Tonstate Group Limited & Ors v Rosling King LLP

The judgment determines competing procedural applications arising out of long-running litigation against a former director, Mr Wojakovski. The Claimants applied to strike out parts of the Defendant's Defence in which the Defendant challenged the correctness of Zacaroli J's earlier decision in Tonstate Group Ltd v Wojakovski [2019] EWHC 3363 (Ch) (the "Duomatic Judgment"). The Defendant applied to strike out aspects of the Claimants' Particulars of Claim and for reverse summary judgment on parts of the negligence claim brought against it by the Claimants (alleging aimlessness in litigation conduct, a failure to appreciate the limits of the Duomatic principle, and culpability for a loan that breached court undertakings).

The court held that the Duomatic principle does not save conduct which the company could not lawfully undertake itself and that the Duomatic Judgment was correctly decided on that basis: informal shareholder assent cannot ratify acts that are ultra vires or that involve the use of a company as a vehicle to defraud HMRC. Applying that legal analysis, the court struck out specified paragraphs of the Defendant's Defence which challenged the Duomatic Judgment because the Defendant had no real prospect of persuading the court that the Duomatic Judgment was wrong.

Conversely, the court refused to strike out the Claimants' negligence pleadings in their original or amended form and refused reverse summary judgment against them. The alleged failures by Rosling King (cost control/"aimlessness", failure to spot the Duomatic point, and matters concerning the loan) raised significant factual issues and questions of causation and loss that required fuller evidence and could not be resolved summarily. The Claimants were granted permission (subject to formal application) to amend particulars of claim to provide greater particularisation.

This judgment resolves two interlinked applications in proceedings concerning extensive alleged unlawful extractions from companies in the Tonstate group and consequential enforcement and costs litigation.

• Background and parties: The principal underlying claims (the "Claims") concern large sums extracted by Mr Wojakovski from Tonstate companies. The Claimants here are Tonstate Group Limited and associated companies and individuals (the Matyases). The Defendant in these proceedings is the firm of solicitors Rosling King LLP, who had acted for the Claimants until August 2019. The Claimants have pursued substantive claims, enforcement proceedings and a contempts/committal process against Mr Wojakovski; they also instituted a negligence claim against Rosling King and separate assessment proceedings as to Rosling King's fees.
• Procedural posture / relief sought: (i) By the Claimants' Application (9 November 2023) the Claimants sought to strike out parts of Rosling King's Defence in which Rosling King challenged the correctness of the Duomatic Judgment ([2019] EWHC 3363 (Ch)). (ii) By the Defendant's Application (19 January 2024) Rosling King sought strike out of two of the Claimants' negligence heads and reverse summary judgment under CPR Part 24, contending the Claimants had no real prospect of success on those claims.
• Issues for decision as framed by the court: (i) whether the Claimants' negligence pleadings (in particular the "aimlessness" complaint and the failure to appreciate the limits of the Duomatic principle) disclosed reasonable grounds and/or had a real prospect of success; (ii) whether Rosling King had a real prospect of persuading the court that the Duomatic Judgment was wrong and thus whether the relevant parts of the Defence should stand; (iii) whether summary disposal by reverse summary judgment or strike out was appropriate.
• Court's reasoning and conclusions: The court analysed the Duomatic principle and its recognised limits. It held that the principle cannot be used to validate conduct which the company itself could not lawfully carry out, including payments procured for the unlawful purpose of defrauding HMRC (an "ultra vires"/dishonesty exception). The court followed and applied the reasoning in earlier decisions (including Robin Knowles J in Auden McKenzie and the Duomatic Judgment) and concluded that the Defendant had no real prospect of persuading a trial judge that the Duomatic Judgment was wrong. Consequently the court struck out specified paragraphs in the Defence challenging that judgment.
• By contrast, the court refused to strike out the Claimants' negligence pleadings and refused reverse summary judgment. The pleaded aimlessness and failure-to-spot-Duomatic points raised matters of fact, causation and loss which required full investigation, disclosure and evidence (including the question whether the Claimants would have instructed an earlier strike-out application and whether earlier conduct would have produced a materially different outcome). The court therefore permitted (subject to formal application) amendments to particularise the Claimants' case and indicated the quantum of loss could be assessed at the Senior Courts Costs Office if appropriate.

The court therefore dismissed the Defendant's Application and allowed the Claimants' Application, striking out the parts of the Defence which challenged the Duomatic Judgment and leaving the negligence claims to be tested at trial (with permission to amend the Particulars of Claim).

The court dismissed the Defendant's Application (strike out/reverse summary judgment) and granted the Claimants' Application to strike out parts of the Defence challenging the Duomatic Judgment. Rationale: the Duomatic principle cannot validate conduct the company could not lawfully undertake (including payments used to defraud HMRC); Zacaroli J’s Duomatic Judgment was correctly decided and Rosling King had no real prospect of persuading a trial judge that it was wrong. By contrast, the Claimants’ negligence allegations (aimlessness, failure to spot the Duomatic point, and matters relating to the loan) raised factual and causation issues that could not be resolved on summary disposal and remained triable; the Claimants were permitted to apply to amend and to seek assessment of loss if appropriate.