1. This is an application for summary judgment made by Mr Robert Valentine who is the liquidator of Bangla Television Limited ("the Company"), whereby Mr Valentine seeks summary judgment in respect of an application under section 214 of the Insolvency Act 1986, together with consequential relief, against the Second and Third Respondents, Mr Feroze Khan and Mr Syed Haque. Mr Haque was neither present nor represented at the hearing of the application before me and, as I shall explain more fully below, has taken no part in these proceedings for a considerable time. Mr Khan was represented by solicitors and by his learned counsel, Mr Moraes, on the hearing of the application.
2. Mr Valentine relies on the witness statements dated 4th September 2007, 24th January and 10th December 2008 of his solicitor Mr Guy Davis. There is also before the Court an affidavit from Mr Valentine, dated 27th September 2004, which was sworn in support of his originating application seeking relief under sections 238, 239 and 214 of the Insolvency Act 1986. Mr Khan served no evidence upon the summary judgment application, relying on an amended points of defence, supported by a statement of truth.
3. The Company was incorporated on 5th May 1998. From about 28th June 2003, its only directors were and remained Mr Khan and Mr Haque. At an extraordinary general meeting of the Company on 23rd December 2003, it was resolved that the Company would be wound-up voluntarily and Mr Valentine was appointed liquidator. The statement of the Company's affairs as at 23rd December 2003 showed that the Company had no assets, it had debts of 5,600 due to preferential creditors, 1,014,403 to other unsecured creditors and a deficiency of 2,220,003 in respect of shareholders. Before the Company took steps to be wound-up, its last known action was to execute a Business Sale Agreement dated 9th September 2003 ("the BSA") which provided that all of the Company's assets (save for some "excluded assets") were to be transferred to the First Respondent, Bangla TV Limited ("BTVL"), a company which is also now in liquidation. At the time that the BSA was made the value of the assets transferred was 250,000, which was also the value given to those assets in the BSA. Despite what was recorded in the BSA, the assets of the Company were transferred to BTVL for no consideration at all so that the BSA was a transaction at an undervalue within the meaning of section 238(4)(a) of the Insolvency Act 1986.
4. All of the above facts have been expressly admitted, in pleadings, on behalf of Mr Khan. In the case of Mr Haque all of these facts are proved by the various witness statements which Mr Valentine has filed. In the case of both Mr Khan and Mr Haque the facts are also established by a judgment of the 14th July 2006 handed down by Mr David Donaldson QC, sitting as a Deputy Judge of the Chancery Division, in circumstances which I shall describe later in this judgment.
5. On 28th September 2004 Mr Valentine issued an originating application against BTVL, Mr Khan and Mr Haque by which he sought a declaration that the BSA was a transfer at an undervalue. He also sought declarations and orders against Mr Khan and Mr Haque under section 214 of the Insolvency Act 1986 on the basis of their liability for wrongful trading. The case was tried over a number of days during March and June 2006 by Mr Donaldson QC who handed down his judgment on the 14th July that year.
6. In his judgment the Deputy Judge made a number of findings, and recorded other matters, which are relevant to the application before me:
(1) At the time of the BSA the Company was hopelessly insolvent. The effect of the BSA was to extract the business and assets from the Company to be carried on, shorn of its liabilities, in a new "phoenix" company, BTVL.
(2) The relief sought by Mr Valentine was resisted by all of the Respondents including BTVL at the time when the hearing began before the Deputy Judge. The position changed rapidly in the course of the hearing so that BTVL accepted that the sale constituted a transaction at an undervalue, as did Mr Khan, who also accepted that an order against him under section 214 of the Act was appropriate.
(3) BTVL and Mr Khan maintained that as against the value of the assets (which were agreed to have been 250,000 on the basis of an independent valuation in September 2003), they should be given credit in any order for a number of payments which the Deputy Judge mentioned. He specifically recorded that the hearing before him was in consequence focused upon that argument.
(4) Mr Haque's solicitors had come off the record a few months prior to the hearing. Mr Haque was neither represented nor present at the trial, save that at an adjourned hearing he did attend Court when he accepted that the transaction was at an undervalue, but did not suggest that credit should be given for any payments. He did not participate otherwise in the trial.
(5) The cases advanced by BTVL and Mr Khan to the effect that there should be credit in respect of alleged payments were rejected.
7. In his judgment, having decided that a transaction at an undervalue had been established, the Deputy Judge concluded in the following terms:
"30. As regards [BTVL], the choice appears in practice to lie between an order setting aside the transaction and one requiring [BTVL] to compensate the Company for the loss occasioned by the transaction. Before me, [Mr Valentine] reserved his position and, though the topic was broached, it was not the subject of systematic submissions. Since then I have been informed that [Mr Valentine] intends to seek an order setting aside the BSA transaction and that the Respondents oppose such relief. That is not a matter which I can determine in this judgment or in advance of hearing submissions, and probably receiving further evidence, on the point.31. The relief sought against Mr Khan and Mr Haque is an order that they make such contribution to the Company's assets as the Court thinks proper. It is unclear to me what, if anything, this would entail in practice if the transaction were to be set aside, as requested by the [Mr Valentine], and this point will also require further submissions and probably evidence.32. If the Court were to decide against setting aside the transaction, further questions would arise on which submissions and probably further evidence would be required. Without any attempt to be exhaustive, these would appear to include whether and how any improvement or degeneration of the business in the hands of [BTVL] over the past 3 years should be determined and reflected, and the financial consequences of any such change. 33. In short, this litigation is very far from terminated and may demand significant further expenditure in terms of time and cost. The parties and those financing them, would be wise to reflect collectively on the implications of this depressing conclusion."
8. In resisting the application for summary judgment, Mr Moraes submits, first, that the claim under section 214 is res judicata in these proceedings and secondly that there are real issues of fact that can only be determined at trial after full disclosure and after the testing of evidence.
