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Scottish Court of Session Decisions


You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Osborne & Hunter Ltd v Messrs Hardie Caldwell & Ors [2001] ScotCS 17 (23 January 2001)
URL: http://www.bailii.org/scot/cases/ScotCS/2001/17.html
Cite as: [2001] ScotCS 17

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OUTER HOUSE, COURT OF SESSION

 

 

 

 

 

 

 

 

 

 

 

 

OPINION OF LORD KINGARTH

in the cause

OSBORNE & HUNTER LTD

Pursuers;

against

MESSRS. HARDIE CALDWELL AND OTHERS

Defenders:

 

________________

 

Pursuers: Brailsford, Q.C, Bowen, Drummond Miller W.S. (for Harper McLeod, Glasgow)

Defenders: Hanretty, Dowdall (for 1st, 2nd 3rd, 5th to 10th defenders), Dundas & Wilson C.S Fitzpatrick (for 4th defender), Macbeth Currie

 

23 January 2001

[1] The pursuers are a long established company carrying on business in the field of electrical contracting and installation. The first defenders are a firm of chartered accountants. Those who were partners at all material times and others who are now partners have also been called as defenders, as such partners and as individuals. In the action the pursuers claim (first) payment by the defenders jointly and severally of the sum of £55,000 with interest on £10, 000 from 25 April 1990, on £10, 000 from 18 May 1990, on £10, 000 from 21 June 1990, on £10, 000 from 23 October 1990, on £10, 000 from 30 November 1990 and on £5, 000 from 31 January 1991 (all at the rate of 15% per annum until 31 March 1993 and at the rate of 8% per annum thereafter until payment) and (second) payment by the defenders jointly and severally of £140, 000 with interest thereon at the rate of 15% per annum from 29 June 1992 until 31 March 1993 and at 8% thereafter. These claims arise out of the advance by the pursuers of sums by way of loan amounting in total to £55, 000 (the funds being provided in separate tranches in 1990 and 1991) to McMillan Litho Ltd ("ML"), and the provision by the pursuers in August 1991 of a guarantee of £140, 000 to the

Royal Bank of Scotland in respect of ML's borrowings. ML in due course became insolvent, ceased trading and on 20 January 1993 was dissolved. The pursuers were unable to recover the loan sums and were required to satisfy the bank guarantee. The funds were advanced and the guarantee was granted on the advice of Donald P MacLean ('Mr MacLean') who at the time was a director and secretary, and also shareholder, of the pursuers and who also, as matter of fact, was a partner of the defenders. The capacity in which he advised and the question of whether the first defenders and the remaining partners are responsible for any failures is the central matter of dispute between the parties and is critical to the question of liability in the present action.

[2] Although separate defences were entered on Mr MacLean's behalf as fourth defender, he died during the course of the litigation and a Minute of Transference was served on his widow as his executrix. At the close of the proof, however, counsel for the pursuers indicated that he did not seek any decree against her and accepted that in these circumstances it would be appropriate for the Court to dismiss the claim so far as directed against the fourth defender or his representative.

[3] Evidence was led on behalf of the pursuers over the course of 5 days. The principal witness adduced was Mr Hugh McGown - at all material times managing director, and major shareholder, of the pursuers. In addition evidence was led from Mary McTaggart personal assistant and secretary of Mr MacLean, from Desmond O'Keefe a director of ML, from Robin Crawford CA, a partner in KPMG, and from James Archibald Wittle, the second defender and a former partner in the first defenders, and the evidence of Mrs Tina Coughlan, office manager of the pursuers was available in the form of a transcript, her evidence having been taken on commission. The defenders led no evidence.

[4] At the end of the proof it was clear that a number of matters were not seriously in dispute.

[5] Mr McGown had been employed by the pursuers since 1978. He began employment as chief estimator but thereafter became, by 1986, managing director. About three years after joining the company he acquired a shareholding. This was initially 3,000 shares. Over the years this shareholding was increased until following the "buyout" of 31 May 1989, hereafter mentioned, he owned 91.5% of the shares.

[6] The pursuers were long-standing clients of the first defenders. Mr McGown could only speak to the period since 1978 but it was his understanding, based on his knowledge of the company, that the relationship went back to the 1930's. Since 1978 the first defenders provided company secretarial and payroll services for the pursuers together with general accounting services. They were in particular engaged in the preparation of management and year-end accounts and looked after the personal taxation affairs of the directors. Through the first defenders wholly owned subsidiary, Hardie Kerr, certain insurance related services were also provided to the directors of the pursuers. It appeared that for a substantial number of years the senior partner of the first defenders had been the chairman of the pursuers. Latterly prior to the "buyout" this was Mr Williamson. Prior to May 1989 board meetings of the pursuers were generally held in the offices of the first defenders.

