
reassured me that this was not the case and that they were genuine and I did
[quaere need] not worry. He said he did not have an explanation for why
there was a 1 in the 0161 but believed that there would be and he would
consider it."
The second is of a meeting on 4 August 1999:
"I went through again the letter of Eversheds of 3.8.99 and asked [Nigel
Tobias] to reconsider whether there were any problems with the letters to which
they were referring on the files of Lambert Smith Hampton and Gruber Levinson
Franks. He told me that he had considered the matter last night and he wanted
to tell me that the letters were not authentic and were forgeries. He went on
to explain that Lorraine was not aware and he told her for the first time last
night. That David Royle at Lambert Smith Hampton was not aware. That he had
borrowed the file from Lambert Smith Hampton in order to check matters and then
had inserted on to these files letters in place of other letters that were
already there in order to strengthen up small parts of the letters.
Within respect of (sic) Gruber Levinson Franks file he had borrowed that from
Edward Cobb to read. There were two letters on this file and he had extracted
them and put in their place two other letters. The main one being the first one
in May which he amended by changing two or three words to say that the margin
would go on from 17.5%."
26. Mr Edward Cobb, of Gruber Levinson Franks (or "GLF"), was an accountant who
had advised Nigel Tobias. The letter described in the Linder Myers file note
which I have just set out as "the main one" is dated 3 May 1994 - that is to
say, at or about the time when, by amendment, it was alleged that there had
been an oral agreement with Graham Blackledge. It is in these terms, so far as
material:
"The Bodycare option originally came about when Dad and I were looking for a
business for Peter and at that stage Graham tried to convince us of the merits
of some kind of Franchise, but upon inspection this was clearly not going to
work as from the information provided to me it was not likely to be viable.
Following on from recent discussions with Graham, and his niece, Lorraine, we
are looking to progress in a different way.
This Bodycare option could offer great potential and whilst the initial salary
package, to be set by ourselves, will be low, this is offset by the investment
required for the purchase of some 24% of the shares. Graham needs Bodycare to
replace the loss in turnover, c£25m, of Wilkinsons who have given notice
that they are leaving and he needs to replace them quickly. From our
discussions it is anticipated that we have the potential to open at least 150
stores, certainly 40 or more over the first three years of our agreement. It is
envisaged by Graham that we will produce profits of c£1m p.a. within 3
years, as he will supply at a profit margin of 15% from inception, rising every
6 months by 0.5% to 17.5% and we will move forward from there.
We discussed the possibility of a Floatation or even taking over Graham's, but
either way from here on in we would be the retail arm establishing the value
and Graham gets to replace Wilkinsons which he desperately needs to."
27. On 18 August 1999 Nigel Tobias and Lorraine Blackledge swore affidavits
verifying a revised list of documents. The revised list of documents confirmed
that the six documents had been falsified by Mr Tobias in May or June 1999.
Notwithstanding the reference in the Linder Myers file note of 4 August 1999 to
Nigel Tobias "changing two or three words" in the letter dated 3 May 1994, the
extent of the falsification of that letter was described in the revised list of
documents in these terms:
"Section 54 item 1 letter Nigel Tobias to Edward Cobb 3/5/94 - this letter was
not written and despatched by Nigel Tobias to Mr Cobb on 3/5/94. Rather it was
created by Mr Tobias in or around May/June 1999."
That was confirmed in paragraph 4(3) of a further affidavit sworn by Nigel
Tobias on the same day, 18 August 1999:
"In relation to the two letters appearing to be from myself to Gruber Levinson
Franks dated 3 May and 18 May 1994 these letters were never sent from me to
Gruber Levinson Franks on or about the dates which appear on the face of the
letters or at all. I created the letters and placed them in Gruber Levinson
Franks' file."
28. The revised list of documents disclosed, also, that Mr Tobias had falsified
some of the entries in the diaries which had been disclosed. In relation to his
diaries, Nigel Tobias said this, at paragraph 4(4) of that further
affidavit:
"I have given disclosure of my 1995, 1996 and 1997 diaries. At the same time as
I added to/created the letters referred to above I added to these diaries by
locating some of the dates of my meetings with Graham Blackledge and adding in
from memory notes of what took place. Regrettably I cannot now distinguish
between my genuine contemporaneous notes and the ones I have added in. . . .
This represents the sum total of the evidence I have created."
29. The further affidavit of 18 August 1999 contains expressions of remorse. At
paragraph 4(5) Nigel Tobias states:
"First and foremost I wish to sincerely and profusely apologise to all those
affected including but not limited to the Court, Graham and Margaret
Blackledge, Eversheds, Lorraine Blackledge and my former advisors Linder Myers,
Lambert Smith Hampton and Gruber Levinson Franks (now Baker Tilly). I realise
only too well that what I did was not only utterly wrong but also stupid.
Indeed I realised that soon after I had done it but unfortunately it was too
late. I literally feel sick with contrition. I still do not understand why I
did it. It all happened over a two day period in or around May or June of this
year. I do not know whether or not I had a mental block but I would say it was
a mental and moral aberration."
A less self serving explanation of why Nigel Tobias falsified documents appears
in the following sub-paragraph of that affidavit:
". . . the written evidence was not as helpful as I had expected . . ."
The first application to strike out
30. The revelation that disclosed documents had been falsified led the
Blackledge respondents to apply to strike out the petition. The hearing of that
application before Mr Justice Evans-Lombe extended over three days, concluding
on 25 October 1999. In the judgment which he handed down on 2 November 1999,
the judge referred to Nigel Tobias' actions as "conduct of the most profound
dishonesty, involving what was obviously a careful and deliberate strategy on
his part to perpetrate a fraud on the court . . .". But the judge was not
satisfied that what was presented to him as the past conduct of Nigel Tobias
justified the Draconian course which he was being invited to take; namely, to
strike out the petition.
31. The judge directed himself that the first question which he had to decide
was whether it was a proper exercise of the court's power to strike out
proceedings before it on the grounds of breach of the rules or, generally, of
abuse of its process in circumstances:
". . . where the Court could be satisfied that the abuse had as far as possible
been remedied and there was no significant risk that a fair trial of the issues
between the parties could not thereafter take place. In short whether the word
"contumelious" when used by Lord Diplock [in Allen v Sir Alfred
MacAlpine & Sons Ltd [1968] 2 QB 229, 259 and in Birkett v James
[1978] AC 297, 318] meant "deliberate and continuing" or simply
"deliberate"."
32. After considering the judgments of Mr Justice Millett in Logicrose Ltd v
Southend United Football Club Ltd (reported in the Times of 5 March 1988),
Lord Justice Lloyd in Landauer Ltd v Comins & Co (a firm)
(unreported, 14 May 1991), Mr Justice Lindsay in the Employment Appeal
Tribunal in London Borough of Lambeth v Blandford (unreported, 20 May
1997) and Mr Justice Laddie in In re Swaptronics Ltd (unreported, 24
July 1998), the judge concluded, at page 23 of his first written judgment:
". . . it is not a proper exercise of the Court's power under the rules or its
inherent power to strike out a claimant's case where the claimant has been
found to be in contumacious breach of the rules or an order of the Court or
even is guilty of conduct amounting to a fraud on the Court and to a gross
contempt, if it can be shown that notwithstanding the claimant's conduct there
is no substantial risk that a fair trial of his claim cannot follow."
