Terry & Ors v Watchstone Ltd

The court held that, on the balance of probabilities, the board of Quindell Limited (subsequently Watchstone Limited) agreed in late March or early April 2011 to grant the Claimants a tax indemnity covering tax liabilities (other than capital gains tax on the ultimate disposal of the shares) and associated costs arising from the sale to Mission Capital Plc, and that payments made under that indemnity were not repayable. The judge applied the guidance in Gestamin and Blue about the limits of reliance on memory evidence but found the contemporaneous silence outweighed by the unanimous recollection of the directors, the independent investigation by Dorsey & Whitney and the signed 2013 Memorandum. The court also held that the indemnity did not amount to a "substantial non-cash asset" for the purposes of Companies Act 2006 section 190 (read with section 1163), because it was a non-marketable contractual right to cash rather than a proprietary interest, and that shareholders had in any event approved the arrangement. As a result the Claimants' claim succeeded and the Defendant's counterclaim for restitution failed; the amount then payable under the indemnity was determined as £1,025,620.20.

This was a first‑instance commercial trial concerning whether a board agreement existed that Watchstone Limited (then Quindell Limited) would indemnify certain shareholders (the Claimants) for tax liabilities and associated costs arising from the sale of the company to Mission Capital Plc in May 2011.

Background and parties:

• The First Claimant was the company's founder and a director; the other Claimants were his wife and two connected family trusts.
• Mission Capital Plc acquired the entire issued share capital of Quindell Limited by an agreement dated 28 April 2011, completing on 17 May 2011.

Nature of the claim and relief sought:

• The Claimants sought payment under an alleged oral "tax indemnity" agreed by the company's board before the sale to meet tax liabilities and associated costs arising from the sale and related transactions.
• The Defendant denied any enforceable indemnity and counterclaimed in restitution for repayment of sums previously paid to the Claimants (a payment of £3,135,816 made in February 2013).

Issues framed by the court:

1. Whether an agreement (a tax indemnity) was made by the board prior to the sale and, if so, what its terms were;
2. Whether the indemnity, if granted, was an arrangement falling within Companies Act 2006 section 190 (a substantial property transaction) requiring shareholder approval; and
3. What sums, if any, were payable pursuant to the indemnity.

Evidence and procedural posture: The case primarily turned on oral recollections of the directors who were present in early 2011, a later unsigned contemporaneous documentary absence, the 2013 "Memorandum of Terms of Tax Indemnity" drafted after legal advice and signed by directors in February 2013, contemporaneous board minutes and accounts references, and the fact of a payment made in February 2013.

Court’s reasoning:

• The judge accepted the general warnings about the fallibility of memory set out in Gestamin and Blue and consequently treated oral recollection cautiously, preferring inferences from documentary and known facts where possible. Nevertheless, he concluded that the unanimous and consistent recollection of the directors who allegedly made the agreement, the independent advice and investigation by the company's lawyers leading to the signed 2013 Memorandum, the subsequent payment in February 2013, and the board and accounts references together showed with considerable force that an indemnity had been granted.
• On statutory issues, the court analysed Companies Act 2006 sections 190, 191, 192, 195 and the definition of "non-cash asset" in section 1163. The judge concluded the indemnity was not a proprietary interest or other non-cash asset but a non-marketable contractual right to cash payments; accordingly it was not a "substantial non-cash asset" within section 190 and the civil consequences in section 195 did not arise. The judge also found the indemnity was provided to the Claimants in their character as members and that shareholder approval had been obtained.
• The court therefore refused the Defendant's argument that the indemnity was voidable under section 190 and dismissed the counterclaim for restitution. The payable amount under the indemnity was quantified as £1,025,620.20.

Subsidiary findings: The judge accepted that the 2013 Memorandum recorded the terms of the earlier oral agreement, that the directors intended payments would not be repayable, and that one of the signatories, a former senior tax partner (Mr Bowers), had no evident bias in affirming the indemnity.

First instance: the Claimants' claim is allowed. The court found, on the balance of probabilities, that the board agreed a tax indemnity in March/April 2011 covering tax liabilities (excluding ultimate capital gains tax) and associated costs and that payments under the indemnity were not repayable. The indemnity was not an arrangement within section 190 of the Companies Act 2006 because it was not a substantial non‑cash asset and it was given to the Claimants in their capacities as shareholders; the shareholders had approved the arrangement. Consequently the counterclaim for restitution failed and the payable sum under the indemnity was quantified at £1,025,620.20.