THE RES JUDICATA ISSUEBackground9. The trial before the Deputy Judge took place over a 5-day period and judgment was handed down on 14th July 2006 without attendance on behalf any party. The Deputy Judge invited written submissions as to the terms of order that he should make.
10. In October 2006 there were communications by e-mail between the Deputy Judge and counsel for the various parties concerned in the litigation. On behalf of Mr Valentine it was submitted by e-mail of 9th October that in addition to a declaration under section 238(4)(a) of the Insolvency Act of 1986, a declaration should be made in the following terms:
"It is declared that the Second and Third Respondents engaged in wrongful trading under section 214 of the Insolvency Act 1986 by causing the assets of Bangla Television Limited to be transferred to Bangla TV Limited under the Business Sale Agreement dated 9th September 2003. The issue of what (if any) contribution the Second and Third Respondents should be declared liable to make to Bangla Television Limited's assets shall be adjourned with liberty to restore."
11. On 16th October 2006, by e-mail, Mr James Gibbons, counsel for Mr Khan, provided the Deputy Judge with a draft order which it appears enjoyed some support from counsel for BTVL. The draft order provided at paragraph (3) as follows:
"The issue of whether the Second and Third Respondents pursuant to section 214 of the Insolvency Act 1986, should be ordered to make any, and if so, how much contribution to the Company's assets, should be adjourned with liberty to restore."
12. On 24th October 2006 the Deputy Judge gave his decision in writing as to the form of order that was to be made as follows:
"(1) As I indicated in an earlier communication, the order should cover the point which actually formed the subject of the hearing before me, namely whether the Defendants were entitled to a "credit". Formally, as I summarised it in paragraph 21 of the judgment, the contest was whether the case fell under section 238(4)(a) or 238(4)(b) of the Insolvency Act. I therefore consider that the declaration should take the form proposed by Mr Clegg as item (1) of his draft order.(2) The question of wrongful trading received little discussion before me, and I do not think it necessary to address it in my judgment. I do not make the order proposed by Mr Clegg as item (2). (3) I do not approve the proposal by either Mr Clegg or Mr Gibbons as to the order re further directions. I shall only order that further directions as to the conduct of the case be sought from the Master (i.e. not from me or any other judge)."
13. An order was drawn up to reflect the Deputy Judge's directions; though bearing the date 8th February 2007, it was never actually sealed. In Court before me it was confirmed on behalf of Mr Valentine and Mr Khan that that order should be made and I was invited to give a direction accordingly, which I do. It contains a declaration that the BSA transferred the assets of the Company to BTVL at an undervalue within section 238(4)(a) of the Insolvency Act 1986 and provides that further directions as to the conduct of the case are to be sought from the Registrar. The order also provides for costs, the refusal of Mr Khan's application for permission to appeal, and an extension of time to 2nd March 2007 for the filing of an Appellant's Notice.
Submissions on behalf of Mr Khan14. Against this background it is pleaded on behalf of Mr Khan that the matter of section 214 relief is res judicata, and that for Mr Valentine to pursue the matter further constitutes an abuse of the process of the Court. Mr Moraes submitted that:
(1) The Deputy Judge expressly did not make a declaration as to wrongful trading, and did not make any order adjourning the issue arising under section 214.
(2) In the light of the Deputy Judge's decision not to make a declaration as to liability under section 214, Mr Valentine could do one of three things. First he could accept the decision of the Deputy Judge. Secondly he could apply to re-open the consideration of the relief under section 214, and thirdly he could appeal the decision not to make a declaration or adjourn the issue.
(3) Mr Valentine accepted the decision of the Deputy Judge. That decision, providing that all further matters were to be dealt with by the Registrar and not a Judge, did not envisage that the Originating Application would be re-opened to have a Judge try the section 214 claim.
(4) Since Mr Valentine had accepted the decision of the Deputy Judge, he could not now re-open issues under section 214.
(5) The directions order made by the Deputy Judge was concerned only with issues connected with section 238 and not the grant of any other relief.
(6) The Court could have ordered contribution against the Respondents under section 214, and refrained from quantifying it, making it clear that any issue of quantum was to be dealt with on a later occasion. This course was not adopted.
(7) In all the circumstances, all matters concerning section 214 were res judicata, and it would be an abuse of process for them to be re-opened.
(8) This issue arises upon an application for summary judgment, so that I must be satisfied that there is no real prospect of Mr Khan's successfully defending the claim made by Mr Valentine on the basis of the plea of res judicata or abuse of process, and I must also be satisfied there is no other compelling reason why the case should be disposed of at trial in relation to that issue. Further, if the case were to proceed to trial, the Court would be likely to have the benefit of additional material, such as skeleton arguments which had been before the Deputy Judge.
Submissions made on behalf of Mr Valentine15. Mr Clegg relies on all of the background circumstances which I have described above. His submission, which he put shortly but clearly, was that the Deputy Judge made plain that he was not deciding the issue under section 214 and that further directions would be required for such an issue to be determined. Thus there was no room for a plea of res judicata or abuse of process.
Decision16. I keep firmly in mind Mr Moraes' submission that this question arises upon an application for summary judgment. However, despite his able submissions, I conclude that it is clear that the Deputy Judge did not intend by his ruling, or the order giving effect to it (which Mr Valentine and Mr Khan have agreed should now be sealed), that Mr Valentine should be precluded from pursuing in this litigation (or indeed at all) the claim against Mr Khan under section 214 of the 1986 Act. The following matters I consider to be particularly significant:
(1) At trial, as is demonstrated by the passages in the judgment and the subsequent ruling which I have cited above, the focus was upon the issue of whether BTVL and Mr Khan should be given credit for a number of alleged payments. The Deputy Judge did not consider himself able on the material before him to decide whether (1) to make an order setting aside the BSA transaction, or (2) to make an order requiring BTVL to compensate the Company for loss occasioned by the transaction. He considered that further submissions and evidence were likely to be required.
