SOMERVILLE AGAINST 1051 GWR LTD [2019] ScotCS CSOH

BAILII is celebrating 24 years of free online access to the law! Would you consider making a contribution?
No donation is too small. If every visitor before 31 December gives just £1, it will have a significant impact on BAILII's ability to continue providing free access to the law.
Thank you very much for your support!

[1] The pursuer in this action sues on behalf of GCOS Limited (“the Company”)

pursuant to an interlocutor granted by Lord Doherty in terms of section 266 of the

Companies’ Act 2006 (“the 2006 Act”). The pursuer and David Maguire (“David Maguire”)

are the directors and shareholders (in equal amounts) of the issued capital of the Company.

The Company acquired the tenant’s interest under a long lease in certain commercial

premises at 1051 Great Western Road, Glasgow (“the Premises”). It proposed to sublet the

[2] This is one of several actions between the pursuer and David Maguire, or between

entities with which one or other of those individuals is said to be associated. By this action

the pursuer seeks reduction of a lease (or, more properly, a sub-lease) of the Premises

granted by the Company to the defender in June 2015 (“the Lease”). It is not necessary to

record the protracted path by which the Lease came to be granted. Had notice to quit been

given when it was first possible to do so, the Lease would have terminated in mid-

September 2015. Notwithstanding the short-term rolling nature of the Lease, by reason of

the deadlock between the pursuer and David Maguire qua directors of the Company it has

[3] The defender resists reduction. At a two-day debate, it sought to have the pursuer’s

action dismissed as irrelevant on the basis of a number of arguments set out in its note of

argument. The pursuer moved the court to allow his whole averments to go to proof.

[4] The Summons has been subject to multiple adjustments. The averments, which are

prolix and unstructured, may be divided into three broad categories. There are averments

about the unsuccessful negotiations for the pursuer and David Maguire to disentangle their

business and property interests. There are averments about the many offers made by David

Maguire to let the premises on various terms and which the pursuer rejected because he did

not believe them to be in the best interests of the Company. Falling within the third

category of averments are those anent David Maguire’s conduct linking him in a variety of

ways to the defender. The legal basis for reduction (reading short the pursuer’s first plea-in-

law) is that the defender acquired the Lease in “bad faith and in the knowledge that it had

obtained that interest as a result of David Maguire having acted in breach of his fiduciary

duties to the Company…” and “the benefit” of which the defender is not entitled to retain.

[5] For ease of reference, the factual averments extracted from the pursuer’s pleadings,

and which may potentially be relevant to the legal ground of the action, include the

1) In about the first part of 2015, David Maguire first proposed that the

2) Over an extended period of time David Maguire provided undisclosed

support for the defender, the purpose of which was to secure a binding legal

relationship between the Company and the defender, in the form of a lease

3) David Maguire thereafter promoted the former head chef of the Premises and

his family as being interested in taking a short-term rolling lease. The rent

payable of £4,333 per month (after a one-month rent-free period) proposed

lease was “below market rent”, but the Company’s selling agents advised in

favour of this proposal as a means to keep the Premises heated while a full

4) It was “on this basis” that the pursuer and David Maguire agreed that the

Company should accept the offer and they entered into the Lease with a

term of three months’ duration. If neither party terminated the Lease, then it

would continue until terminated by either party upon giving three months’

notice. The pursuer was not then aware of David Maguire’s involvement in

5) While the basis for the pursuer’s “below market rent” averment is not

entirely clear, there is a later passage (added in the fourth round of

adjustments in a different article of condescendence (article 2)), to the effect

that in or around May 2015 David Maguire had proposed the lease of the

Premises to a new company to be formed by him on an annual rent of

£80,000 (albeit with an initial three-month rent-free period and a further

three-month period at a restricted rent), with an option in favour of the

tenant to purchase the Company’s interest in the Premises within a five-year

period at the sum of £80,000. Further, there is reference in article 3 (made by

the third round of adjustments) to a different offer in May 2015 to let the

Premises for a 36-month period at an annual average payment of £80,167.

