Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2010] CSOH 114
CA165/08	OPINION OF LORD HODGE in the cause GILLESPIE INVESTMENTS LIMITED Pursuer; against JOHN McLEAN THOMSON GILLESPIE Defender: ­­­­­­­­­­­­­­­­­________________

Pursuer: Ferguson QC, Simpson; Semple Fraser LLP

Defender: McIlvride; Anderson Fyfe LLP

13 August 2010

[1] This is the second of two actions which Gillespie Investments Limited ("GIL") has raised. Each is against one of its former directors. In the first action GIL seeks damages of £534,637.42 from Mr Thomas Graham Gillespie ("Mr Graham Gillespie") and in this action GIL seeks damages of £689,556.97 from Mr Graham Gillespie's son, Mr John McLean Thomson Gillespie ("Mr Scott Gillespie") for alleged breaches of their fiduciary duties as directors of that company.

[2] As there was a conjoined proof in the two actions I have set out findings of fact and have discussed the defences to the claims in my opinion in the action against Mr Graham Gillespie. Those findings and that discussion are equally relevant to this action and I adopt them for the sake of brevity in this opinion.

The disputed payments: the Joint Minute

[3] Counsel again helpfully agreed a Joint Minute setting out the disputed payments and agreeing that the defender authorised the payments. They identified where they could the beneficiary of those payments. In summary, it was accepted or thereafter proved that payments out of GIL's funds were made for the benefit of the following persons or entities:

Kirkton Park Farm (a partnership) £294,770.19

Strathbell Ltd £378,351.02

Scott Gillespie  (personal and other expenditure) £12,267.12

Scott Gillespie  (other expenditure) £24,766.95*

(* This sum includes £5,500 paid to Strathbell. See below)

The sums paid out in respect of the Kirkton Park partnership included a payment to Scott Gillespie of £249,000 in April 2005 to fund the purchase of the property and payment of various professionals for work in relation to that site. A charge of £14,845.69, which was either an arrangement fee for setting up an overdraft or was the aggregate of several months' interest, was charged on 1 November 2005 and thereafter monthly transfers were made to meet Kirkton Park's interest obligations. The partners of that partnership were Scott, Graham, Gary and Alan Gillespie.

[4] The sums, which were for the benefit of Strathbell Limited ("Strathbell"), were principally the reimbursement of wage bills for the staff whom Strathbell employed but who worked for GIL. They also included periodic payments to HMRC in respect of PAYE and national insurance contributions in respect of those staff, and to Vodafone plc in respect of the mobile phone contracts of GIL's directors, their families and GIL's staff, which Strathbell had entered into on their behalf. There was also a payment to Mr Alasdair Young, of £3,266.55. He operated a garage near Airdrie and provided fuel to GIL's directors (other than Steven) and their families on an account.

[5] Of the £24,766.95 in the final line of the table in paragraph [3] above, £14,149.45 related to legal fees charged by Maclay Murray & Spens to Mr Scott Gillespie in relation to a potential development in Edinburgh which, had it proceeded, would have been a joint venture with Graham, Gary and Alan Gillespie. Also in that line £5,500 was paid to Strathbell on about July 2004.

[6] The parties in the Joint Minute also recorded that on 26 September 2005 Strathbell transferred £20,598.31 to GIL and agreed (in paragraph 3 of the Minute) that that sum fell to be deducted from the total amount, if any, due by Mr Scott Gillespie to GIL in respect of the payments to Strathbell. The Joint Minute also recorded that between 14 February 2005 and 12 May 2006 payments totalling £304,282.54 were paid into GIL's account, including a sum of £250,000 on 27 October 2005. But neither Mr Scott Gillespie nor Mr Stephen Bell was able to identify the nature of those payments.

Discussion

[7] In my opinion in the action against Mr Graham Gillespie, I rejected the defence of consent to the disputed transactions, the defence of waiver and the application for relief under section 1157 of the Companies Act 2006. My reasoning on those matters applies equally in this case. But there are two further considerations which need to be addressed which are specific to this case.

[8] First, it is clear that Mr Steven Gillespie and all of the other shareholders in GIL must have been aware (a) that Strathbell provided the staff for GIL, including Mr Bird, and also paid the directors' expenses and (b) that it required to be reimbursed. Mr Ferguson QC did not seriously argue otherwise but said that Mr Steven Gillespie would not have known the details of the payments. I can readily see that, having regard to the strictness with which trust obligations are enforced, if a trust beneficiary did not know the details of irregular transactions, his knowledge that there were some irregularities would not amount to consent to all such transactions from which a trustee had profited; there must be full disclosure: see for example Taylor v Hillhouse's Trustees (1901) 9 SLT 31; Dunne v English (1874) L.R. 18 Eq 524, Sir George Jessel MR at p.535; Hurstanger Ltd v Wilson [2007] 1 WLR 2351, Tuckey LJ at paragraph 35. In this case, however, GL was a family company in which all of the shareholders were directors. Mr Steven Gillespie was both a shareholder and also a director and thus he also was a fiduciary. Mr Scott Gillespie gave evidence, which was not challenged, that Steven also benefited from Strathbell's expenditure as GIL staff assisted him at a site at Drymen Mains Farm and he was also given architectural and design assistance on his own projects by Mr Colin McRobbie, who was on GIL's staff and paid for by Strathbell. It appears to me in the circumstances that all of the corporators of GIL knew that its directors were obtaining benefit from the services of the GIL staff outside the scope of GIL's business activity and the payment of their expenses for which GIL was reimbursing Strathbell. With the exception of the payment of £3,266.55 to Alasdair Young, all of the payments for the benefit of Strathbell related to payments for GIL staff and the reimbursement of all of their directors and their families. In view of this course of conduct it seems to me to be very artificial to suggest that the shareholders of GIL did not consent both to the use of GIL staff to assist in projects outside the scope of GIL's business and to the reimbursement of Strathbell for such business expenses.