33. In reaching that conclusion the judge followed the observations of Mr
Justice Millett in the Logicrose case:
"The object of order 24 rule 16 [of the Rules of the Supreme Court 1965] is not
to punish the offender for his conduct but to secure the fair trial of the
action in accordance with the due process of the Court (see Husband's of
Marchwood Ltd v Drummond Walker Developments Ltd [1975] 1 WLR 603) The
deliberate and successful suppression of a material document is a serious abuse
of the process of the Court and may well merit the exclusion of the offender
from all other participation in the trial. The reason is that it makes the fair
trial of the action impossible to achieve and any judgment in favour of the
offender unsafe. But if the threat of such exclusion produces the missing
document, then the object of order 24 rule 16 is achieved. In my judgment an
action ought to be dismissed or the defence struck out (as the case may be)
only in the most exceptional circumstances once the missing document has been
produced and then only if, despite its production, there remains a real risk
that justice cannot be done.
That might well be the case, for example, if it were no longer possible to
remedy the consequences of the document's suppression despite its production,
perhaps because a material witness who could have dealt with the document had
died in the meantime, or where, despite the production of the document, there
was reason to believe that other documents had been destroyed or remained
concealed. But I do not think that it would be right to drive a litigant from
the judgment seat without a determination of the issues as a punishment for his
conduct, however deplorable, unless there was a real risk that that conduct
would render the further conduct of proceedings unsatisfactory. The Court must
always guard itself against the temptation of allowing its indignation to lead
to a miscarriage of justice."
34. On the basis of the conclusion which he had reached on the first question
the judge went on to consider whether he could be satisfied on the evidence
before him at that stage that there was a significant risk that a fair trial
could not take place. Notwithstanding what he described as the formidable
points made to him on behalf of the Blackledge respondents - which included
submissions that there was a significant risk both that there were other
material documents which had been destroyed and that there were other documents
still put forward as authentic which Nigel Tobias had forged - the judge
answered that second question in the negative. But he went on to emphasise, in
the passage to which I have referred at the beginning of this judgment, that he
was dealing with the application on the evidence then before him. If further
evidence emerged to show that other documents had been suppressed or altered,
the application could be renewed. The renewed application would be likely to
succeed if the court were led to the view that "contrary to Nigel's denials, he
has not made a clean breast of his fraudulent activities".
The second application to strike out
35. The trial commenced on 10 November 1999. The second application, which the
judge had envisaged, was made just before the end of the Michaelmas term. There
had been, as I have said, extensive cross-examination of Nigel Tobias, David
Royle (the regional director of Lambert Smith Hampton, to whom four of the
admittedly falsified letters had been addressed) and Edward Cobb (the
accountant at Gruber Levinson Franks, who appeared on subpoena and who declined
to answer a number of questions about the letters on his file on the ground of
potential self-incrimination). Much of that cross-examination was directed
towards establishing that Nigel Tobias "had not been truthful in his account of
the events surrounding his forgeries, that he had not made a clean breast of
those forgeries but rather had continued and was continuing to present an
untruthful account of them". In the light of the judge's observations in the
concluding paragraph of his judgment of 2 November 1999 - to which I have
referred - that line of cross-examination was inevitable.
36. After reviewing the evidence the judge reached the conclusions expressed
in paragraphs 43 to 48 of the written judgment handed down on 24 January 2000.
It is, I think, appropriate to set out those conclusions in the judge's own
words:
"43 I am not satisfied that I have received from Nigel a
truthful picture of the circumstances of the forgeries which he admits
... I accept that contrary to Nigel's evidence the respondents have
established that in respect of the four letters that Nigel admits he
forged to LSH in late 1993 and early 1994, contrary to Nigel's evidence,
there were either no original letters and in consequence the forged letters
were entirely new creations or, alternatively, the letters which were
originally sent were in a substantially different form from the forged letters.
I do not find it established that there were replies from LSH to these letters
which have been destroyed as submitted.
44 This memorandum [the Linder Myers' file note of 4 August 1999]
contradicts Nigel's evidence that the two GLF letters were entirely
new creations and their forgery did not involve the destruction
of existing letters from him to GLF.
45 I am satisfied that an entirely false picture has been
presented by Nigel and his brother Joel of the forged additions
to the 1995, 1996 and 1997 diaries. . . . I find that Nigel only
confessed to the forged entries in the diaries after it was apparent
to him from Messrs Eversheds letter of the 6th August
that they had their suspicions as to certain entries in those diaries.
46 . . .
47 In my judgment, therefore, it must be accepted that there is a
significant risk that the originals of Nigel's letters to LSH which
he admits to having tampered with contained information
damaging to the petitioners' case which is now not available because
those letters have been destroyed. There must also be a
significant risk that there were original letters by Nigel to GLF which his
forged letters replaced which contain similar damaging
information. In the light of Nigel's untruthful account of the
forgeries of these letters the disappearance of the 1993 and 1994 diaries
becomes more suspicious as does the removal of pages from the diaries which
were produced. None of the entries recording events in the produced
diaries can now be trusted unless confirmed from reliable sources and
this doubt must infect evidence contained in affidavits and witness
statements which may have been prepared in reliance on those diary
entries.
48 The respondents submit that because Nigel has been shown to
have lied in his account of the forgeries it follows that his denial that
any other relevant documents have been tampered with or suppressed
cannot be accepted and there must be a serious risk that other
relevant documents now in evidence have been forged or have been
destroyed containing relevant information damaging to the petitioners'
case. Subject to what I shall say about the apparent purpose of
this campaign of forgery I accept that submission. . . ."
37. The judge's findings as to the purpose of what he there described as
"this campaign of forgery" are set out in paragraphs 51 and 52 of his
judgment:
"51 In his evidence Nigel sought to give the impression that his
forgeries came about as a result of an impulsive moment of
madness flowing from his disappointment that his case was not adequately
supported by the documents. In my judgment, so far from that being
the case, it is apparent that the process of forgery, which
Nigel admitted to, was sophisticated and must have taken time
to complete including the special manufacture of headed notepaper
of the defunct Tobias family companies. But for the slip up with
relation to the telephone numbers shown on the headings it would,
in all probability, not have been discovered.
52 In the course of his cross examination Nigel was pressed as to the
purpose behind the forgeries. He would not admit that there was any specific
purpose. It seems to me to be quite plain that the purpose of the forgeries
was to manufacture written support for Nigel's case as to what was
agreed between himself and Graham in late 1993 and early 1994 as to
the terms upon which Bodycare would deal with PLC in the supply of
toiletries for the first three years of its trading and thereafter. In
particular he wished to create written evidence which supported his case
that he never at any time accepted that a 15% margin over the retail price
fixed for toiletries by PLC would afford Bodycare an acceptable level of
profit. . . ."
38. It is relevant to have in mind the passage in the concluding paragraph of
the judge's earlier judgment, handed down on 2 November 1999 when he dismissed
the first application to strike out, to which I have already referred:
"If in the course of the trial further evidence emerges that
there have been breaches of the disclosure obligations by the petitioners and,
in particular, that other documents have been suppressed or fraudulently
altered, the application to strike out can then be renewed and is highly likely
to be successful because it will lead the Court to take the view that
contrary to Nigel's denials he has not made a clean breast of his fraudulent
activities."
