Interactive Technology Corp v Ferster

The court decided a large, fact-heavy shareholder dispute between three brothers and a group of related companies. Key legal principles applied were the scope of a director's actual authority (express and implied), the limits of the Duomatic principle, fiduciary duties of directors, the burden on a fiduciary to justify expense claims and the statutory remedies under section 994 and section 996 of the Companies Act 2006. The judge found that the Asset Purchase Agreement and Supply of Services Agreement purporting to transfer ITC’s online gaming business to WOS were not authorised by ITC and therefore had no effect.

Material subsidiary findings included that ITC remained the beneficial owner of the gaming business and of monies shown in nominee bank accounts (held on bare trust for ITC), that Jonathan Ferster had paid himself unauthorised remuneration and taken sums as improper expenses (those sums should be repaid or accounted for), and that relief sought by Jonathan under section 996 (to require purchase of the other brothers’ shares by him at market value) was refused because he was principally responsible for the breakdown in trust and confidence and because an independent valuation would likely heavily discount the business value due to regulatory and enforcement risk.

This litigation concerned ownership and control of an online gaming business and related corporate, trust and shareholder disputes between three brothers (Warren, Stuart and Jonathan Ferster), ITC and a number of companies connected with Jonathan. ITC, and two brothers, alleged that Jonathan had misappropriated the business and assets by (inter alia) causing back‑dated agreements (an Asset Purchase Agreement and a Supply of Services Agreement) to be entered into which purported to transfer ITC's gaming business to WOS and to limit ITC to a cost‑only service provider. Jonathan denied dishonesty and petitioned under section 994 CA 2006 for an order that he be permitted to buy the other brothers' shares at fair value.

Nature of proceedings and relief sought:

• ITC’s claim sought declarations and relief concerning ownership of WOS and other companies, proprietary remedies, accounts and equitable compensation.
• Jonathan’s petition under s.994 CA 2006 sought an order permitting him to purchase Warren’s and Stuart’s shares at fair market value (alternative remedies were pleaded).
• Separately, Warren and Stuart brought a Trust Claim alleging breach of trust by Jonathan in respect of the single registered share held by him pre‑2007.

Issues framed by the court:

1. What were the arrangements between the brothers in 2004/2005 and in 2007 (ownership, trusts and director/shareholder authority)?
2. What was the legal effect of the back‑dated APA and SSA, and was ITC bound by them?
3. Jonathan’s motive for entering into the APA/SSA.
4. Whether monies in nominee accounts and gaming licences were beneficially ITC’s assets.
5. Whether Jonathan had fixed and taken unlawful remuneration or expenses; whether he breached fiduciary duties; and whether he could be relieved under section 1157 CA 2006 or s.61 Trustee Act 1925.
6. Relief under s.994 and the appropriate remedy under s.996 CA 2006.

Court’s reasoning and conclusions (concise):

• The contemporaneous financial and corporate documents and the oral evidence led the judge to find that ITC, not WOS, had carried on the online gaming business from 2005 until the litigation. The December 2004–2008 management accounts and annual accounts supported ITC’s ownership and receipt of turnover.
• The January 2007 Deeds of Confirmation were intended to record that Jonathan held the single initial share on trust for the three brothers (and originally Mr Binnes). The later formal share issues produced equal shareholdings in ITC for the three brothers.
• The judge rejected Jonathan’s central factual case that the business had been intended to belong solely to him. Much of Jonathan’s evidence was found unreliable or dishonest; certain other witnesses were found partially unreliable as described in the judgment.
• The APA and SSA, back‑dated and signed by Jonathan in 2013, were not authorised by ITC. They effected a fundamental change (disposal of ITC’s business) beyond the scope of the authority which Jonathan, as de facto managing director, legitimately exercised. Absent authorisation or rectification, ITC was not bound by those agreements.
• Monies standing in accounts in the names of related companies were held on bare trust for ITC; the judge declined to decide in this judgment whether Curaçao or Kahnawake licences were themselves capable of being held on trust without further foreign‑law material.
• Jonathan had paid himself remuneration and claimed expenses beyond what had been agreed in 2007; those excess payments were unauthorised. He was liable to account and to repay unjustified expenses; he was not entitled to relief under s.1157 CA 2006 or s.61 Trustee Act 1925 because he had not acted honestly or reasonably.
• Although some complaint could be made about the other brothers’ litigation tactics (including a mediator’s email held to be an improver privative and admissible for that reason), the petition under s.994 was not met by a remedy in favour of Jonathan. The court refused to make an order under s.996 permitting Jonathan to buy the brothers’ shares at market value because Jonathan’s misconduct was central to the breakdown of trust and confidence, and because any open‑market valuation would likely be heavily discounted by enforcement/regulatory risks, producing an inequitable result.

First instance: The court made multiple factual and legal findings. In short: the court held that the Asset Purchase Agreement and Supply of Services Agreement were not authorised by ITC and therefore had no effect; ITC remained the owner of the online gaming business and of receipts in nominee bank accounts (held on bare trusts for ITC); Jonathan had taken unauthorised remuneration and expenses and must account/repay; relief sought by Jonathan under section 996 CA 2006 (to buy the other shareholders’ shares at market value) was refused because Jonathan’s misconduct caused the breakdown in trust and because an open‑market valuation would likely be heavily discounted. The court therefore declined to grant the principal remedies sought by the petitioner Jonathan under s.994/s.996.

The judgment records significant interlocutory appellate history. Various interim orders (freezing, property preservation and search orders) obtained ex parte were continued after inter partes argument and were the subject of appeals to the Court of Appeal. The Court of Appeal dismissed appeals concerning continuation of those interlocutory orders: see [2016] EWCA Civ 614 (re continuation of ex parte orders) and [2016] EWCA Civ 717 (re admissibility of a mediator’s without prejudice email where unambiguous impropriety was found). The judgment also records interlocutory hearings before Birss J, Warren J, Asplin J and others and Rose J’s prior ruling on admissibility (upheld by the Court of Appeal).