[7] Mr MacLean was a chartered accountant and from about 1974 was a partner in the first defenders. He became company secretary of the pursuers in 1976. In

May 1989 Mr Williamson helped both Mr McGown and Mr MacLean to effect a "buyout", following which Mr McGown and Mr MacLean were the sole directors of the pursuers and, in addition to Mr McGown's majority shareholding, Mr MacLean acquired 6.5% of the issued shares. Prior thereto there had been a number of shareholders, many of whom were the widows of former directors, and although since 1986 Mr McGown had been managing director - apparently essentially in

day-to-day control of affairs - he had been assisted on the board by a number of other directors who might properly be called non-executive.

[8] After the "buyout" the first defenders continued to provide general accounting services and secretarial and payroll services for the pursuers - although it was Mr McGown's evidence that the pursuers became more involved in respect of payroll services themselves. The first defenders however continued to prepare management accounts, provide company secretarial services and look after the directors' taxation affairs. Year-end accounts were prepared. Fees were invoiced in respect of these services and collected in the ordinary professional way. The partner of the first defenders who was directly involved was Mr MacLean.

[9] After 1989 Mr McGown relied heavily on the advice of Mr MacLean in respect of the financial affairs of the pursuers. In particular Mr McGown dealt with the electrical and engineering side of the pursuers (and plainly had little or no financial acumen) whereas Mr MacLean dealt with the financial side. It was Mr McGown's evidence that as his fellow director, Mr MacLean was responsible for all financial aspects of the company. This included - in liaison with the office manager - action to secure payment from debtors. In this regard letters were written by Mr MacLean on the pursuers' note paper, copies of which he held at the offices of the first defenders. Although it was not an expression he ordinarily used Mr McGown was prepared to accept that Mr MacLean could be described as the financial director. From the date of the "buyout" all board meetings were held at the pursuers' offices.

[10] As a director Mr MacLean was paid a salary of £6,000 and director's fees of £4,000. These were paid direct to him personally under deduction of PAYE. Notwithstanding this, in 1993 the then Senior partner of the first defenders, Mr Wittle, collated details of partners' clients/business interests. This was a normal, albeit ad hoc, procedure. In response to an enquiry about payment of directors' fees from the pursuers, Mr MacLean answered, on a document dated 7 December 1993, "through HC" (apparently intending to convey a meaning that the fees were paid to the first defenders). This at the time was accepted. In some cases where partners acted as company directors it appeared, from Mr Wittle's evidence, that directors' fees were invoiced by the first defenders (together with VAT) and paid to them. In such cases these fees would be treated as part of the partnership profits. Mr Wittle, however, in due course discovered that Mr MacLean's declaration in the document of 7 December 1993 was untruthful. As a result it appeared that in 1997 a "netting" exercise was carried out in which sums were deducted from Mr MacLean's share of profits in the accounts for the year to April 1995 and credit adjustments made to other partners' individual shares - all apparently in terms of the partnership agreement. The accounts were not produced in evidence, and how precisely this was done was not made clear.

[11] The Contract of Co-partnery dated 3 February 1986 (No 32/1 of process) was agreed to contain the terms of the first defenders' partnership agreement at all material times. Clause Fifth, headed "Attention to Business", provided, subject to provisions enabling a retiring partner to work part-time, that "all the Partners shall devote their full time and attention to the conduct of the firm's business". Clause Ninth headed "Calculation of Profits" provided:

"in arriving at the Firm's annual profit available for division among the Partners there shall be brought in for sharing all Directors' fees (including payments by way of compensation for loss of office) personal fees or other benefits attributable to the firm or by virtue of personal appointments. Any such payments or benefits which may be received personally by any partner shall be adjusted by reduction of such partner's share of profits. Subject to the approval of the Partners holding the majority of votes there shall be excluded from such reckoning (i) any legacy which is not in lieu of a Partner's professional services, (ii) any tutorial or similar fees earned out within normal office hours and not impinging thereon which fees shall be viewed as personal remuneration of the partner concerned, (iii) any Directors' or other fees paid instead of share of profit or dividend of any family business or company personal to the Partners and in addition any compensation paid by such business or Company for loss of office and (iv) any pension contributions made on behalf of any Partner by any company business or other organisation".