(2) The Deputy Judge did not rule that there should be no order under section 214, but only that the order which he made should cover the limited point which he had tried. When giving his decision on the form of order on 24th October 2006, the Deputy Judge recorded that the question of wrongful trading had received little discussion before him, and he did not think it necessary to address it in his judgment. When saying that he was not making the proposed order in relation to section 214, I do not consider he was suggesting that there should never be such an order made, only that since he had not tried that aspect of the case, it was inappropriate for him to make the order sought.
(3) On Mr Khan's part it had been accepted that an order under section 214 was appropriate, as was recorded in paragraph 4 of the judgment handed down on 14th July 2006. Against that background it would be very remarkable if the Deputy Judge intended to exclude any possibility of such an order's ever being made, and had he so intended I would have expected him to make it clear in express terms. It is noteworthy that Mr Khan's then counsel clearly did not entertain the view that what was disposed of at trial was exhaustive of all forms of relief, including an order under section 214. As the history demonstrates, he contemplated that the Court might make an order under the section. This, too, suggests that those who participated in the trial realised that what was being conducted was not an exhaustive enquiry into forms of relief that might be available; the trial dealt with only part of the case.
(4) Contrary to Mr Moraes' submission, the Deputy Judge did not decide that all further matters were to be dealt with by a Registrar and not a Judge. What he decided was that further directions as to the conduct of the case be sought from the Registrar. Such an order enabled the Registrar to give directions for trial as to outstanding issues, including that any trial was to take place before a Judge.
17. In relation to the plea of res judicata it is appropriate to remember that in the recent case of Johnson v. Gore-Wood [2002] 2 AC page 1, Lord Bingham of Cornhill said at page 22:
"Litigants are not without scrupulous examination of all the circumstances to be denied the right to bring a genuine subject of litigation before the court ".
That observation was made in a case where an abuse of process was alleged in that the plaintiff in those proceedings had not brought an action against solicitors at the same time as the company, which he controlled, had done so. When he later issued proceedings against the solicitors, it was suggested that in those circumstances, those proceedings amounted to an abuse of the process of the court. Lords Goff of Chieveley, Cooke of Thorndon and Hutton expressly agreed with Lord Bingham's speech on the abuse of process point, and Lord Millett delivered a concurring speech. Lord Bingham, at page 23, referred to the well known passage in the judgment of Sir James Wigram V-C in Henderson v. Henderson 3 Hare 100, at 114-115:
"In trying this question, I believe I state the rule of the court correctly, when I say, that where a given matter becomes the subject of litigation in, and of adjudication by, a court of competent jurisdiction, the court requires the parties to that litigation to bring forward their whole case, and will not (except under special circumstances) permit the same parties to open the same subject of litigation in respect of matter which might have been brought forward as part of the subject in contest, but which was not brought forward, only because they have, from negligence, inadvertence, or even accident, omitted part of their case. The plea of res judicata applies, except in special cases, not only to points upon which the court was actually required by the parties to form an opinion and pronounce a judgment, but to every point which properly belonged to the subject of litigation, and which the parties, exercising reasonable diligence, might have brought forward at the time."
A little later in his speech Lord Bingham said at page 30:
"It may very well be, as has been convincingly argued (Watt, "The Danger and Deceit of the Rule in Henderson v Henderson : A new approach to successive civil actions arising from the same factual matter" (2000) 19 CLJ 287 ), that what is now taken to be the rule in Henderson v Henderson has diverged from the ruling which Wigram V-C made, which was addressed to res judicata. But Henderson v Henderson abuse of process, as now understood, although separate and distinct from cause of action estoppel and issue estoppel, has much in common with them. The underlying public interest is the same: that there should be finality in litigation and that a party should not be twice vexed in the same matter. This public interest is reinforced by the current emphasis on efficiency and economy in the conduct of litigation, in the interests of the parties and the public as a whole. The bringing of a claim or the raising of a defence in later proceedings may, without more, amount to abuse if the court is satisfied (the onus being on the party alleging abuse) that the claim or defence should have been raised in the earlier proceedings if it was to be raised at all. I would not accept that it is necessary, before abuse may be found, to identify any additional element such as a collateral attack on a previous decision or some dishonesty, but where those elements are present the later proceedings will be much more obviously abusive, and there will rarely be a finding of abuse unless the later proceeding involves what the court regards as unjust harassment of a party. It is, however, wrong to hold that because a matter could have been raised in earlier proceedings it should have been, so as to render the raising of it in later proceedings necessarily abusive. That is to adopt too dogmatic an approach to what should in my opinion be a broad, merits-based judgment which takes account of the public and private interests involved and also takes account of all the facts of the case, focusing attention on the crucial question whether, in all the circumstances, a party is misusing or abusing the process of the court by seeking to raise before it the issue which could have been raised before. As one cannot comprehensively list all possible forms of abuse, so one cannot formulate any hard and fast rule to determine whether, on given facts, abuse is to be found or not. Thus while I would accept that lack of funds would not ordinarily excuse a failure to raise in earlier proceedings an issue which could and should have been raised then, I would not regard it as necessarily irrelevant, particularly if it appears that the lack of funds has been caused by the party against whom it is sought to claim. While the result may often be the same, it is in my view preferable to ask whether in all the circumstances a party's conduct is an abuse than to ask whether the conduct is an abuse and then, if it is, to ask whether the abuse is excused or justified by special circumstances. Properly applied, and whatever the legitimacy of its descent, the rule has in my view a valuable part to play in protecting the interests of justice."
