Clearwell International Ltd v MSL Group Holdings Ltd & Anor

An appeal on facts is a review, not a rehearing. The Court of Appeal should be slow to disturb careful findings based on witness credibility and the trial evidence. An oral remuneration agreement is not void merely because it is simple or undocumented. Payments to directors who are also shareholders are not necessarily unlawful distributions. The decisive question is whether the transaction is, in substance, a disguised return of capital or a bona fide contract for services. The statutory restriction in the Companies Act 1985 operates alongside common-law maintenance-of-capital rules, but does not invalidate a bona fide remuneration agreement where substantial services were provided or expected, the sums are not clearly disproportionate, and the arrangement benefits the company.

Clearwell appealed from a judgment of the High Court, Queen’s Bench Division, after a five-day trial. Sir Raymond Jack found that an oral agreement had been made under which licence-fee instalments received by Clearwell were to be paid to the directors in agreed proportions as remuneration for services, and gave judgment for Mr Clark and Mr Lauretti for £50,619.90 each plus interest.

Clearwell challenged the pleading, the finding that a binding agreement existed, the factual findings, and the conclusion that the arrangement was lawful. Permission was granted only on the unlawful-distribution issue, although permission on the other grounds was sought in the Court of Appeal. The central questions were whether the agreement was properly pleaded and binding, and whether its performance involved an unlawful distribution or return of capital.

The appeal was dismissed. Lord Justice Kitchin and Lord Justice Richards agreed with the judgment of Peter Smith J. The respondents’ costs were summarily assessed at £24,948.

1. Pleading. The amended pleading, read as a whole, alleged that the directors would provide services when required. It did not describe a wholly voluntary arrangement. In any event, Clearwell knew the case advanced and could not show that any alleged departure from the pleading had affected the trial.
2. Formation and appellate review. The oral agreement was a simple contract. Its informality and absence of a formal written instrument did not make it void for uncertainty. The Court of Appeal’s task was review rather than rehearing. It should be slow to interfere with factual conclusions based on credibility and a careful evaluation of the evidence, applying the approach in Assicurazioni Generali SpA v Arab Insurance Group [2003] 1 WLR 577, as approved in Datec Electronic Holdings Ltd v UPS Ltd [2007] 1 WLR 1325, and reflected in Thorner v Major [2009] UKHL 18. Nothing justified interfering with the trial judge’s findings.
3. Illegality and distributions. The court considered the transaction in substance. The relevant inquiry was whether the company had divested itself of part of its undertaking in favour of a shareholder otherwise than through a bona fide contractual transaction. The directors had provided substantial services and were expected to provide further services. The sums were not clearly disproportionate to those services, and the arrangement was in the company’s interests. It was therefore proper remuneration, not a disguised return of capital or unlawful distribution under section 263(1) of the Companies Act 1985. Section 281 preserved the concurrent common-law restrictions.
4. Costs. Summary assessment was appropriate for relatively modest Court of Appeal costs because detailed assessment would be disproportionate and would delay matters.

• Court of Appeal (Civil Division). On 16 November 2012, the court refused permission to appeal on the pleading, formation and factual grounds, dismissed the appeal on the unlawful-distribution ground, and summarily assessed costs at £24,948: [2012] EWCA Civ 1440.
• High Court of Justice, Queen’s Bench Division. On 6 January 2012, Sir Raymond Jack found an oral agreement relating to the division of licence-fee instalments and gave judgment for Mr Clark and Mr Lauretti for £50,619.90 each plus interest.