After some 29 days of evidence and submissions the judge was satisfied that
Nigel Tobias had "not made a clean breast of his fraudulent activities"; that
there was a serious risk that documents (other than those which were admitted
forgeries) had been forged and that other documents containing relevant
information damaging to the petitioners case had been destroyed. The conditions
identified by the judge on 2 November 1999 as "highly likely" to lead to
success in a second application to strike out had been satisfied. Nevertheless,
the judge reached the conclusion, expressed at paragraph 62 of his second
judgment, that the petitioners were able to present a case for relief under
their petition in respect of which there was no substantial risk that a fair
trial could not be held.
39. It is necessary to examine the reasons which led the judge to that
conclusion. He accepted, at paragraph 54 of his second judgment, that any case
which depended on breach of the "reasonable expectations" of the petitioners
derived from the 1994 agreements pursuant to which Nigel Tobias and Lorraine
Blackledge joined the Company could not receive a fair trial - or that there
was, at the least, a substantial risk that it could not receive a fair trial -
because Nigel Tobias' forgeries had placed in question the documentary evidence
on which the court would expect to be able to rely. But he went on:
"I accept that submission subject to the qualification that there would
be no substantial risk to a fair trial of a case which was not based
on the 1994 agreements, or, to the extent that it depended on the terms of
those agreements, the relevant terms were not in issue between the
parties."
The judge identified two matters agreed in 1994 as to which there was no issue:
(i) that the petitioners should each be able to subscribe at par for 24% of the
issued shares in the Company; and (ii) that the Company was to pursue a policy
of expansion through the acquisition of retail outlets both during the initial
three year period and thereafter. But he identified, also, two matters which
were the subject of dispute: (iii) whether the expansion of the Bodycare chain
of retail shops was intended to be conducted through the Company alone, to the
exclusion of Blackledge plc or any other subsidiary of Blackledge plc; and (iv)
whether the terms upon which Blackledge plc was to supply toiletries to the
Company were to be renegotiated at the end of the initial three year period.
The case advanced by the Blackledge respondents was that there was no
agreement, in 1994 or thereafter, as to the terms on which toiletries would be
supplied after the end of the initial three year period. Thereafter the Company
was not bound to accept toiletries from Blackledge plc on terms which it
regarded as unfavourable; equally, Blackledge plc was not bound to supply
toiletries to the Company at any particular margin or discount. Each could have
regard to its own commercial interest.
40. The judge explained his view of the position at paragraphs 56 and 57 of
his second judgment:
"56 It seems to me that the petitioners are able to pursue a
simple case for relief under sections 459 and 461 on the basis
that at the time that the parties fell out in December 1997 they held
48% of Bodycare's issued shares. Since that time the respondents by
reason of the fact that they are majority shareholders and
directors, with at least equal representation on the board,
have been able to prevent any further expansion by Bodycare
of its retail outlets [see paragraph 8(1) of the petition] . . .
It seems to me also that such a claim could be based on the allegation
that it was reasonable to expect that the respondents would not use
their control of Bodycare to require it to purchase from PLC
toiletries on terms less favourable than those available to other
customers of PLC or from third party suppliers in the open market thereby,
at least, restricting Bodycare's profits and so the value of the
shares of the petitioners. [See paragraph 7(5) and 8(3) of the
petition]. If it can be shown that the respondents have used
their control of Bodycare to restrict its ability to borrow money to
finance its trading and expansion to borrowing from PLC, which has
charged interest on borrowings at a rate higher than that obtainable by
Bodycare in the open market, that might also be a ground for seeking relief
[see paragraphs 7(6) and (9) and 8(2) of the petition]. [emphasis added]
57 These claims of the petitioners do not depend on any term of the
1994 agreements which is in issue between the parties. If fought out,
whether the petitioners establish a right to relief will depend on events which
have occurred between December 1997 when the parties fell out and today. It
will depend on whether the petitioners can establish that the respondents
have used their control of the company to restrict its ability to expand
and/or have diverted opportunities for expansion to PLC. It will depend on a
comparison between the terms offered to comparable customers of PLC and those
given to Bodycare during that period and whether Bodycare could have obtained
supplies of toiletries from third party suppliers at appreciably less cost than
it was incurring in taking supplies from PLC to which supplies it was
restricted by reason of the respondents' control of Bodycare." [emphasis
added]
41. It is clear, from the passages which I have emphasised, that the judge
accepted that the unfair conduct in relation to the affairs of the Company
which would found a claim to relief on a petition under section 459 of the
Companies Act 1985 was conduct which could be regarded as an abuse by the
Blackledge respondents of their powers as directors and shareholder. It was on
that ground that he distinguished the decision of the House of Lords in
O'Neill v Phillips [1999] 1 WLR 1092. After referring to the passage in
the speech of Lord Hoffmann at pages 1101D-1102B the judge said this, at
paragraph 60 in his second judgment:
"60 From this passage in the speech of Lord Hoffmann it is plain that he was
not restricting the right to relief under section 459 and 461 to circumstances
where it could be shown that the respondent was exercising his control of the
company to the disadvantage of the petitioner in breach of some contract or
understanding between them which the Court would regard as either contractually
binding or sufficiently binding in conscience so that the Court could treat its
breach as unfair. Lord Hoffmann plainly acknowledges the right, long
established by authority under section 210 of the Companies Act 1948 and
section 459, for a minority shareholder to petition where a majority
exercised its majority power to the disadvantage of the minority in their
capacity as shareholders. Such conduct can be rationalised as a breach of
the express or implied terms of the articles of association binding on the
shareholders." [emphasis added]
The appeal against the judge's refusal to strike out on the second
application
42. The acts or omissions on the part of the Blackledge respondents on which
the petitioners rely as conduct of the Company's affairs in a manner which is
unfairly prejudicial to their interests are to be found in the amended
paragraph 8 of the petition. The paragraph is introduced by an allegation in
three parts: that, "in causing or procuring matters hereunder complained of"
the respondents have acted (i) contrary to the 1994 agreement, (ii) contrary to
the legitimate expectations of the parties, and (iii) "in any event" unfairly
in the conduct of the Company's affairs so as to prejudice the petitioners. It
is alleged, further, that Graham and Margaret Blackledge are "in breach of the
fiduciary duty of directors".
43. The judge held that there was a substantial risk that there could not be
a fair trial in so far as the complaints of unfair conduct were based on (i) or
(ii) - acting contrary to the 1994 agreement or to the petitioners' legitimate
expectations. He did so on the basis that the admitted forgeries, coupled with
his finding that Nigel Tobias had continued to lie on oath as to the extent of
his fraudulent activity in relation to documents, made it impossible to have
confidence in any documents produced by the petitioners unless those documents
were corroborated by some other evidence. Further - and this is an important
element in his approach - that the existence of the forged documents and the
diaries was likely to have infected evidence contained in affidavits and
witness statements prepared in reliance on those documents and diaries.