In 1990 the pursuers were cash rich, having about £350, 000 in the bank which was not required for the normal running of the business. For some years there had been a degree of interest at board level in diversification, but nothing much had come of that. Mr McGown was at no stage particularly interested in the proposals which were being discussed, although prepared to consider any proposal which, as he saw it, would give added value to the electrical side of the business. From at least 1990, however, Mr MacLean was interested in pursuing the matter. It was discussed at a board meeting on 19 January 1990. His first suggestion related to potential investment in a saw mill that was of no interest to Mr McGown. The second suggestion, introduced by Mr MacLean, related to an ink print company, which was in fact ML. At a board meeting on 28 March 1990 Mr MacLean said that he had come across a business plan of interest. Mr McGown did not ask how he had come by such a plan and it was agreed that the matter be reviewed by Mr MacLean, provided that any involvement of the pursuers was kept within reasonable limits. Sometime thereafter Mr MacLean showed Mr McGown a business plan of ML consisting of four sheets of paper. He suggested to Mr McGown that if the pursuers became involved "we would make so much money it's not true". It appeared that Mr McGown, who felt that it was "not my department" to ask, relied entirely on what he was told. He agreed to the pursuers advancing certain funds to ML. The initial decision was not specifically recorded but as he explained meetings in such a company with two people across the table were not always recorded. Precisely what form the advance would take or what return if any there would be were not disclosed to Mr McGown. Security was not discussed. It was Mr McGown's belief that if Mr MacLean said "we could do that, that was all right". Sums totalling £55,000 were advanced by a number of cheques on various dates between 25 April 1990 and 31 January 1991. In or about August 1991 Mr MacLean suggested that the pursuers guarantee a further loan to be made to ML by the Royal Bank of Scotland. It was represented that ML required to invest in certain additional machinery and that the pursuers would be "well covered" by the value of such machinery if anything happened. Mr McGown was told that the pursuers could not lose. Relying on Mr MacLean, he signed the guarantee.

[12] In 1990, unknown to Mr McGown, ML were clients of the first defenders. Mr MacLean was the partner who dealt with ML. It appeared that he had been introduced to ML to advise them, a new company, in relation to the obtaining of outside funding to enable the business to grow. It appeared that Mr MacLean in particular advised in respect of a business plan originally drawn up by the directors of ML. Although the first defenders issued fee notes to ML (which ultimately were not paid) in respect of these services and although Mr Wittle was aware of the firm's involvement, at one point being involved in the revisal of the business plan, neither he or nor any other partner was aware until 1995 that Mr MacLean had been involved in seeking to obtain funding for ML from the pursuers.

[13] When Mr MacLean first introduced the proposal relative to ML to the pursuers he did not disclose that they were clients of the first defenders, nor that he was also acting in his capacity as a partner of the first defenders in obtaining funding for ML. He did not at any stage advise Mr McGown and the pursuers that they ought to be independently advised in relation to the proposed advances and the guarantee.

[14] In 1989 the Institute of Chartered Accountants of Scotland published an "Ethical Guide" for its members. This guide was current in 1990 and 1991. The advice in the guide was applicable to all members of the Institute, whether in public practice or not. Mr MacLean and the other partners of the first defenders were members of the Institute and as such required to follow its rules and regulations including the Ethical Guidelines. These guidelines were an important source of guidance for chartered accountants and underpinned the conduct of members in practice. It was a professional obligation of a chartered accountant to be aware of the professional guidelines. A failure to be aware would be a breach of those rules and might be a disciplinary matter.

[15] Paragraph 35 of the "Ethical Guide" is entitled "Professional Independence". Sub-paragraph (21), and following, fall under the heading "Conflicts of Interest". Sub-paragraph (21)(a) provides:

"In cases where conflict in interest arise there should be a full and frank explanation to those involved, coupled with any action necessary to disengage from one or both positions, the conflicting interest of which have occasioned the difficulty. Conflicts should, so far as possible, be avoided by not accepting any appointment or assignment in which conflict seems likely to occur".

[16] There were however at the end of the proof a number of matters of fact - some of significance - in relation to which the parties were at issue.

[17] In the first place a question was raised as to the precise nature of services provided by the first defenders to the pursuers before the "buy-out" in 1989. In particular it was the defenders' position that there was no evidence to suggest that the first defenders' role extended beyond the provision of secretarial and payroll services and the provision of general accounting services; that in particular there was no evidence that as a firm they provided financial advice in relation to potential investments by the company. On this matter it seems clear that the first defenders' submissions were well founded.

