Jafari-Fini v Skillglass Ltd & Ors

In civil proceedings, fraud and other discreditable conduct are proved on the balance of probabilities. The seriousness and inherent improbability of an allegation affect the cogency of the evidence required, rather than creating a higher standard of proof.

Whether a director’s knowledge counts as a company’s knowledge depends on the applicable rule and its context. Under a contractual disclosure obligation, construction of the contract determines whose knowledge is attributable to the company. Relevant information held by one director may constitute company knowledge even though it was acquired informally and was not communicated to the board.

Unless a commercial loan agreement clearly provides otherwise, a premature notice of default is ordinarily ineffective rather than a breach of contract.

The claimant acquired control of Chesterton International Plc through Phoenix Acquisitions Ltd (“PAL”), using loan finance provided by Skillglass Ltd. The facility agreement restricted Skillglass’s default remedies during a “Certain Funds Period” unless a “Major Default” had occurred.

Skillglass served a notice of default during that period. It contended that PAL had committed a Major Default by failing to disclose a £150,000 bribe paid by the claimant to procure Skillglass’s consent to waiver of an offer condition. Mr Stuart Isaacs QC found that the payment was a bribe, that a PAL director knew of it, and that PAL had breached its disclosure obligation: [2006] EWHC 77 (Ch).

The principal questions on appeal were whether the bribery finding was sustainable, whether the director’s knowledge was attributable to PAL, whether the trial had been procedurally unfair, and what effect an unauthorised notice of default would have had.

1. Appeal dismissed by a majority. Moore-Bick LJ, with whom Laws LJ agreed, held that the judge was entitled to find that the £150,000 payment was a bribe. The civil standard remained the balance of probabilities, although cogent evidence was required because of the allegation’s seriousness. The judge had directed himself accordingly. His assessment depended substantially on oral evidence, witness credibility and inherent probability. The Court of Appeal was not well placed to overturn a conclusion reasonably open to a judge who had seen the witnesses: [1957] 1 QB 247 and [1996] AC 563 applied; [2003] 1 AC 787 explained.

2. The information about the bribe was attributable to PAL for the purposes of clause 21.8.2. Ordinary agency principles did not themselves attribute Mr Webster’s knowledge because he had received the information as a friend, rather than in his capacity as director, and had not communicated it to the board. The contractual question was instead whose knowledge the parties intended to count as PAL’s knowledge. Relevant information possessed by one member of a board could generally be treated as information possessed by the company.

3. The information was material because reasonable directors of Skillglass would have wished to take it into account when deciding whether to waive an offer condition. Clause 21.8.2 did not excuse disclosure merely because a recipient might already possess the information. In any event, the knowledge of a director acting fraudulently against Skillglass was not attributable to Skillglass. PAL’s non-disclosure therefore constituted a continuing Major Default, making the October notice valid and the December demand enforceable.

4. The procedural-unfairness ground was dismissed unanimously. A litigant in person remains responsible for pursuing procedural objections promptly. The claimant had not pursued the proposed witness summons for the alleged recipient of the bribe, and the judge’s case-management decisions did not render the trial as a whole unfair.

5. Obiter: had no Major Default existed, an unauthorised notice of default would ordinarily have been invalid and ineffective, rather than a contractual breach. The facility agreement imposed no positive obligation on Skillglass to refrain from serving such a notice: [2004] EWCA Civ 1001 and [2005] UKHL 27 applied.

6. Carnwath LJ dissented on the bribery issue. He considered that the defendants had failed to prove either the bribe or the necessary extent of Mr Webster’s knowledge, but agreed that the trial had not been procedurally unfair and accepted Moore-Bick LJ’s analysis of the governing attribution principles.

1. Court of Appeal (Civil Division): The appeal was dismissed by a majority: [2007] EWCA Civ 261. The court unanimously rejected procedural unfairness, while Carnwath LJ dissented on whether the bribe and relevant knowledge had been proved.

2. High Court, Chancery Division: Mr Stuart Isaacs QC, sitting as a Deputy High Court Judge, determined the directed preliminary issues and found a Major Default arising from PAL’s failure to disclose the bribe: [2006] EWHC 77 (Ch).

3. Earlier Court of Appeal proceedings: An appeal from HH Judge Rich QC’s refusal to permit a derivative claim was dismissed. PAL was joined as a defendant and preliminary issues concerning the notices and enforceability of the financing arrangements were directed for trial: [2005] EWCA Civ 356.