44. The judge's conclusion as to the extent and effect of Nigel Tobias'
fraudulent conduct is challenged by a respondents' notice served by the
petitioners. But, to my mind, that challenge must fail. There was ample
material before the judge to justify his conclusion that Nigel Tobias had
continued to lie on oath as to the extent of his fraudulent activity in
relation to documents. The judge had the advantage, which this Court did not
have, of hearing and seeing Nigel Tobias give oral evidence at the trial under
cross-examination. There is no basis on which this Court could interfere with
the judge's finding of fact. Nor can it be said that the judge was wrong to
take the view that the existence of forged documentary material is likely to
infect the oral evidence. In a case of this nature it is inevitable that
documents will provide the basis for recollection. It is likely to be very
difficult for a witness - even for a witness doing his or her best to tell the
truth under oath - to accept that what the witness now thinks that he or she
recalls from memory may, in truth, be based on a document which has been shown
to be false, or in relation to which there is suspicion. The effect of forged
documentary material on a trial is pernicious, because witnesses who have, at
one stage in the process of preparing for trial, believed that documentary
evidence to be genuine are unlikely to be able to evaluate, objectively, the
effect which it has had on their recall of the events to which it relates.
45. The question for the judge, therefore, was whether - on a proper analysis
of the allegations - the remaining complaints were that the powers of control
over the Company (which were undoubtedly exercisable by Blackledge plc, as
majority shareholder, and by Graham and Margaret Blackledge, as directors with
a casting vote), had been exercised in fact - or, perhaps, had been threatened
with exercise - in a way which was to the benefit of Blackledge plc at the
expense of the Company and of the petitioners as shareholders. Once the judge
had held (in my view rightly) that the petitioners could place no reliance on
those terms of the 1994 agreement which were in dispute, or on any expectations
said to arise out of those terms, it followed that it was only on the basis of
abuse by the respondents of their powers of control that the petitioners could
found their complaints. It was on that basis - but only on that basis - that
the complaints could be brought within (iii): acting "in any event" unfairly in
the conduct of the Company's affairs so as to prejudice the petitioners.
46. The question whether the Blackledge respondents had exercised, or
threatened to exercise, any powers of control as directors or shareholder was
addressed in paragraph 17 of the amended points of defence served in November
1999 (during the course of the trial). It is there pleaded:
". . . None of the matters referred to in paragraph 8 [of the petition] amount
to acts by the Third Respondent relate (sic) to the exercise or proposed
exercise by the Third Respondent of its majority voting power at general
meetings of the Company, but relate solely to the Third Respondent's acts on
its own behalf and in the conduct of its own affairs in its commercial
relationship with the company. Further the First and Second Respondents have at
no time had day-to-day conduct of the affairs of the Company nor have they
exercised a majority vote at board meetings. . . ."
In relation to the allegation in paragraph 8(i) of the petition - withdrawal of
consent for the opening of new stores - the Blackledge respondents denied that
the Company ever had any definite programme of opening new stores, rather than
a general intention to open new stores; and denied that their approval for the
opening of new stores in the locations specified (Bootle, Edinburgh, Liverpool,
Birmingham and Ashton-under-Lyme) had ever been given - so that there was no
question of that consent having been withdrawn. As to paragraph 8(ii) - the
increase in the interest rate charged by Blackledge plc on inter-company
borrowing - it was accepted that, in February 1998, the rate was increased to
3% over base rate; but it was denied that the Blackledge respondents had sought
to prevent the Company from obtaining suitable finance from sources other than
Blackledge plc. It was pleaded, at paragraph 17.2.2, that the respondents:
". . . have sought to ensure that the company enters into a new credit facility
only if the terms and conditions of the facility are appropriate, and only if
the company's financial and trading position is such that it can meet its
obligations under it."
and, at paragraph 17.2.5, that:
"The company is a subsidiary of the Third Respondent and its debtor. The
company is not being prevented from paying off its debts, or wrongfully
prevented from opening new shops. The First to Third Respondents simply seek to
ensure that the company is managed prudently and does not become financially
over-extended."
It is pertinent to note that, in the points of reply served in response to
paragraphs 17.2.2 and 17.2.5 of the points of defence, it is not alleged that
the Blackledge respondents had exercised powers of control as directors or
shareholders.
47. In the course of the hearing of this appeal we enquired whether there had
been any board meetings of the Company since the end of 1997, and if so when.
We were told that there had been one board meeting, on 22 April 1998. There do
not appear to have been any meetings of shareholders. In those circumstances it
is difficult to see how this Company can have complied properly with its
statutory obligations as to the approval and filing of accounts; but that is
not a matter with which we are concerned. The board meeting of 22 April 1998
was convened following a suggestion to that effect in a letter dated 11 March
1998 from Eversheds to Linder Myers. In relation to the three principal matters
of complaint - the refusal to agree to the opening of new stores, the interest
rate in respect of inter-company indebtedness and the margin or discount at
which goods were to be supplied - Eversheds set out the position of their
clients in these terms:
"Plainly decisions as to whether to seek to open or to reverse decisions to
open stores are for the board of [the Company] to take and it is not for your
clients to seek to do so in isolation. It is for Blackledge, as owners of the
IP rights, to determine whether or not [the Company] can open further
stores.
In the event that:
(1) a business plan and cash flow forecast can be produced in relation
to the five stores referred to in your clients' letter and
(2) your clients acknowledge (as they seem to be willing to do)
in clear terms that it is for Blackledge, as owners of the Bodycare IP
rights, to determine whether [the Company] can open future stores and
(3) the issue of margin is resolved (as to which see below)
then we recommend that a board meeting of [the Company] is convened for the
purpose of considering the position. Both Blackledge and Mr and Mrs Blackledge,
in their capacity as directors of [the Company], would be willing to consider
fairly and positively the position in relation to the proposed stores referred
to by your clients.
. . .
Our clients will agree to the indebtedness being repaid at the rate of
£700,000 per annum, to be repaid by two equal portions on 30th June and
31st December each year. Interest is to accrue at 3% above base rate on the
liability. If your clients wish to consider replacing the Blackledge loan with
facilities from another source then, subject to checking the terms of any
proposed facility our clients will be amenable to this in principle. . . .
. . . your clients themselves have acknowledged that following the expiration
of the three year term the terms of business between the parties were to be
renegotiated. Because of the terms of trading between Blackledge and [the
Company] the discounts extended by Blackledge give [the Company] a guaranteed
margin, that is a profit which is risk free regardless of any fluctuations in
market prices or sources of supply. Whilst our clients will listen carefully to
your clients observations on this point, they are firmly of the view that the
discount should be 15%.
. . .
These proposals are not put forward on a "take it or leave it" basis. They
represent our clients' view as to a fair and proper way forward. They seek to
temper your clients' enthusiasm for a rapid and ambitious programme of
expansion with our clients' genuine and serious concerns over the current level
of indebtedness within [the Company] and the fact that future expansion will
increase the company's gearing still further. We would encourage your clients
to discuss these proposals. . . ."