[18] There was further a question as to why Mr MacLean had become a director in 1989. The submission on behalf of the pursuers - based largely on the former apparent practice of the senior partner of the first defenders being chairman of the pursuers - was that the Court could and should infer that Mr MacLean would not have been made a director had he not been a partner in the first defenders. I have come to the view there was insufficient evidence to enable that inference to be drawn. There was certainly no clear express evidence to that effect from Mr McGown, who would have been best placed to know and who might reasonably have been expected to say so if it was the case. Instead the evidence suggested that what happened in 1989 was the creation of what could be described as almost a new company (as accepted by Mr McGown) in which there were two directors, one of whom dealt with the electrical side of the business and the other who (paid fees and salary personally, under deduction of PAYE) dealt with all financial aspects of it. This was essentially a different structure and form of management from anything which had proceeded it. There was no doubt that Mr McGown's desire to have Mr MacLean as a fellow director was influenced by his apparent financial acumen and by the fact that he was a trained and practising accountant - all of which would have been apparent given the many years during which Mr MacLean had been secretary. It does not, however follow, it seems to me, that he would not have been appointed had he not been an active partner in the first defenders. Instead the evidence suggested a strong element of delectus personae in relation to Mr MacLean personally. That was perhaps most graphically illustrated by the fact that although Mr MacLean resigned as a partner from the first defenders on 30 April 1995, not only was he not removed as a director of the first defenders until December 1995, but in the interim he continued to work as an accountant in a new firm, MacLean Shepherd, and in that capacity apparently carried out work on behalf of the pursuers. Although Mr McGown and Miss McTaggart were somewhat uncertain about this, there appeared to be little doubt about it - in particular from documents relating to the preparation of audited accounts. Further, it is difficult to infer any continuation in 1989 of any previous practice in circumstances were Mr MacLean was not senior partner of the first defenders and did not become chairman.

[19] A further question arose as to whether after 1989 the services provided by the first defenders to the pursuers included actings in pursuit of debtors. The weight of the evidence from Mr McGown and Mrs Coughlan was that in so far as Mr MacLean wrote letters or took decisions in relation to the pursuit of debtors, this was done as a director of the pursuers and the letters were written on the pursuers' note paper - copies of which were kept in the first defenders' offices. There was however one letter dated 27 February 1991 which appeared to have been written by Mr MacLean in his capacity as a partner of the first defenders in pursuit of debts on behalf of the pursuers. This, however, was only one document in nine volumes of documents produced for the proof, and counsel for the pursuers fairly accepted that he could not make much of it and could not - at least strongly - resist the suggestion that this might, on that occasion, have been done in error.

[20] It was not, as I understood it, accepted on behalf of the defenders that the evidence disclosed, at any rate clearly, that at no stage during the time the pursuers provided funding to ML, and before the provision of the guarantee, was Mr McGown aware that Mr MacLean was acting for ML. Doubts, it was said, arose from a conflict in the evidence of Mr McGown. In particular at one point he appeared to suggest that he did not realise until certain documents were put before him during the course of the proof how closely Mr MacLean had been involved with ML. Later he gave evidence to the effect that the close relationship between Mr MacLean and ML was something which came to light sometime before March 1995, when he was advised of it by Mr Gordon, corporate manager of the Royal Bank of Scotland, in the course of a discussion of the affairs of the pursuers. My impression, however, was that the two statements were not wholly inconsistent, and I have no reason to disbelieve Mr McGown's position that certainly prior to the granting of the guarantee he had no knowledge of Mr MacLean's involvement with ML. Indeed I accept the submission made on behalf of the pursuers that the inference must be that in all the circumstances Mr MacLean, for whatever reason, deliberately chose not to reveal these matters to his fellow director. I should perhaps also indicate at this point that although counsel for the defenders suggested that inter alia this apparent inconsistency cast doubt on the credibility of Mr McGown's evidence, he seemed to me to be a witness who throughout was doing his best to tell the truth, albeit his recollection of matters, particularly in relation to dates, was not always entirely reliable.

[21] The central disputed question between the parties, however, was whether Mr MacLean gave his advice in relation to the loans and the guarantee not only as director of the pursuers (which at the end of the proof, it was accepted, could not be disputed), but also as a partner of the first defenders, or at least in circumstances in which the first defenders were liable for his actings. The answer to this (apart from a subsidiary position very tentatively advanced with which I will deal in due course), was, it was accepted, crucial to any question of liability attaching to the first defenders and the other partners called as defenders. The pursuers' position, as I understood it, was that although it could not be gainsaid that the relevant advice was given as director, it was also given at the same time by Mr MacLean as partner of the first defenders. The roles, it was argued, were synonymous, inseparable and inextricably linked. Even if that was not so, it was at least arguable that the advice was given as director in circumstances in which the first defenders were liable, in a question with the pursuers, for his actings.