[9] Mr Ferguson submitted that if I were not satisfied that the real possibility of conflict of interest which arose through the use of Strathbell, which Scott owned, gave rise to loss in the sum claimed, I should apportion that sum between legitimate expenditure on GIL and irregular expenditure on the other businesses. He suggested that I should use a rather broad brush by having regard to Scott's evidence that he normally spent about 40% of his time on GIL business, to the limited nature of the work which managing that company's business involved, and to the disproportion between the annual rental income of GIL (£240,000) and the payment of over £378,000 to Strathbell between May 2005 and April 2006. He suggested that I should attribute no more than 25% of the monies paid to Strathbell to bona fide expenditure on GIL's business.

[10] I readily appreciate Mr Ferguson's point that GIL's expenditure appears out of proportion to GIL's annual income. I also accept that the onus of showing that there was consent to payments made in breach of fiduciary duty because of a conflict of interest rests on the person asserting that consent. But I consider that Mr Scott Gillespie has done enough to persuade me that there was such consent where all of the shareholders and directors of GIL must have known that the staff were used to assist in other family ventures and that the directors were reimbursed for their general business expenditure. It is not simply a case of someone being put on inquiry. It is a case of actual knowledge of a practice. In these circumstances I consider that the loss which GIL would have suffered but for the shareholders' repayment of its overdraft in the context of the sale of the shares to Eastercroft was the £3,266.55 paid to Mr Alasdair Young, which was a facility made available to the directors and their families other than Mr Steven Gillespie and of which he appears to have had no knowledge. Having regard to the parties' agreement in paragraph 3 of the Joint Minute (see paragraph [6] above), I consider that no sum is due by the defender in relation to the payments to Strathbell.

[11] I do not regret this outcome as there was no suggestion that Mr Scott Gillespie obtained any personal benefit in his capacity as a director or shareholder of Strathbell from the challenged payments.

[12] The second consideration relates to the claim in respect of the Kirkton Park Farm partnership. £249,000 of this expenditure was disclosed to Mr Steven Gillepsie and the other shareholders in the two Share Transfer Proposals. In both a calculation was made of the amount due to Mr Steven Gillespie on the basis that the other shareholders and directors reimburse GIL that sum. I have set out the first Share Transfer Proposal in paragraph [21] of my opinion in the action against Mr Graham Gillespie. The later Share Transfer Proposal, which, like the first, was a discussion document and did not vouch an agreement, was in these terms:

Gillespie Investments

Share Transfer Proposal

						£		£
Share Purchase								4,000,000
Less:
TGG - Loan				250,000
						250,000
GI O/D						2,889,333
Total Deductions								3,139,333
								860,667 _________
								860,667
Income Due In
Directors Loan						128,031
Saltoun Street						209,000
Kirkton Park						249,000
								586,031
								1,446,698
		%					Less SS & KP
Shares	TGG		22		318,274		114,500		203,774
	SG		22		318,274				318,274
	GG		22		318,274		114,500		203,774
	AG		22		318,274		114,500		203,774
	JMTG		10		144,670		114,500		30,170
	JMcD		2		28,934				28,934
_____________________________________________
			100		1,446,698		458,000		988,698

[13] If this Share Transfer Proposal had been implemented, Mr Steven Gillespie would have received £318,274 while his brothers would each have received £203,774. The picture is complicated as I have held that neither Mr Scott Gillespie nor Mrs Julia McDonald were entitled to shares in GIL and thus the proceeds enhanced by the income from reimbursements would have been divided by four, giving Mr Steven Gillespie a share of £361,674. That is not the point however. What is relevant is that under the Share Purchase Agreement Mr Steven Gillespie (like his brothers) was due £262,840.70 but he received £300,000 from the sale, namely £37,159.30 more than his contractual entitlement. Mr Scott Gillespie in his evidence suggested that the enhanced sum was an attempt to give an allowance for the fact that Steven did not have an interest in Kirkton Park and the Saltoun Street venture.

[14] In the action against Mr Graham Gillespie I have invited counsel to make written submissions on the issues set out in paragraph [64] of my opinion. Those submissions are equally relevant to this action. In addition I invite the parties to address me on whether and if so how I should take account of the £37,159.30 which Mr Steven Gillespie has received in excess of his contractual entitlement under the Share Purchase Agreement.

Conclusion

[15] I invite counsel to produce and lodge in process within four weeks of the date of this opinion written submissions on the issues raised in paragraph [64] of my opinion in the case against Mr Graham Gillespie and to include within those submissions arguments on the issue raised in paragraph [14] of this opinion. Thereafter I will put out the two cases by order for a hearing on those submissions.