48. It can be seen from that letter that Eversheds were asserting, on behalf of
their clients, that Blackledge plc was the owner of intellectual property
rights in the Bodycare name and concept. Whether or not that claim can be made
good is the subject of proceedings (HC 1999 No 00882) brought by Blackledge plc
against Nigel Tobias and Lorraine Blackledge. That action was itself the
subject of an application to strike out which was before Mr Justice Evans-Lombe
at the same time as the petition. He dismissed the application. The action
remains to be determined - although whether it will proceed in the light of our
decision to strike out the petition may be open to question. What is not in
doubt - given the judge's decision that the application to strike out the
action failed - is that the claim is not obviously ill-founded. If it can be
made good, then there is force in Eversheds' contention that the opening of new
shops making use of the Bodycare name and concept required the consent of
Blackledge plc.
49. As might be expected in circumstances where a letter is written by
experienced solicitors, there is nothing in Evershed's letter of 11 March 1998
which gives support to the allegation that the Blackledge respondents were
exercising, or threatening to exercise, their powers of control over the
Company in a manner which subordinated the interests of the Company to those of
Blackledge plc. Nor do the informal minutes of the board meeting which took
place on 22 April 1998 - prepared by Nigel Tobias and Lorraine Blackledge but
not agreed by Graham or Margaret Blackledge - provide any support for that
allegation. Those minutes show that the parties were unable to agree what the
obligations of the Company to Blackledge plc, as lender and supplier, were as
a matter of contract. The minutes do not evidence oppressive conduct on the
part of Graham or Margaret Blackledge. There was no occasion for them to use
their powers of voting.
50. By letter dated 6 November 1998 (the day on which the petition was
presented), signed on behalf of the Company by Nigel Tobias and Lorraine
Blackledge as joint managing directors, the Company gave notice to the
Blackledge respondents that it would not be obtaining supplies from Blackledge
plc after 7 May 1999. The letter contained the following paragraph:
"Bodycare will be entering into a supply agreement with another supplier which
will be operative after that and which will at that stage enable bank loans to
be entered into which will in fact enable repayment of all monies owing from
Bodycare to the PLC."
That proposal did not proceed. On 12 November 1998 (the day on which the
cross-petition was presented) the court granted injunctions restraining the
Company from obtaining supplies from sources other than Blackledge plc, and
restraining Blackledge plc from taking steps to enforce payment of the monies
owed to it.
51. I can find nothing in the material which was before the judge at the close
of the petitioners' case which supports a contention that the Blackledge
respondents had exercised, or threatened to exercise, their powers as directors
and shareholder in a manner intended to benefit Blackledge plc at the expense
of the Company. The judge does not identify any material which supports that
contention. I share the judge's concern that this was a case pregnant with
potential for an abuse of powers. But it must be borne in mind that, from an
early stage in the dispute, the Blackledge respondents had the benefit of
advice from experienced solicitors; who might be expected to recognise the
danger and counsel their clients how to avoid it. The fact that there was
potential for an abuse of powers does not lead to the conclusion that there was
such abuse.
52. The true position, as it seems to me, is that matters never reached the
stage at which the Blackledge respondents needed to exercise their powers of
control as directors and shareholder. They had effective control over the
Company's affairs because Blackledge plc was a creditor in the sum of £4
million or thereabouts (£2 million in respect of monies advanced for the
purchase of retail shops, and a further £2 million on trading account);
and because the Company had found no alternative source of finance or supply.
It was for Blackledge plc to decide, in its own interests, whether it was
willing to enter into a medium to long term supply agreement, and (if so) on
what terms. Without a supply agreement the Company could not, in practice,
arrange alternative bank finance. The solution, of course, was for the Company
to find another source of supply, enter into a supply agreement with that
supplier, and raise bank finance on the basis of that supply agreement. If
that had been done, the Blackledge respondents might have been put in the
position in which they had to decide how they would vote at a board meeting to
approve those proposals. But, as I have said, matters never reached that stage.
The petition was presented, and cross-injunctions granted by the court, before
those proposals were formulated; let alone put before the board of directors.
53. In those circumstances I take the view that it was wrong for the judge to
allow the petition to proceed once he had reached the conclusion that there was
a substantial risk that the allegations in relation to the disputed terms of
the 1994 agreement were incapable of a fair trial. He recognised, correctly,
that a claim to relief based on allegations of abuse by the Blackledge
respondents of their powers as directors and shareholder after 1997 would not
require an investigation into what had or had not been agreed in 1994. But, as
it seems to me, he failed to appreciate that, on a true analysis, the
allegations made in the petition were allegations of oppressive conduct by
Blackledge plc as supplier or as lender; and were not allegations of oppressive
conduct by Blackledge plc as majority shareholder. In so far as there were
general allegations of breach of duty by Graham and Margaret Blackledge as
directors, those allegations were not supported by any evidence which the judge
identified; and are contradicted by the material which was put before this
Court. In my view the judge ought to have reached the conclusion that, once the
allegations in respect of which there was a substantial risk that Nigel Tobias'
fraudulent conduct had made a fair trial impossible were put on one side and
left out of account, there was no case for relief which remained to be
tried.
54. It would be open to this Court to allow the appeal against the judge's
refusal to strike out the petition on that ground alone. But, for my part, I
would allow that appeal on a second, and additional, ground. I adopt, as a
general principle, the observations of Mr Justice Millett in Logicrose Ltd v
Southend United Football Club Limited (The Times, 5 March 1988) that the
object of the rules as to discovery is to secure the fair trial of the action
in accordance with the due process of the Court; and that, accordingly, a party
is not to be deprived of his right to a proper trial as a penalty for
disobedience of those rules - even if such disobedience amounts to contempt for
or defiance of the court - if that object is ultimately secured, by (for
example) the late production of a document which has been withheld. But where a
litigant's conduct puts the fairness of the trial in jeopardy, where it is such
that any judgment in favour of the litigant would have to be regarded as
unsafe, or where it amounts to such an abuse of the process of the court as to
render further proceedings unsatisfactory and to prevent the court from doing
justice, the court is entitled - indeed, I would hold bound - to refuse to
allow that litigant to take further part in the proceedings and (where
appropriate) to determine the proceedings against him. The reason, as it seems
to me, is that it is no part of the court's function to proceed to trial if to
do so would give rise to a substantial risk of injustice. The function of the
court is to do justice between the parties; not to allow its process to be used
as a means of achieving injustice. A litigant who has demonstrated that he is
determined to pursue proceedings with the object of preventing a fair trial has
forfeited his right to take part in a trial. His object is inimical to the
process which he purports to invoke.
55. Further, in this context, a fair trial is a trial which is conducted
without an undue expenditure of time and money; and with a proper regard to the
demands of other litigants upon the finite resources of the court. The court
does not do justice to the other parties to the proceedings in question if it
allows its process to be abused so that the real point in issue becomes
subordinated to an investigation into the effect which the admittedly
fraudulent conduct of one party in connection with the process of litigation
has had on the fairness of the trial itself. That, as it seems to me, is what
happened in the present case. The trial was "hijacked" by the need to
investigate what documents were false and what documents had been destroyed.
The need to do that arose from the facts (i) that the petitioners had sought to
rely on documents which Nigel Tobias had forged with the object of frustrating
a fair trial and (ii) that, as the judge found, Nigel Tobias was unwilling to
make a frank disclosure of the extent of his fraudulent conduct, but persisted
in his attempts to deceive. The result was that the petitioners' case occupied
far more of the court's time than was necessary for the purpose of deciding the
real points in issue on the petition. That was unfair to the Blackledge
respondents; and it was unfair to other litigants who needed to have their
disputes tried by the court.