18. Lord Millett also referred, at page 58, to the passage in Henderson v. Henderson which I have cited above. At page 59, speaking of abuse of process, issue and cause of action estoppel, he continued:
"... these various defences are all designed to serve the same purpose: to bring finality to litigation and avoid the oppression of subjecting a defendant unnecessarily to successive actions. While the exact relationship between the principle expounded by Sir James Wigram V-C and the defences of res judicata and cause of action and issue estoppel may be obscure, I am inclined to regard it as primarily an ancillary and salutary principle necessary to protect the integrity of those defences and prevent them from being deliberately or inadvertently circumvented.
In one respect, however, the principle goes further than the strict doctrine of res judicata or the formulation adopted by Sir James Wigram V-C, for I agree that it is capable of applying even where the first action concluded in a settlement. Here it is necessary to protect the integrity of the settlement and to prevent the defendant from being misled into believing that he was achieving a complete settlement of the matter in dispute when an unsuspected part remained outstanding.
However this may be, the difference to which I have drawn attention is of critical importance. It is one thing to refuse to allow a party to relitigate a question which has already been decided; it is quite another to deny him the opportunity of litigating for the first time a question which has not previously been adjudicated upon. This latter (though not the former) is prima facie a denial of the citizen's right of access to the court conferred by the common law and guaranteed by article 6 of the Convention for the Protection of Human Rights and Fundamental Freedoms (1953) . While, therefore, the doctrine of res judicata in all its branches may properly be regarded as a rule of substantive law, applicable in all save exceptional circumstances, the doctrine now under consideration can be no more than a procedural rule based on the need to protect the process of the court from abuse and the defendant from oppression. In Brisbane City Council v Attorney General for Queensland [1979] AC 411 , 425 Lord Wilberforce, giving the advice of the Judicial Committee of the Privy Council, explained that the true basis of the rule in Henderson v Henderson 3 Hare 100 is abuse of process and observed that it "ought only to be applied when the facts are such as to amount to an abuse: otherwise there is a danger of a party being shut out from bringing forward a genuine subject of litigation". There is, therefore, only one question to be considered in the present case: whether it was oppressive or otherwise an abuse of the process of the court for Mr Johnson to bring his own proceedings against the firm when he could have brought them as part of or at the same time as the company's action. This question must be determined as at the time when Mr Johnson brought the present proceedings and in the light of everything that had then happened. There is, of course, no doubt that Mr Johnson could have brought his action as part of or at the same time as the company's action. But it does not at all follow that he should have done so or that his failure to do so renders the present action oppressive to the firm or an abuse of the process of the court. As May LJ observed in Manson v Vooght [1999] BPIR 376 , 387, it may in a particular case be sensible to advance claims separately. In so far as the so-called rule in Henderson v Henderson suggests that there is a presumption against the bringing of successive actions, I consider that it is a distortion of the true position. The burden should always rest upon the defendant to establish that it is oppressive or an abuse of process for him to be subjected to the second action."
19. These passages demonstrate very clearly that there is a public interest in the finality of litigation, and the protection of a party from being vexed twice in the same matter. However it seems to me that this principle is not engaged in the present case at all because there is no question of any of the Respondents being vexed twice in the same matter. As the history of the case described above demonstrates, all that has happened is that the Court has previously decided only part of what has to be adjudicated upon in the case (namely the issue as to whether any of the Respondents was entitled to a credit in respect of alleged payments). The Court left over for later determination any other relief, including section 214 relief, which might be appropriate. In those circumstances, no question of abuse of process, issue estoppel or cause of action estoppel arises.
20. I consider that the case of res judicata and abuse of process advanced on behalf of Mr Khan is without any foundation. Mr Khan has no real prospect of successfully defending the claim on such bases, and there is no other compelling reason why the case in relation to those matters should be disposed of at trial. In my view all of the material that is necessary to decide those questions is before the Court. I see no basis for supposing that other material may emerge which may demonstrate that the case as to res judicata or abuse of process might have some foundation.
THE APPLICATION UNDER SECTION 214 OF THE INSOLVENCY ACT 1986
Background21. Section 214 provides as follows:
"(1) Subject to subsection (3) below, if in the course of the winding up of a company it appears that subsection (2) of this section applies in relation to a person who is or has been a director of the company, the court, on the application of the liquidator, may declare that that person is to be liable to make such contribution (if any) to the company's assets as the court thinks proper.
(2) This subsection applies in relation to a person if
(a) the company has gone into insolvent liquidation,
(b) at some time before the commencement of the winding up of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation, and
(c) that person was a director of the company at that time;
but the court shall not make a declaration under this section in any case where the time mentioned in paragraph (b) above was before 28th April 1986.
(3) The court shall not make a declaration under this section with respect to any person if it is satisfied that after the condition specified in subsection (2)(b) was first satisfied in relation to him that person took every step with a view to minimising the potential loss to the company's creditors as (assuming him to have known that there was no reasonable prospect that the company would avoid going into insolvent liquidation) he ought to have taken.
(4) For the purposes of subsections (2) and (3), the facts which a director of a company ought to know or ascertain, the conclusions which he ought to reach and the steps which he ought to take are those which would be known or ascertained, or reached or taken, by a reasonably diligent person having both
(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and
(b) the general knowledge, skill and experience that that director has.
(5) The reference in subsection (4) to the functions carried out in relation to a company by a director of the company includes any functions which he does not carry out but which have been entrusted to him.
(6) For the purposes of this section a company goes into insolvent liquidation if it goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up. ..."