[22] In the first place reference was made to evidence of McGown's apparent understanding of matters, and in particular to two passages in his evidence. Asked in examination-in-chief whether he questioned Mr MacLean's assertion that the company would make so much money it was not true, he answered to the effect that he did not need to because Mr MacLean was his financial director, an accountant and with a firm of chartered accountants "we associated with for years". Later in

cross-examination, asked whether he had noticed reference to taking legal advice in the written guarantee, he gave an answer to the effect that he had a chartered accountant backed up by a firm of chartered accountants and that was sufficient for him.

[23] Further, reference was made to the terms of the partnership agreement. Looking to the agreement as a whole it was argued that it was apparent that Mr MacLean performed any outside duties in his capacity as a partner including his duties as director of the pursuers. Moreover, it was plain that any emoluments from directors' fees would be payable to the firm.

[24] Further it was argued that the Court could infer that Mr MacLean would not have been appointed as director unless a partner in the first defenders. Reference was also made to evidence which suggested that Mr MacLean spent time while at the offices of the first defenders in relation to his responsibilities as director of the pursuers - apparently without objection. To a much lesser extent counsel sought to found on the one letter which indicated that at least on one occasion he sought to pursue debtors of the pursuers in his capacity as partner of the first defenders - at least as indicating that Mr MacLean himself did not always closely distinguish his roles. Although there was some evidence that Mr Paterson, managing partner of the first defenders, had said at a social meeting in 1995 - apparently after he had learned certain things about Mr MacLean's activities - that he was not a rich man but that

"if I was you I'd sue me", counsel did not seek to place any great reliance upon it in circumstances were the remark was made at some social gathering, where it was not further explored in evidence and where it was uncertain what particular knowledge the first defenders or their partners then had. It is also perhaps right to record that although, relying at least on some of these factors (albeit perhaps in a slightly different way), the pursuers' expert Mr Crawford appeared in part of his evidence to support (somewhat diffidently) the pursuers contentions on this matter (ultimately concluding that there was "some evidence to support them"), his evidence was not specifically referred to or relied on in closing submissions on behalf of the pursuers.

[25] On behalf of the defenders it was argued that none of the factors together or singly pointed to the conclusion that Mr MacLean acted not only as director but also as a partner insofar as he gave advice in relation to the loans or guarantees. Nor did he give such advice in the circumstances in which it could properly be said that, in a question with the pursuers, the partnership assumed liability for his actings as director.

[26] In the first place it was submitted that the overwhelming weight of the evidence (leaving aside Mr McGown's own apparent impressions) suggested that the relevant advice was given only in the capacity of director. The evidence suggested that the matter was first broached, and continued to be broached, at board meetings. These meetings took place at the premises of the pursuers. Further, such directorial services were remunerated by payments directly made to Mr MacLean under deduction of PAYE. There was no question of any payments being made by the pursuers to the first defenders. The evidence of Mr Wittle was that had the first defenders received payment for directors' services VAT would require to have been, and would have been, added to the charge. There was no document or evidence to suggest that the ordinary business of the first defenders, before or after 1989, involved the giving of investment advice. The firm could only be liable for actings in the ordinary course of the business of the firm. Reference was made to the Partnership Act 1890 Section 10, to Lindley & Banks on Partnership(17th Edition) at paragraphs 12-88 and 12-89. Reference was also made, albeit in passing, to

Dubai Aluminium Co Ltd v Salaam &c 2000 PNLR 578 and, obliquely, to

Dignon v Irving &c an unreported decision of the First Division of 3 October 2000.

[27] Further it was argued that it was clear from a number of pieces of evidence that Mr McGown understood that the advice was being given to him by Mr MacLean, solely qua director. In relation to the guarantee he said expressly that it was his co-director who had convinced him, and when he learned of the problems he gave evidence of being upset with his co-director who had brought the proposal to him. The passages in his evidence referred to by the pursuers were equivocal, and on one view showed that Mr McGown recognised a distinction between Mr Maclean's acting as director and as a partner. What he thought - and it may be that that he had no clear appreciation - could not in any event be determinative.

[28] As a matter of law, it was argued that the notion of simultaneous actings, both as a director and as a partner of the first defenders giving advice, was ill founded. No man could serve two masters. Reference was made to Esso Petroleum Co Ltd v Hall Russell & Co Ltd 1988 S.L.T. 874 at 888 and Park v Wilsons and Clyde Coal Co Ltd 1928 S.L.T. 170 at page 177.