56. In my view, having heard and disbelieved the evidence of Nigel Tobias as to
the extent of his fraudulent conduct, and having reached the conclusion (as he
did) that Nigel Tobias was persisting in his object of frustrating a fair
trial, the judge ought to have considered whether it was fair to the
respondents - and in the interests of the administration of justice generally -
to allow the trial to continue. If he had considered that question, then - as
it seems to me - he should have come to the conclusion that it must be answered
in the negative. A decision to stop the trial in those circumstances is not
based on the court's desire (or any perceived need) to punish the party
concerned; rather, it is a proper and necessary response where a party has
shown that his object is
not to have the fair trial which it is the court's function to conduct, but to
have a trial the fairness of which he has attempted (and continues to attempt)
to compromise.
The position of Lorraine Blackledge
57. We were urged, at a late stage in the argument, to consider allowing the
petition to proceed as if it were the petition of Lorraine Blackledge alone.
Although there was no suggestion in the respondents' notice (served by the
petitioners) that that would be an appropriate course, it is a reflection of a
point taken in the petitioners' cross appeal - namely that the judge should
have allowed the petitioners' principal claim for relief (that Blackledge plc
be ordered to sell its shares to them) to stand in the alternative form of a
claim that Blackledge plc be ordered to sell its shares to Lorraine Blackledge
alone. In that context it was said that the conduct of Nigel Tobias in relation
to the petition is no more than a discretionary factor as regards himself or
Arrow Nominees Inc.
58. To suggest that the basis on which the court acts, when deciding to strike
out a petition on the ground that there is a substantial risk that a fair trial
has become impossible as the result of a petitioner's conduct, is founded upon
the court's determination that a petitioner of whose conduct it disapproves
should be denied discretionary relief is to misunderstand the position in a
fundamental respect. The court does not strike out the petition because it
disapproves of the petitioner's conduct; it strikes out the petition because it
is satisfied that the petitioner's conduct has led to an unacceptable risk that
any judgment in his favour will be unsafe. It is, I think, possible to envisage
circumstances in which the court might reach the conclusion that there was an
unacceptable risk that a judgment in favour of one of two co-petitioners would
be unsafe, but that a judgment in favour of the other would not be subject to
that risk. But, in such a case, the claims of the two petitioners would, in
effect, be severable. The court would, in effect, be dealing with two distinct
claims for relief each founded on its own facts. That is not this case. In this
case the relief claimed is founded on facts which are, in all respects, common
to both petitioners. If there is a risk that a judgment in favour of Arrow
Nominees Inc would be unsafe, there is an identical risk that a judgment in
favour of Lorraine Blackledge would also be unsafe. Having determined that
there is an unacceptable risk of an unsafe judgment it is not open to the court
to allow the petition to proceed in respect of the relief claimed by either
petitioner.
59. There is no injustice in this result in the present case. It is clear from
the file notes disclosed by Linder Myers in the course of the trial that,
following Nigel Tobias' admission of forgery on 4 August 1999, Lorraine
Blackledge was advised (quite properly in the circumstances) that there was a
potential conflict of interest between herself and her co-petitioner. She was
advised to seek advice as to her own position from a solicitor who could act
without regard to the interests of Nigel Tobias or Arrow Nominees Inc. She
decided not to take that advice. She took the view that her interests were best
served by continuing to make common cause with her partner and cohabitee. That
was a view which she was entitled to take; but she cannot now be heard to
complain that it is unjust to treat her as she has, hitherto, wished to be
treated - as a joint petitioner.
The appeal against the refusal to strike out on the first application
60. The conclusion which I have reached in relation to the second application
to strike out makes it unnecessary to decide whether the judge was correct in
refusing to strike out the petition on the application made to him in October
1999. Further, for understandable reasons, the point was not developed before
us at any length in argument.
61. But I should not leave the matter without this comment. The judge's
observation, in the final paragraph of his first judgment, that . . . "if in
the course of the trial further evidence emerges that . . . other documents
have been suppressed or fraudulently altered, the application to strike out can
then be renewed and is highly likely to be successful" . . . must be taken to
have led, in some measure, to the trial thereafter taking the course that it
did. It seems to me that it may well be more satisfactory, in a case where
there has been admitted forgery or destruction of relevant documents, to decide
- on the application to strike out - whether the full extent of the fraudulent
conduct has been revealed, even if that requires oral evidence at that stage.
The judge recognised that cross-examination could have been sought on the
application in October 1999. It is, of course, a matter of case management for
the judge in each case whether to invite cross-examination on an interlocutory
application, or to leave the point until trial. But I venture to suggest that a
judge faced with an application to strike out in circumstances such as those in
the present case ought to address the question whether the better course would
not be to resolve the issue, before the trial begins (or, perhaps, as a
preliminary issue at the start of the trial), whether full disclosure of the
fraudulent conduct has been made. If, in the absence of cross-examination, the
judge cannot resolve that issue at the interlocutory stage, then he is left in
the position that he cannot be confident that there is no substantial risk that
the trial (if it proceeds) will be a fair trial. Indeed, he can be reasonably
confident that it will be unfair - in the sense that it will give rise to a
detailed examination of issues which ought not, properly, to be occupying the
time of the court at the trial. If, on the other hand, he is able to resolve
that issue before trial (after cross-examination if necessary) then it will not
require further investigation at the trial. If the judge is satisfied, in the
light of what he accepts is full disclosure, that there is no substantial risk
that the admitted forgery or destruction of documents will lead to a result
which is unsafe then he will allow the trial to proceed. But, if he is not
satisfied that there has been full and frank disclosure of the fraudulent
conduct, then, for the reasons which I have already given, it seems to me that
the correct response is to refuse to allow the party in default from taking any
further part in the proceedings - with whatever consequences follow from that.
The petitioners' cross- appeal
62. If the petition is struck out, there is no longer any foundation for the
cross-appeal. The petitioners' claim to an order that Blackledge plc be ordered
to sell its shares to them (or to Lorraine Blackledge alone) is struck out
together with the other claims in the petition.
The appeal against the refusal of injunctions
63. The judge refused the injunctions sought because he had decided to strike
out the claim in the petition that Blackledge plc be ordered to sell its shares
to the petitioners (or to Lorraine Blackledge alone). The effect of that
decision was that control of the Company would remain with the Blackledge
respondents. The only question (as it would have appeared to the judge) was
whether the petitioners should remain locked in to the Company or whether
Blackledge plc should be ordered to buy out their shares. On neither basis
could the petitioners expect to continue to manage the affairs of the Company
as joint managing directors. There was no reason to restrain Blackledge plc
from exercising the powers to control the composition of the board of directors
given to it by the articles; or to restrain Graham and Margaret Blackledge from
exercising their powers, as directors, to determine who should be employed to
manage the Company's affairs on a day to day basis.
64. The judge's refusal of the injunctions sought was an exercise of his
discretion. It would have been wrong for this Court to interfere - even if it
would, if faced with the need to exercise its own discretion, have reached a
different conclusion - unless satisfied that the judge erred in principle.
There is no basis for a submission that the judge erred in principle. He was
plainly entitled to reach the conclusion which he did. In so far as it is
material, it seems to me that the judge was plainly correct to refuse the
injunctions sought on the basis of the position as it was when the application
was before him.