22. On 6th November 2007 Mr Valentine applied to the Court for leave to proceed with his case for orders against Mr Khan and Mr Haque under section 214 of the 1986 Act. His application was supported by a witness statement from Mr Guy Davis, the solicitor acting for him. That witness statement described the history which I have set out above, and explained that a winding-up order had been made on 7th February 2007 in respect of BTVL. In his witness statement Mr Davis said that the possibility of Mr Valentine's effecting recovery by setting aside the BSA had receded, and that the prospects of effecting recovery in the liquidation of BTVL were not particularly good, not least because there subsisted a debenture over the assets of BTVL in favour of the Bank of Baroda. Mr Davis asserted that there were two matters which might be relevant to the exercise of any discretion under section 214. He said that those matters supported the view that Mr Khan had a high level of culpability for the loss to the Company of its assets under the BSA. The first matter he relied upon was a suggestion that Mr Khan, by March 2007, had become a director of yet another company called Bangla TV (Worldwide) Limited ("Worldwide") which company was trading from the same address as the Company and BTVL had traded from. Secondly Mr Davis said that there was much material to suggest that Mr Khan was very much involved in the affairs of BTVL throughout and had been "de facto managing director" of it.
23. On 28th January 2008 Mr Registrar Simmonds gave Mr Valentine leave to continue proceedings against BTVL and also gave directions in respect of the application for relief under section 214 of the 1986 Act, but without prejudice to Mr Khan's right to argue that the pursuit of relief under section 214 was res judicata or otherwise an abuse of the process of the Court. The learned Registrar directed that Mr Valentine should serve points of claim by 19th February 2008, Mr Khan and Mr Haque should serve points of defence by 18th March 2008 and points of reply should be served by Mr Valentine by 8th April 2008.
24. In accordance with the order of 28th January 2008, points of claim were served on 18th February 2008. The points of claim complied with the order made in that they set out fully the case upon which Mr Valentine sought relief under the section.
25. On 28th March 2008 Mr Khan served points of defence. The points of defence developed Mr Khan's arguments in respect of the pleas of res judicata and abuse of the process of the Court, but expressly declined to deal with the factual allegations set out in the points of claim (save for making admissions in respect of matters already established by the judgment of the Deputy Judge) pending determination of res judicata and abuse of process defences. There was a general denial of entitlement to relief.
26. Mr Haque served no points of defence.
27. On 14th November 2008 Mrs Registrar Derrett ordered that unless Mr Khan pleaded fully to the factual allegations in the points of claim which had not been admitted, then Mr Khan be debarred from defending those allegations. He required the further pleading to be served by 28th November 2008.
28. On 11th December 2008, no further pleading having been provided on the part of Mr Khan, Mr Valentine applied for summary judgment in respect of his application under section 214. This was supported by a further witness statement from Mr Davis, describing the progress of the case since his previous witness statement.
29. On 19th January 2009 Mr Justice Blackburne (with the consent of Mr Valentine and Mr Khan) adjourned the application for summary judgment, and extended time for Mr Khan to plead his case properly until 6th February 2009.
30. On 6th February 2009 Mr Khan served an amended points of defence which was very substantially in the form of the points of defence previously served, but the amended pleading did purport to address the factual allegations in the points of claim which had not previously been dealt with by Mr Khan.
31. The summary judgment application was listed to be heard by me on 25th June. On the previous day the solicitors acting for Mr Khan issued an application returnable on the 25th June seeking an adjournment of the application for summary judgment pending determination of an application on the part of Mr Khan for the striking out of these proceedings under CPR 3.4, or alternatively under the inherent jurisdiction of the Court, on the basis that there had been an abuse of process. Mr Khan's application was founded upon a suggestion that Mr Valentine had previously misled the Court in respect of arrangements made with regard to costs liabilities; this, it was said, amounted to a serious abuse of process which should be dealt with by the striking out of the proceedings. In view of the extreme lateness of the application, it was quite clearly impossible for Mr Valentine to be given any opportunity properly to address the points raised. It must be said, in fairness to Mr Valentine, that he disputes any suggestion that he has misled the Court. Mr Moraes submitted that I should not deal with the summary judgment application on 25th June, but adjourn it, so that if Mr Khan's application for the striking out of the proceedings were to succeed, it would never become necessary for the summary judgment application to be dealt with. Given that the application for summary judgment had been listed for some considerable time, and that no adequate prior warning of Mr Khan's application had been given, I was not prepared to adjourn the application for summary judgment, and I gave my reasons for taking that course in a separate judgment. I considered, however, that it was appropriate to preserve for Mr Khan the opportunity to develop his application in respect of striking out, and I indicated that the course which I proposed to take was to deal with the application for summary judgment, and in the event that I acceded to that application, I would direct that there be a stay in respect of the coming into force of any order which I made, pending disposal of Mr Khan's application to strike out.
The submissions made on behalf of Mr Valentine32. Mr Clegg relied upon the undisputed and hopeless insolvency of the Company at the time of the BSA, and the fact that its last known action was to execute the BSA whereby the Company's assets were transferred for no consideration at all to BTVL. This occurred at a time when Mr Khan and Mr Haque were directors of the Company.
33. Mr Clegg then undertook a careful analysis of what had been pleaded against Mr Khan and Mr Haque and how, eventually, Mr Khan had responded to the factual allegations made. He stressed that Mrs Registrar Derrett's order had required Mr Khan to plead fully and properly to the factual allegations in paragraphs 9 to 26 of the points of claim. He also drew attention to the provisions of CPR 16.5, the effect of which is that if a defendant denies an allegation made in a claim, then he must state his reasons for doing so, and if he intends to put forward a different version of events from that given by the claimant, he must state his own version. Further, a defendant who fails to deal with an allegation is taken to admit it.
34. With this background in mind, Mr Clegg first drew attention to what was pleaded in paragraph 10 of the points of claim, namely, that at the time when the BSA was made, Mr Khan and Mr Haque knew or ought to have concluded that there was no reasonable prospect that the Company would avoid going into insolvent liquidation. This was denied in the points of the defence in paragraph 11 which went on to assert that the decision to put the Company into voluntary liquidation at an EGM on 23rd December 2003 was taken after due and proper consideration of the Company's financial state at that time. That assertion, Mr Clegg argued, did not address the question of whether as of the 9th September 2003, the date of the BSA, Mr Khan and Mr Haque knew or ought to have concluded that there was no reasonable prospect that the Company would avoid going into insolvent liquidation.