[29] Further, it was argued that, on a proper reading of the contract co-partnership, where a partner devoted time to work as a director of a company and where he received payments therefore personally, the other partners would be compensated (for what would be an apparent breach of Clause Fifth of the agreement) - in particular that any such payments would be deducted from the relevant partner's share of profits and credited to the share of the remaining partners. There was no question in such circumstances of there being any addition to the partnership profits or of such remuneration being treated as partnership profit. This was what had happened during the "netting" process in relation to Mr MacLean's fees etc. In these circumstances it was not surprising that Mr Crawford had not referred to the terms of the partnership agreement in his evidence. By contrast it was accepted that there could be circumstances in which by agreement, express or implied, between a company and a firm such as the first defenders, the services of a partner as director would be provided as part of the firm's business, and that in such circumstances the firm would be vicariously liable for any acts or omissions of the partner qua director. The circumstances in which such an agreement could be inferred would, for example, include circumstances in which the director's services were remunerated by fees or salary paid directly to the partnership in response to specific fee notes issued. It was Mr Wittle's evidence that where such fees were charged by the partnership, VAT would be included in such invoices. Even if such an interpretation of Clause Ninth of the partnership agreement and in particular the second sentence thereof was wrong (and, in particular, if on a proper construction the partners agreed to treat the actings of any partner as director as if part of the partnership business and to add payments from such actings to the firm's profits) this, as far as the pursuers were concerned, was res inter alios acta and could not create liability between the firm and its remaining partners and the pursuers. Given that the partnership agreement appeared to envisage that there would be occasions when partners worked as directors notwithstanding Clause Fifth, it was of no consequence that Mr MacLean may have spent time at the first defenders' offices in respect of work as a director of the pursuers. In any event the evidence was unclear as to how much work he did spend on that business. Above all, there was no evidence to entitle the Court to find that Mr MacLean had only been appointed as director because he was a partner in the first defenders.

[30] I have come to the view that the defenders' submissions on this matter - although not in every detail - are to be preferred.

[31] I cannot, in particular, accept the submission that the relevant advice was given by Mr MacLean as director, and at the same time as a partner of the first defenders giving advice of the type which it was their business to give. The overwhelming weight of the evidence, as referred to by the defenders, suggested that such advice was given by Mr MacLean as Mr McGown's fellow director, and was understood to be given on that basis. The passages in Mr McGown's evidence, relied on on behalf of the pursuers, were, in my view, wholly equivocal. In respect of his services as director Mr MacLean was paid personally under deduction of PAYE. There was no evidence that it was part of the ordinary business of the firm to give investment advice. Further, in my view, there is no sound legal basis for the suggestion that at the same time as he was acting as director, with duties as agent to the company, it could be said that he was simultaneously acting as a partner, giving advice, as an agent of the first defenders.

[32] The issue of whether nonetheless Mr MacLean gave his advice as director in circumstances in which the first defenders would be liable in a question with the pursuers, is less straightforward. In particular, I am unable wholly to agree with the defenders' interpretation of the contract of co-partnery. It seems to me to be clear from Clause Ninth that it was agreed that such benefits as were received by a partner as director would, subject to certain exceptions, be "brought in for sharing" as part of the partnership's profits. Without prejudice to that generality, it was provided that insofar as such payments might be received personally these, subject to the exceptions (including "any legacy which is not in lieu of a partner's professional services, fees earned outwith normal office hours and director's fees from any family business personal to the partner"), were to be "adjusted by reduction of such partner's share of the profits". This, it seems to me was plainly intended to be an accounting device to ensure that so far as the partners were concerned such payments were treated as if part of the partnership's profits (though not formally added thereto) and - although this is perhaps not clearly expressed - that the adjustment of existing shares would be on that basis - i.e. that deduction would be made from the relevant partner's share only so far as the other partners should have benefited (with appropriate upward adjustment to their shares). It would not in my view be a sensible interpretation to envisage (as I understood the defenders did) deduction of the whole payments made to such a partner. As already indicated, it was not wholly clear from Mr Whittle's evidence, or from any other source, how the "netting" process was in fact carried out to deal with Mr MacLean's salary and fees, and certainly there was no clear evidence that the whole salary and fees paid to him by the pursuers were deducted from his share of the profits. Even if that was done, it would not affect what, in my view, is the correct interpretation of the contract.

