Terry & Ors v Watchstone Ltd

In assessing an alleged oral agreement in commercial litigation, the absence of a contemporaneous document may weigh heavily but does not create an inevitable inference that no agreement was made. The court must assess the documentary evidence, known or probable facts and oral evidence together. Witness recollection should be treated cautiously, but it may still be relied upon where the evidence as a whole supports it.

For the purposes of sections 190 and 1163 of the Companies Act 2006, a non-marketable contractual right to receive cash in specified circumstances is not necessarily property or an interest in property. An indemnity granted to shareholders because of their membership is also a transaction with members within section 192.

The claimants were shareholders in Watchstone Ltd, formerly Quindell Ltd. Before the company’s reverse takeover and share sale, its directors allegedly agreed that the company would indemnify the claimants against tax liabilities and associated costs arising from the transaction, without seeking repayment of sums paid.

The agreement was not recorded contemporaneously. The defendant denied that it was legally enforceable and counterclaimed for repayment of an earlier indemnity payment. It also alleged that the indemnity was a substantial property transaction requiring member approval under section 190 of the Companies Act 2006. The issues were whether the agreement existed, what its terms were, and whether the statutory provisions invalidated it.

1. Agreement and terms. The claimants established, on the balance of probabilities, that the directors agreed before completion of the sale to indemnify them against tax liabilities, other liabilities and costs arising from the sale and contemplated transactions, excluding capital gains tax on the ultimate disposal of their shares. It was also agreed that sums paid under the indemnity would not be repayable.
2. Evidence. The absence of a contemporaneous record and the limited disclosure of the indemnity were striking matters requiring explanation. They did not produce an inevitable inference that no agreement existed. The court accepted the directors’ explanations and found significant support in the consistent recollections of the participants, the later signed memorandum, the company’s investigation and payment, and the absence of any contemporaneous objection.
3. The guidance in Gestmin SGPS SA v Credit Suisse (UK) Limited [2013] EWHC 2560 (Comm), Blue v Ashley [2017] EWHC 1928 (Comm) and Edgeworth Capital v Aabar Investments [2018] EWHC 1627 (Comm) required caution about recollection, but did not mean that oral evidence could never reasonably be relied upon.
4. Companies Act 2006. The indemnity was not a non-cash asset under sections 190 and 1163. It created non-marketable contractual rights to cash payments, rather than property or an interest in property. In any event, the indemnity was granted because the claimants were shareholders and members, not because the first claimant was a director, so the section 192 exception applied. The members had also approved the arrangement.
5. The statutory challenge therefore failed. The claimants’ claim succeeded in the further sum of £1,025,620.20, and the defendant’s counterclaim for repayment failed.