35. Next Mr Clegg drew attention to paragraph 14 of the points of claim which asserted that the effect of the BSA was to extract the business and assets from the Company to be carried on, shorn of its liabilities, in BTVL. Whilst that allegation is denied in the points of defence, it was established, said Mr Clegg, by the judgment of the Deputy Judge.
36. Next Mr Clegg pointed out that there was a bare denial without further elaboration, of paragraph 15 of the points of claim which alleged that the BSA maximised the potential loss to the Company's creditors consequent upon the Company's liquidation.
37. Mr Clegg then dealt with paragraph 19 of the points of claim which gave particulars of a number of facts which it was said demonstrated that Mr Khan and Mr Haque were shadow directors of BTVL. This, he argued, showed that Mr Khan and Mr Haque were involved on both sides of the BSA transaction, that is to say for the transferor as well as for the transferee. Mr Clegg maintained that it was not necessary for this to be established in order for the case under section 214 to be made out, but he would rely upon those matters if it was necessary to do so as being relevant to the exercise of any discretion.
38. The position with regard to the allegations said to support a finding of shadow directorship in BTVL as against Mr Khan can be summarised as follows:
(1) BTVL's bank account was held with the Bank of Baroda. When the account was established Mr Khan was represented as being BTVL's Chief Operating Officer. This is not challenged in the points of defence; it is said merely that when Mr Mustafa Pasha, a director of BTVL, could not travel to London, arrangements were made for Mr Khan to sign cheques. Thus Mr Khan's description as Chief Operating Officer appears to be undisputed.
(2) Mr Khan signed many cheques on behalf of BTVL. In his points of defence he said that he was unable to deal with that allegation until disclosure of the cheques referred to, but he has still not dealt with the allegation although he has had copies of the cheques concerned.
(3) Mr Khan represented himself to third parties as "CEO" for BTVL; this was not addressed in the points of defence.
(4) A great deal of BTVL's documentation including that relating to advertising contracts and invoices was dealt with in Mr Khan's name. Mr Khan admitted his authority to sign all such documentation.
(5) Mr Haque's name appeared on many of BTVL's invoices; this was not disputed by Mr Khan.
(6) VAT returns were signed by Mr Khan in the absence of Mr Pasha.
(7&8) Solicitors' bills for Mr Khan were sent to BTVL's address; Mr Khan says that he was working and staying in London and asked that that should happen.
(9) Accountants' bills for Mr Khan were sent to BTVL's address. Mr Khan answers this by saying that no personal bills were sent to him at BTVL's address. Mr Clegg accepted that in this respect there was a properly pleaded answer.
(10) Photographs at BTVL's address taken on 31st January 2007 showed Mr Khan in what appeared to be the director's office, and further similar photographs were taken on 30th November 2006. In answer to this Mr Khan merely says that the property concerned was temporarily rented and had all the facilities to run as a TV station.
(11) A number of invoices concerning other companies were sent to the offices of BTVL for the attention of Mr Khan. Mr Khan does not appear to dispute this but says that any bills were paid in accordance with the liabilities of whatever companies were concerned.
39. Mr Clegg pointed out that no case had been advanced on the part of Mr Khan or Mr Haque, under section 214(3) of the Act, to the effect that after the condition specified in subsection (2)(b) was first satisfied in relation to them respectively, they took any step with a view to minimising the potential loss to the Company's creditors (assuming them to have known that there was no reasonable prospect that the Company would avoid going into insolvent liquidation) they ought to have taken.
40. In all of these circumstances Mr Clegg submitted that the case was made out under section 214 for the Court to make a declaration as to the liability of Mr Khan and Mr Haque to contribute to the Company's assets. As to how much that contribution should be, he relied upon the decision of Mr Justice Knox in Re Produce Marketing Consortium Limited (No. 2) [1989] BCLC 520 at page 553E-G, where his Lordship said:
"In my judgment the jurisdiction under section 214 is primarily compensatory rather than penal. Prima facie the appropriate amount that a director is declared to be liable to contribute is the amount by which the company's assets can be discerned to have been depleted by the director's conduct which caused the discretion under subsection (1) to arise. But Parliament has indeed chosen very wide words of discretion and it would be undesirable to seek to spell out limits on that discretion, more especially since this is, so far as counsel were aware, the first case to come to judgment under this section. The fact that there was no fraudulent intent is not of itself a reason for fixing the amount at a nominal or low figure, for that would amount to frustrating what I discern as Parliament's intention in adding section 214 to section 213 in the 1986 Act, but I am not persuaded that it is right to ignore that fact totally".
41. Mr Clegg relied also on the decision of the Court of Appeal in Morphitis v. Bernasconi & others [2003] Ch 552. This was a case brought under section 213 of the Insolvency Act, where there was an allegation that former directors of the company concerned were knowingly parties to the carrying on of the company's business with intent to defraud creditors. In that case the trial judge had found that the directors had been guilty of fraudulent trading and ordered that they contribute an amount of 35,000 to the assets of the company, which sum included an element ( 17,500) which the judge had described as punitive. The Court of Appeal held that fraudulent trading within section 213 had not been established and therefore that the directors were not liable to make any contribution to the company's assets. However, with regard to how a contribution under the section should be assessed, Lord Justice Chadwick (with whose judgment Lord Justice Aldous and Mr Justice Munby agreed) said at paragraph 55:
" I am not persuaded that there is power to include a punitive element in the amount of any contribution which, in the exercise of the power conferred by section 213(2) of the 1986 Act a person should be declared liable to make to the assets of the company. As I have said, I think that the principle on which that power should be exercised is that the contribution to the assets which the company's creditors will share in the liquidation shall reflect (and compensate for) the loss which has been caused to those creditors by the carrying on of the business in the manner which gives rise to the exercise of the power. Punishment of those who have been party to the carrying on of the business in a manner of which the court disapproves beyond which is inherent in requiring them to make a contribution to the assets of a company with limited liability which they could not otherwise be required to make seems to me foreign to that principle."