65. But the position has changed, in that there is now no petition pending in
which an order is sought that Blackledge plc buy out the minority's shares.
Ironically, that is (in part, at least) the consequence of the petitioners'
success in having the Blackledge respondents' cross-petition struck out on the
ground that it was demurrable - a result with which the Blackledge respondents
are content. The position, now, is that (subject to any agreements reached
between them and the Blackledge respondents since the hearing of the appeal)
the petitioners are minority shareholders in the Company. As such they have the
rights given to shareholders by the articles of association. They have failed
to establish that they have any further rights under any agreement reached in
1994. They have failed to establish that Blackledge plc is under any fetter in
respect of the powers attached to its shares other than those imposed by equity
on majority shareholders; that is to say, the obligation not to use those
powers to obtain a benefit at the expense of the Company or the minority. There
is no basis upon which Blackledge plc can be restrained from exercising its
power to control the composition of the board; or upon which Graham and
Margaret Blackledge, as directors, can be restrained from determining who
should manage the affairs of the Company on a day to day basis. In my view
there is no more reason, now, to grant the injunctions sought than there was
when the matter was before the judge.
Ward LJ:
66. In many ways this is an anxious case. We have here a young couple who in a
comparatively short time built up a very successful business indeed. The
turnover is in the region of £50 million per annum. The staff are loyal
and full of praise for Nigel Tobias and Lorraine Blackledge. Such
entrepreneurial skill commands universal praise. Ordinarily it should command
reward, in the form, at least, of fair recompense for their shareholding. Now
they face the strike out of their present claim to that entitlement. It is a
Draconian step for the court to take.
67. In his first judgment handed down on 2 November 1999, Evans-Lombe J.
analysed the authorities on striking out for an abuse of the process of the
court beginning with Allen v Sir Alfred MacAlpine and Sons Ltd
[1968] 2Q.B. 229 and Birkett v James [1978] A.C. 297 through to an
unreported decision of Laddie J. on 24 September 1998 in the case of Re
Swaptronics Limited. He held at p.23 that:-
"The applicable rule is to be found in the judgment of Mr Justice Millett in
The Logicrose case."
In Logicrose Limited v Southend United Football Club Limited,
unreported save in the Times of 5 March 1998, Millett J. (as he then was)
held:-
"In my view a litigant is not to be deprived of his right to proper trial as a
penalty for his contempt or defiance of the court, but only if his conduct has
amounted to an abuse of the process of the court which would render any further
proceedings unsatisfactory or prevent the court from doing justice. Before the
court takes that serious step it needs to be satisfied that there is a real
risk of this happening" (i.e. the risk that it is impossible to conduct a fair
trial).
...
"The deliberate and successful suppression of a material document is a serious
abuse of the process of the court and may well merit the exclusion of the
offender from all other participation in the trial. The reason is that it
makes the fair trial of the action impossible to achieve and any judgment in
favour of the offender unsafe. But if the threat of such exclusion produces
the missing document, then the object of Order 24 rule 16 is achieved. In my
judgment an action ought to be dismissed or the defence struck out (as the case
may be) only in the most exceptional circumstances once the missing document
has been produced and then only if despite its production there remains a real
risk that justice cannot be done."
At that stage and applying that test, Evans-Lombe J. concluded that the
petition should not be struck out though he did not preclude further
consideration of the matter.
68. In his second judgment handed down on 21 January 2000, the judge defined
his task in these terms:-
"I would decide the following questions under C.P.R. Rules 3.4 and 24.2:-
1. Whether the petitioners had shown a prima facie case against the
respondents under section 459 for relief under section 461, failing which the
petition would be dismissed.
2. In the event that the petitioners had demonstrated such a prima facie case
whether I was still of the view that there was no substantial risk that a fair
trial of that case could not take place. If I had changed my view the result
would be the dismissal of the petitions."
He then made his findings of fact and in paragraph 53 of his judgment turned
"to consider whether these findings require me to strike out the petition." He
held in paragraph 54:-
"It was the respondent's submission that any case which depended on breach of
`reasonable expectations' of the petitioners derived from the 1994
agreements pursuant to which Nigel and Lorraine joined Bodycare cannot receive
a fair trial or, at least, there is a substantial risk that it cannot receive a
fair trial, because Nigel's forgeries had placed in question the documentary
evidence on which the court could base its conclusions. I accept that
submission subject to the qualification that there would be no substantial risk
to a fair trial of a case which was not based on the 1994 agreements or, to the
extent that it depended on the terms of those agreements, the relevant terms
were not in issue between the parties."
Having analysed the impact of the 1994 agreement he concluded in paragraph
62:-
"For these reasons it seems to me that notwithstanding what I said in my first
judgment and my findings the petitioners are able to present a case for relief
under their petition in respect of which there is no substantial risk that a
fair trial cannot be held."
69. As I analyse the judgment it seems to me plain that although the judge made
reference to C.P.R. 3.4, he concentrated on whether there was a substantial
risk that a fair trial could not be held on at least some part of the
petitioners' case. That seems to be the only test he applied. The judge drew
on the old authorities seemingly unaffected by the impact of the Civil
Procedure Rules, notwithstanding that in Biguzzi v Rank Leisure
PLC [1999] 1W.L.R. 1926, 1934, Lord Woolf M.R. held:-
"Earlier authorities are no longer generally of any relevance once the C.P.R.
applies."
"Generally" does not, of course, mean "never". This court has recognised that
in a number of decisions, for example UCB Corporate Services Limited v
Halifax (SW) Limited dated 6 December 1999, and Purdy v
Cambran, dated 17 December 1999. The old authorities are of interest
only as the straws in the gale force winds of change which blew in Lord Woolf's
reforms. One can easily chart the progression. Birkett v James
laid down that the power to strike out should be exercised on two grounds:-
"(1) that the default has been intentional and contumelious, e.g., disobedience
to a peremptory order of the court or conduct amounting to an abuse of the
process of the court; or (2) (a) ... inordinate and inexcusable delay ... , and
(b) ... a substantial risk that it is not possible to have a fair trial of the
issues ... or ... serious prejudice ..."
The first ground lay largely fallow but recent years has seen an expansion of
its use. This may be for reasons explained by Lord Woolf M.R. in Biguzzi
at p.1932:-
"The courts have learnt, in consequence of the periods of excessive delay which
took place before April 1999, that the ability of the courts to control delay
was unduly restricted by such decisions as Birkett v James [1978]
A.C. 297. In more recent decisions the courts have sought to introduce a
degree of flexibility into the situation because otherwise the approach which
was being adopted by litigants generally of disregarding time limits for taking
certain actions under the Rules would continue."
