Murray v Leisureplay Plc

A contractual payment described as liquidated damages is unenforceable as a penalty where it is not a genuine pre-estimate of loss. The assessment is made by construing the provision at the date of contracting and asking whether its predominant function is compensation or deterrence. A clause that makes no significant allowance for income the employee could earn after termination may be penal. Contractual expressions such as “financial institution” must be construed in the context of the agreement and related commercial documents. A non-binding arrangement may still fall within the scope of statutory controls on substantial property transactions involving directors.

The claimant, a chief executive director, claimed £758,691 under a service agreement providing for one or three years’ salary and benefits on wrongful termination. He argued that acquisitions by the defendant company of Insurance Village plc and Blue Planet Investment Management Ltd triggered the three-year entitlement. The defendant disputed the construction of the agreement, contended that the payment clause was a penalty, and counterclaimed under sections 320 and 322 of the Companies Act 1985.

The claimant also sought holiday pay and permission to amend his claim to include common law damages. The issues concerned the meaning of “financial institution”, the enforceability of the payment clause, the statutory consequences of the proposed acquisition of Blue Planet Investment Management Ltd, holiday pay, relief under section 727, and the late amendment application.

1. Construction. The service agreement, prospectus and related flotation documents were to be construed together. “Financial institution” did not have the extended meaning asserted by the claimant. Insurance Village, which had not begun trading and had no meaningful business, was not an institution within the clause. Blue Planet Investment Management Ltd, with captive clients, no dealings with the public and a business outside the acquisition strategy described in the documents, was also not a financial institution. The claimant therefore remained entitled to one year’s notice.
2. Penalty. Applying the principles collected in Cine Bes Filmcilik Ve YapimClick v United International Pictures [2003] EWCA Civ 1669, clause 17.1 was a penalty. The clause required payment of the whole of one or three years’ salary and benefits without allowing for the substantial income or profits the claimant could obtain after being freed from his commitment to the company. It was therefore unenforceable.
3. Companies Act 1985. The proposed acquisition of Blue Planet Investment Management Ltd involved non-cash assets of the requisite value acquired from a director. The non-binding Heads of Agreement constituted an arrangement within section 320 and required prior shareholder approval. If the agreement had triggered an increased payment under clause 17.1, the claimant would have been liable to account for that gain under section 322(3), and circuity of actions would have defeated the claim for the increase. The professional fees incurred did not constitute recoverable loss or damage resulting from the statutory arrangement.
4. Other issues. The claimant was not entitled to relief under section 727 because he had not acted reasonably in relation to the proposed transaction. “Salary” for holiday pay meant the salary fixed by clause 5, excluding pension and other benefits. The defendant was entitled to judgment for £7,911.43 for overpaid holiday pay. Permission to amend to claim common law damages was refused because the application was extremely late and the proposed loss was neither particularised nor quantified.