42. Mr Clegg submits, in the light of these authorities, that a compensatory payment in the present case would be the agreed value of the assets which were removed from the Company by virtue of the BSA transaction. He submits that in this case it is easy to identify the loss which flowed to the Company from the BSA transaction. This is because it is the last known transaction to have taken place before liquidation and the assets of the Company which were lost as a result of the transaction has an agreed value of 250,000. He relies on Mr Valentine's witness statement of 10th December 2008 confirming that there have been no realisations in the liquidation, and that on current information there will not be any. Therefore, Mr Clegg submits, if the transaction in question had not taken place, the Company's assets would have been increased by 250,000. It is that sum which Mr Clegg submits Mr Khan and Mr Haque should be ordered to pay, together with interest. Mr Clegg submitted that the figure for interest as at the 23rd June 2009 was 87,637.
Submissions made on behalf of Mr Khan43. As with his submissions in respect to the plea of res judicata and abuse of process, Mr Moraes reminded me that this being a summary judgment application, it was necessary for it to be demonstrated against Mr Khan that there was no real prospect that he had a defence to the claim and that there were no other compelling reasons why the claim should be disposed of at trial.
44. He submitted that whilst Mr Khan had not filed any evidence in opposition to the application, his amended points of defence, supported by a statement of truth, demonstrated that Mr Khan's case had a real prospect of success and that there were compelling reasons for the case to be tried. He said that there were real issues of fact that could only be determined at trial after full disclosure and the testing of evidence.
45. Dealing specifically with the merits of the application, Mr Moraes submitted that the claim under section 214 called for the Court to make findings of fact (without use of hindsight), and that to establish liability it was necessary to show that Mr Khan had knowledge on the 9th September 2003, the date when the BSA was made, that the Company was hopelessly insolvent.
46. He submitted also that it was necessary for Mr Valentine to prove that Mr Khan was a shadow director of BTVL on the 9th September 2003, that Mr Pasha was merely a nominee of Mr Khan, and that the loss to the Company by reason of wrongful trading was 250,000. All of those matters, he submitted, were in dispute and needed to be established at trial. He submitted that they were not capable of summary determination. Mr Moraes addressed the suggestion that Mr Khan had failed to plead properly to paragraph 10 of the points of claim. (This alleged that Mr Khan and Mr Haque knew or ought to have concluded that there was no reasonable prospect that the Company would avoid going into insolvent liquidation, as of the 9th September 2003.) Mr Moraes submitted that this point could not properly be taken against Mr Khan, because paragraph 8.2(5) of PD16 provides that a claimant must specifically set out in his pleading notice or knowledge of a fact where he wishes to rely on such notice or knowledge in support of his claim. This, Mr Moraes submitted, had not been adequately undertaken in the points of claim.
47. As to the allegations of shadow directorship, Mr Moraes submitted that it was not relevant to establish that at some time Mr Khan was a shadow director of BTVL; any such allegation might be relevant but only if it were established that he was a shadow director at the time of the BSA. Mr Moraes illustrated this point (and I give this by way of example only) in relation to many of the cheques drawn on the BTVL account which bore the signature of Mr Khan. Some of these cheques were signed in 2005, so that they would not demonstrate a shadow directorship in 2003.
48. As to any compensation, Mr Moraes relied on the decision of Mr Justice Park, on a preliminary question, in the matter of Continental Assurance Company of London plc (24th October 2002) at page 4, where the learned judge said:
"In my judgment, under a section 214 claim the starting point for measuring the directors' contributions to the assets of the company is, or at the very least is likely to be, the loss to the company caused by the wrongful trading. Mr Atherton said that there are a range of possible starting points, of which the loss to the company is only one. Alternatively, it might be fairer to say that he had said that of the range of possible starting points the increase in net deficiency (the IND) is only one. Perhaps there is a range of possible starting points, but if the loss to the company from the continued wrongful trading can be ascertained, I believe that either that is the only possible starting point or, at least, it is the normal starting point. In this case I see no reason to take a different starting point. I believe that what I have said in this respect is in accordance with the authorities ".
49. Relying on this passage Mr Moraes submitted that it must be shown that there is a nexus between the 250,000 by way of compensation which Mr Valentine seeks and the IND. He maintained that this could not possibly be demonstrated because, to take the item of goodwill alone, it was most unlikely that this item would have had the value ascribed to it in the BSA if the Company had been put into liquidation. In the BSA, at paragraph 3.1, a value of 169,850 had been attributed to goodwill. Mr Moraes submitted that if the Company had gone into liquidation then the value of the goodwill would have been extinguished or at the very least much reduced.
50. In all the circumstances Mr Moraes argued, this was not a case where summary judgment should be granted.
Decision51. In my judgment it is established that by the 9th September 2003, and before the making of the BSA, Mr Khan and Mr Haque, both directors of the Company, knew or ought to have concluded that there was no reasonable prospect that the Company would avoid going into insolvent liquidation. The Company was, and was found by the Deputy Judge to be, hopelessly insolvent at the time concerned. Before causing the Company to enter into the BSA which deprived the Company of its assets for no consideration, Mr Khan and Mr Haque should have made it their business to ascertain the financial position of the Company. Other than a general denial as to the fact that Mr Khan knew, or should have concluded, that there was no reasonable prospect of the Company's avoiding insolvent liquidation, Mr Khan advances no case on this issue.