What was troubling the courts was delay in the process. The more robust
approach can be traced through the authorities such as Arbuthnot Latham
Bank Limited v Trafalgar Holdings Limited [1998] 1 WLR 1426, ("From now
on (the consequence to the other litigants and to the court of inordinate
delay) is going to be a consideration of increasing significance," per Lord
Woolf M.R.); Choraria v Seethia Court of Appeal, 15 January 1998
("complete, total or wholesale disregard, put it how you will, of the Rules of
Court ... is capable of amounting to ... an abuse", per Nourse L.J.);
Miles v McGregor, Court of Appeal, 23 January 1998 ("The abuse of
process route is for cases ... when the conduct amounts to an affront to the
court and its Rules", per Auld L.J.); and Lace Co-ordinates Limited v NEM
Insurance Co Limited, 19 November 1998 where Hirst L.J. held:-
"These guidelines ... create an entirely new climate in which the court is
required to examine the plaintiff's conduct by reference to the overall
interests of justice and fairness (including considerations of public
importance reflecting the interests of other litigants, and the interests of
the court, to ensure the prompt despatch of court business in accordance with
efficient case management), and not exclusively the impact (as in Birkett
v James [1978] A.C. 297) of the delay on the conduct of the defendant's
case, having regard to any prejudice the defendant may suffer."
70. The trend of the authorities before C.P.R. was increasingly to support the
notion that as the court became more pro-active, so greater importance was
given to the need to emphasise and to protect the court's own interest in
administering justice fairly not only as between the parties before the court
but to all others using the court service. Access to the courts was open to
all but the time of the courts was a precious resource which needed to be
managed rigorously in order to be fair to all. The C.P.R. is the apotheosis of
those ideals.
71. Under the C.P.R., the court's general powers of case management give the
court the discretion to "take any other step or make any other order for the
purpose of managing the case and furthering the overriding objective," see Rule
3.1(2)(M). Under Rule 3.4(2):-
"The court may strike out a statement of case if it appears to the court -
...
(c) that there has been a failure to comply with a rule, practice direction or
court order."
72. When exercising any power under the Rules, the court must, by virtue of
Rule 1.2, seek to give effect to the overriding objective. The overriding
objective in its rightful place at the forefront of the Rules is in these
terms:-
" 1.1 - (1) These Rules are a new procedural code with the overriding objective
of enabling the courts to deal with cases justly.
(2) Dealing with a case justly includes, so far as is practicable -
(a) ensuring that the parties are on an equal footing;
(b) saving expense;
(c) dealing with the case in ways which are proportionate -
(i) to the amount of money involved;
(ii) to the importance of the case;
(iii) to the complexity of the issue;
(iv) to the financial position of each party;
(d) ensuring that it is dealt with expeditiously and fairly; and
(e) allotting to it an appropriate share of the court's resources while taking
into account the need to allot resources to other cases."
It is not at all clear to me to what extent, if at all, the judge had the
overriding objective in mind as setting out the parameters for the exercise of
his discretion. He correctly saw at the beginning of his judgment that the
source of his power to strike out lay in Rule 3.4 but he did not trace back
through the case management rules to Rule 1.1. Even though this was a reserved
judgment it may still be unfair to the judge to engage in too close a textual
analysis of his judgment and infer from the omission of express reference to
the overriding objective that he did not direct himself to it. Consequently I
prefer to assume he had it in mind. Nevertheless, there is still every
indication that he regarded the risk of a fair trial not being possible as the
factor of crucial, even overriding, weight. It undoubtedly is a factor of very
considerable weight. It may often be determinative. If the court is satisfied
that the failure to disclose a document or the effect of a tampered document
can no longer corrupt the course of the trial, then it would be a factor of
much less and perhaps even little weight in considering a strike out. Where,
in my judgment, Evans-Lombe J. erred, was to treat the question of a fair trial
as the only material factor. It was not: other matters have now to be put in
the scales and weighed.
73. The attempted perversion of justice is the very antithesis of parties
coming before the court on an equal footing. The matter has become hugely more
expensive (to an extent we did not appreciate until we were told when
application was made for a freezing order that the amount of the appellant's
costs overall and on a solicitor and own client basis may be in the region of
£1.5 million.) The judge commented at the beginning of his judgment that
"the hearing has run for twenty nine days greatly exceeding the parties'
estimate." The original estimate was three weeks and we were told another week
to ten days would be required to conclude the matter even on the limited basis
that the judge would still permit. The judge did not, however, treat cost and
time as elements of the overriding objective. He did not appear to allot to
the case an appropriate share of the court's resources while taking into
account the need to allot resources to other cases. In this day and age they
are elements of case management which must not only be seen to have been placed
in the scales but also given due and proper weight when assessing how justice
is to be done to the parties and to other litigants. The balance must be
struck so that the case is dealt with in a way which is proportionate to the
amount of money involved in the case, its importance and complexity and the
financial position of the parties. Mr Tobias stood to gain much had his fraud
gone undetected. He was seeking on behalf of the minority shareholders to
wrest control of the company from the majority and he persisted in that claim
even to the point of his cross appeal. He bolstered his claim by what the
judge found to be a "campaign of forgery" and, more importantly, the judge was
not satisfied with the explanation given for it. He found:-
"In his evidence Nigel sought to give the impression that his forgeries came
about as a result of an impulsive moment of madness flowing from his
disappointment that his case was not adequately supported by the documents. In
my judgment, so far from that being the case, it is apparent that the process
of forgery, which Nigel admitted to, was sophisticated and must have taken some
time to complete including the special manufacture of headed note paper of the
defunct Tobias family company. But for the slip up with relation to the
telephone number shown on the headings it would, in all probability, not have
been discovered."
Any notion that this was a petitioner coming to the Court of Equity with clean
hands is utterly dispelled by the devastating conclusion in paragraph 44:-
"I am not satisfied that I have received from Nigel a truthful picture of the
circumstances of the forgeries which he admits."
74. This was, therefore, a flagrant and continuing affront to the court.
Striking out is not a disproportionate remedy for such an abuse, even when the
petitioners lose so much of the fruits of their labour.
75. Even if the judge were correct in his analysis that all effect of the 1994
agreement could be excised from the petition and a prima facie case could be
made out of what remained, I am quite clear that, if the C.P.R. are to receive
a correct start, then this court must make the clear statement that deception
of this scale and magnitude will result in a party's forfeiting his right to
continue to be heard.
76. Even if Lorraine Blackledge is entitled to the generous treatment afforded
her by the judge, which for reasons given by Chadwick L.J. she is not,
nevertheless she allied herself with the dishonest cause of Nigel Tobias when
she had every opportunity to extract herself from it and to seek to be judged
independently of him. Having chosen to stand by him, she must fall with
him.
77. I have had the opportunity to read in draft the copy of the judgment of
Chadwick L.J. and I agree with it. I have added these words of my own simply
to underline that the principles to apply are those in the new procedural code.
They are encapsulated by the need to do justice, case by case. In this case it
is no more than justice in that broad sense that the petitioners should be
denied the relief which they sought to obtain by persistent cheating.
78. In the result, and despite the sympathy, especially for Lorraine, to which
I alluded at the beginning of this judgment, I, too, would allow the appeal.
Roch LJ:
79. I agree.
Order: appeal allowed, with costs on the standard basis; current injunction
as shown in the Draft Minute dated 22/06/2000 to continue, save for paragraph
4(a) which is to read "Arrow Nominees Inc."; all other issues to be deferred to
a date in July; liberty to apply; Mr. Tobias to be joined personally and to be
heard on whether and on what basis an order for costs should be made against
him; respondents to be permitted to revisit the wording of the injunction at
the hearing in July; permission to appeal refused.
(Order does not form part of the approved judgment.)
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