[33] If, however, Mr MacLean was engaged as director personally and not as partner of the first defenders, clauses such as Clause Fifth and Clause Ninth -essentially providing in such circumstances for treatment of his services as if part of the business of the partnership - would not, in my view, of themselves be enough to impose liability on the first defenders. The critical matter in such circumstances (as Mr Crawford appeared to me to accept) must be the terms on which the pursuers appointed Mr MacLean as director (see e.g. cases such as New Mining and Exploring Syndicate Ltd v Chalmers & Hunter 1912 S.C. 126 and Kirkintilloch Equitable

Co-operative Society v Livingston 1972 SC 111). As I have found, Mr MacLean was engaged as director as an individual. I cannot infer that he would not have been made a director had he not been a partner in the first defenders. The terms of the arrangement plainly were that he would be paid, and he was paid, personally a salary under deduction of PAYE. Given, further, the terms of the partnership agreement it is, in my view, of no consequence that Mr MacLean appeared to do a certain amount of work as director in office hours at the first defenders' place of business. In all the circumstances, where neither the first defenders nor any of the other partners were aware of the specific actings in question, it cannot, in my view, be said that in giving the advice he did, as director, he was acting either in the ordinary course of the business of the firm, or with the authority of his co-partners (section 10 of the Partnership Act 1890).

[34] The subsidiary position of the pursuers - which it was accepted was not easy to advance - was that even if Mr MacLean gave the relevant advice as director alone (and not at all as partner or in circumstances in which the partnership assumed liability therefor in a question with the pursuers) he still could be said to have failed in his duties as a partner given the confidential knowledge he had acquired, as a partner, in his dealings with ML. This contention, I regret, I found difficult to understand given the hypothesis upon which it proceeded, and I am not persuaded by it. I record for completeness, however, that reference in this connection was made by the defenders to Credit Lyonnais Bank Nederland N.V. v Export Credits Guarantee Department 1999 2 WLR 540, for the proposition that for the purposes of vicarious liability all the features of the wrong which are necessary to make an employee (or  agent) liable must have occurred in the course his employment (or agency).

[35] That is enough for determination of the case, but had I been persuaded otherwise I would have required to assess whether, as director et separatim partner of the first defenders, Mr MacLean could be said to have failed in his duties to the pursuers and whether so failing he caused the losses in respect of which the pursuers sue.

[36] As to liability the pursuers' primary position was that, given the conflict of interest which existed between his duties as director and his duties to ML inter alia not to reveal confidential information gleaned about their financial position, Mr MacLean should not have raised the question of potential investment in ML at all, or alternatively, at least should have indicated to Mr McGown that ML were clients of the first defenders and that he was acting in that connection, that he would be unable to take part in any question of investment in or advances to or guarantees in respect of ML, that if he wished to take the matter further he would require to obtain independent advice. This primary position was presented as a breach of fiduciary duty or alternatively as a failure to take reasonable care. Such duties, based on breach of fiduciary duty and lack of reasonable care, were also, it was argued, incumbent upon Mr MacLean if he could be said to have acted simultaneously as a partner in the giving of the relevant advice. As to circumstances in which a person giving advice could be said to be under a fiduciary duty, reference was made to Jackson and Powell on Professional Negligence (4th edition) at paragraph 8-29 and to the decision of the Supreme Court of Canada in Hodgkinson v Simms 1994 3 S.C.R. 377. The secondary position was that, if Mr MacLean saw fit to go further, it was his duty to reveal, at all material times, the true position of ML (the evidence suggesting that Mr MacLean was having difficulties in obtaining finance from other bodies) and further not to advise any of the advances or the grant of the guarantee without recommending that the pursuers first obtain security, and that in these respects he had failed. These duties were said to have been incumbent on him in the exercise of reasonable care both as director and a partner.

[37] On causation it was argued (under reference to the pursuers' primary position) that in so far as liability rested on breach of fiduciary duty the onus was on the defenders to demonstrate that the pursuers' position would in any event have been no better, and they had not done to. Reference in particular, was made to Hodgkinson v Simms at page 23 of 37. Reference was also made to Regal (Hastings) Limited v Gulliver and others 1942 1 All ER 378 at page 386. In any event, the Court could readily infer that Mr McGown would not have entered into any further discussions or investigations about investing in ML, if the man upon whom whose advice he was so dependent was unable to play any part. All the losses could be said to flow therefrom. As to the secondary position, the Court could infer that the pursuers would not have invested or supported ML in any way had the true position been revealed and would not have lent or granted the guarantee without at least obtaining security.