52. I do not consider that Mr Moraes' submission as to a failure in the points of claim to address facts relied upon to support knowledge is well founded. The points of claim specifically refer to the hopeless insolvency of the Company. What is more, there is a specific plea as to knowledge of the fact, or that it ought to have been concluded. That in my judgment satisfies the requirement of the Practice Direction.
53. Further, I consider the following matters to be relevant and material:
(i) Both Mr Khan and Mr Haque were well aware of the Company's financial predicament well before the BSA was made. This is demonstrated by answers to questionnaires completed by them at Mr Valentine's request. He exhibited these at "RV5" to his first affidavit dated 27th September 2004. In answer to question 10, which was "Detail when and how you first became aware the Company was insolvent", Mr Khan replied "We tried to come to break-even to run the TV channel and company profitably but this became impossible by the beginning of 2003 we started looking for new fund.". Question 11 asked when he first became aware of the Company's inability to pay its debts to which he answered "... the revenue was not sufficient and from the beginning of 2003 we started building up debts." There is nothing to suggest that as at the time of the BSA there was a reasonable prospect that the Company would avoid going into insolvent liquidation.
(ii) As I have noted above, at the trial before the Deputy Judge, Mr Khan conceded that an order against him under section 214 was appropriate. This carried with it the implication that he conceded that he had the requisite knowledge, or at least should have drawn the necessary conclusions, at the relevant time.
54. I find also the loss of 250,000 to be "the amount by which the company's assets can be discerned to have been depleted by the director's conduct which caused the discretion under subsection (1) to arise", in the words of Mr Justice Knox in the Produce Marketing case. It is also the "the loss which has been caused to [the] creditors by the carrying on of the business in the manner which gives rise to the exercise of the power" in Lord Justice Chadwick's words in Morphitis. It represents also the increase in the net deficiency as described in the Continental Assurance case.
55. Instead of causing the Company to cease trading on or before 9th September 2003, Mr Khan and Mr Haque instead caused the Company to deal or purportedly trade with its assets so that the Company parted with 250,000 worth of them (subject to Mr Moraes' valuation point to which I return below), for no consideration. There was therefore a straightforward reduction by this amount in the assets of the Company, and a corresponding increase in the net deficiency. I can see nothing in the circumstances which justifies departing from this starting point in the analysis.
56. As for Mr Moraes' valuation point, the short answer is that paragraph 6 of the points of claim expressly pleaded that the value of the assets as of 9th September 2003 was 250,000 and that this was the value ascribed to them in the BSA; this is expressly admitted in paragraph 2 of the amended points of defence. If that were not sufficient, the Deputy Judge recorded that the figure was agreed in this sum based on an independent valuation; this in turn was reflected in report prepared for creditors' meeting, and the Statement of Affairs as at 23rd December 2003, both exhibited to Mr Valentine's first affidavit at "RV2".
57. In the circumstances I find that the ingredients of section 214 are made out against both Mr Khan and Mr Haque, and I consider that the proper sum for them to contribute to the Company's assets is 250,000, together with interest, for which they should be jointly and severally liable.
58. As to Mr Khan's alleged shadow directorship of BTVL, Mr Clegg suggested that the material demonstrated that Mr Khan was involved on both sides of the BSA transaction; though he did not make the submission in terms, the implication was that this factor might demonstrate that this put the transaction within the self dealing rule as against Mr Khan. For that rule to be engaged, it is of course not necessary for a directorship or shadow directorship to be established. What matters is that a director, like any other fiduciary, must not put himself in a position where his duty to his beneficiary, in this case his company, conflicts with fiduciary duties that he owes to others; see the decision of Mr Justice Vinelott in Re Thompson's Settlement [1986] Ch 99 at 115. Mr Khan was BTVL's Chief Operating Officer, and therefore is likely to have owed it fiduciary duties irrespective of whether he was a director or shadow director. Whilst there may be a liability in equity, or under some other provision of the Act (for example section 212) which arises from any self dealing (in the sense explained), it does not seem to me that it advances the case under section 214. In particular, at least on the facts of this case, those matters do not go to knowledge, or what the directors ought to have known, of imminent insolvent liquidation, or to resultant loss from carrying on the business. In my judgment liability under the section must be established independently of issues as to shadow directorship, or self dealing. I do not, in finding that liability to compensate under section 214 has been made out, rely on the alleged shadow directorship.
59. Given that I do not find that proving the case as to shadow directorship would add to the case under the section, or that failure to prove it would detract from it, to the extent that Mr Moraes submitted that Mr Valentine had to show that Mr Khan was a shadow director and that Mr Pasha was his nominee, it follows that I reject his submission. The case under section 214 has been made out independently of those matters. In fairness to Mr Moraes, I think it may well be that what he was arguing was that if I were to find that Mr Khan's alleged shadow directorship and Mr Pasha's alleged nominee status were relevant, then it would be for Mr Valentine to prove them.
DISPOSAL60. I am satisfied that both Mr Khan and Mr Haque are liable to contribute to the assets of the Company under section 214 and that the sum in which they should be jointly and severally liable is 250,000 together with interest.
61. I intend to hand down judgment in open court on 15th June 2009 at 10 am. Legal representatives need not attend. I will on that occasion adjourn to a date to be fixed all questions of the form of the order, including any consequential relief including the amount of interest, and any issues concerning permission to appeal. (As explained above, the order to be made will need to provide for a stay pending determination of Mr Khan's application to strike out.) Time for lodging any Appellant's Notice will run from the adjourned hearing date. If the parties are not able to agree the form of order, I am prepared to deal with the matter in writing, in which case time will run from when I hand down my decision on consequential matters. If the parties consider it necessary to have a further oral hearing, they should make the usual listing arrangements. By the beginning of next Term the parties' respective solicitors should lodge with the Court an agreed form of order, or written submissions as to the form of order dealing with all consequential orders sought, or have arranged to have the matter relisted before me, as the case may be.
62. I am grateful to both counsel for their assistance.
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