[38] As to the duties in which it could be said Mr MacLean had failed, there was only limited dispute on behalf of the defenders. It was not accepted that Mr MacLean should not have raised the possibility of investment etc. in ML at all (in circumstances where he appeared to believe that there were good prospects), but it was agreed that in the circumstances it was his duty, whatever capacity he acted in, to reveal that ML were clients of the first defenders, that he was involved in that capacity and that he would therefore be unable to take part in any further assessment. It was accepted that failure in this respect could be described as a breach of reasonable care and, albeit with some hesitation in light of the pleadings, that it was open to the pursuers to present it also, as a matter of law, as a breach of fiduciary duty. It was, however, argued that elements of the secondary position were not established. In particular, it was submitted that whereas it might well have been the duty of Mr MacLean, in whatever capacity, to take reasonable care to reveal the true position of ML, there was insufficient evidence to allow the Court to draw any conclusion as to what precisely Mr MacLean should have revealed at any particular time. Moreover, although it was agreed that the indications were that there would have come a time when it would have been right to advise that no loan or guarantee should be given without security, it was not possible for the Court to find, on the evidence, when that time was - in particular, in circumstances were it seemed that some others, including the first bank involved with ML, had invested without at least fixed security.

[39] As to causation, although the transfer of onus argued for was not, as I understood it, ultimately disputed as a matter of law (i.e. insofar as the primary duties of Mr MacLean could be said to rest on breach of fiduciary duty), it was submitted that, in the absence of any clear notice on record the pursuers should not be allowed to take advantage thereof, which failing the matter should be put out By Order to enable the defenders to consider whether to lead further evidence. Further, the Court could not infer that Mr McGown would not in any event have proceeded. As to the secondary alleged duties, there was no basis upon which the Court could infer what Mr McGown would have done or with what effect. All the evidence showed was that no creditor of ML had received payment, save some who - to an unknown level - held personal guarantees from directors (including Mr O'Keefe).

[40] In my view, the evidence clearly established that Mr McLean at least failed, in his primary duty, in whatever capacity he acted, to indicate that ML were clients of the first defenders, that he was directly involved in that, that he was therefore unable to take part in any question of lending to, or guaranteeing in respect of, ML and that any further advice would have to be obtained independently. As regards the secondary alleged duties, there was, it seems to me, no clear evidence as to the financial position of ML (or of Mr MacLean's knowledge thereof), at least prior to the granting of the guarantee, such as would enable the Court to give content to Mr MacLean's accepted duties of disclosure. By the time of the guarantee, however, as indicated in the evidence of Mr Crawford, it seems clear that Mr MacLean was aware of the precarious nature of ML's financial position. In particular, management accounts for the year to 30 April 1991 (apparently prepared by the first defenders) showed that ML had net liabilities of £104,000 and had made a net loss of £133,000 and a gross loss £10,000. Further, Mr MacLean became a signatory to ML's bank account with the Royal Bank of Scotland on 2 August 1991 because the bank was concerned about ML's financial position and wanted Mr MacLean to countersign all cheques. In addition in a draft letter dated 4 July 1991 to British of Steel (Industry) Ltd in connection with ML, Mr MacLean stated "the current financial position is not satisfactory in that there is a severe shortage of working capital". Plainly, it was Mr MacLean's duty, in whatever capacity, to convey these unpalatable truths. Further, it seems to me that it was his duty, at all times, not to advise the advance of funds or the granting of the guarantee without the obtaining of security.

[41] Further, I consider that it was proved that the losses in respect of which the pursuers' sue flowed from Mr MacLean's failures. That, in my opinion, is so at least in relation to the primary duty referred to above. In that connection, in my view, it can reasonably be inferred from Mr McGown's evidence as to complete dependence on Mr MacLean in respect of financial matters, that he would not have contemplated any potential investment etc. without the assistance or advice of Mr MacLean being available. Mr MacLean's conscious decision (as I have found) not to tell him of his involvement with ML indicates clearly that he knew that too. In these circumstances it is unnecessary for me to deal with the question of onus which was referred to, although where the defenders appeared to accept that just enough had been averred to enable the pursuers to make a case based on breach of fiduciary duty and in circumstances were it did not appear that the law referred to was in dispute (although as to that I make no comment), the defenders were, it seems to me, in some difficulty in that respect. While I agree with the defenders that there was insufficient evidence to enable any findings to be made as to what would have happened if the pursuers had been advised to obtain security (in particular as to what such security would have been and whether it would, in the event, have protected them), I have no doubt that if the true position of the company had been revealed before the granting of the guarantee the guarantee would not have been signed at all.

[42] While therefore it seems plain that Mr McGown and the pursuers were badly let down by Mr MacLean, for reasons already given I am unable to find the first defenders and the remaining parties liable therefore. In all the circumstances I shall sustain the second and third pleas-in-law for the first to third and fifth to tenth defenders, repel the pursuers' first plea-in-law, insofar as directed against these defenders, and pronounce decree of absolvitor in favour of these defenders. Insofar as the pursuers did not move for decree against the fourth defender or his representative, I shall dismiss the action in so far as thus laid.


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