However, David Maguire “persuaded the pursuer” that a short-term let was

6) From about late 2015 the pursuer has repeatedly proposed that notice be

given to terminate the Lease “in order that the Company can let the Premises

at its true market rent”. David Maguire declined to agree, or he made any

agreement conditional on his having a right to better any offer received by

7) The pursuer repeatedly refused these offers as not in the best interests of the

8) By about late 2015 or early 2016 the business relationship between the

pursuer and David Maguire broke down. As a consequence, they intended

to divide their “joint property interests” between them, with a view to

severing their business relationship. It was anticipated that the pursuer

9) David Maguire eventually disclosed, when pressed, that he provided

“advice” to the defender but he was not a shareholder or director of it.

10) After enquiry by the pursuer it was ascertained that David Maguire, or

possibly his son (who shares the same name), acquired four domain names

that might reasonably be associated with the Premises (eg a combination of

the letters standing for the abbreviation of the street (Great Western Road,

“gwr” etc) and the street number (1051)). The domain names were

11) One of these domain names is, in fact, used by the defender to advertise its

12) From early 2016 the pursuer suspected that David Maguire had a financial

interest in the defender or its business, but David Maguire consistently

13) David Maguire has been the designated premises manager of the Premises

14) From about late 2015 David Maguire has been holding himself out to

customers and to restaurant critics as the owner and manager of the

defender’s restaurant and he is frequently in attendance at the Premises.

16) David Maguire arranged for the opening of the defender’s bank account.

18) David Maguire provided a personal guarantee on behalf of the defender

19) At a board meeting of the Company in June 2016 David Maguire is said to

have stated, that if the Premises were marketed he would not exclude

himself, but would take “full advantage” of the situation and, further, that

the pursuer was “stuck with me as your tenant for life” (emphasis added).

20) Throughout the period from late 2016 the pursuer has proposed that the

Company find a new tenant of the Premises at a rent “reflecting the

Premises’ market value” or that the rent payable by the defender be

increased. David Maguire has refused to agree to these proposals.

21) In an email dated 11 September 2018, it is averred that David Maguire

indicated that he intended to procure that the rent payable by the defender

would “not go into the [Company’s] account in the meantime” (ie pending

severance of the pursuer’s and David Maguire’s business interests).

22) Thereafter, the defender ceased paying rent. As at 22 February 2019, the rent

[6] There are other matters referred to in the pleadings which may be relevant:

23) Prior to grant of the Lease, the Company had carried on a restaurant business

at the Premises “through the medium of MBIC Limited which held a lease of

24) The Company has traded as a restaurant in the Premises prior to June 2015.

25) The pursuer wishes to ascertain the true market value of the Premises, to be

established via a marketing exercise. Since late 2015 the pursuer has

repeatedly proposed giving notice to the defender to terminate the Lease in

order that the Company can let the Premises at its true market rent, but

David Maguire has refused to agree to this unless he is allowed to match any

26) Prior to the raising of this action, the pursuer refrained from causing the

Company to seek to reduce the Lease by reason of David Maguire’s

“repeated statements” that he was willing to enter into an agreement

regulating their joint interests, and the pursuer’s belief that such agreement

The legal characterisation of David Maguire’s conduct and the legal duties founded upon

[7] The pursuer avers that David Maguire “has at all material times been a shadow

director and the controlling mind” of the defender, and separately a de facto director of it.

As a fall-back, it is averred that if David Maguire is not a shadow or de facto director, he

intended to become one and “intended at that time to have, a personal interest in the

[8] The pursuer founds on the following legal duties (as set out in the first three

1) qua director David Maguire owed a fiduciary duty to the Company, including a

duty to avoid placing himself in a position of a conflict (or potential conflict) of

2) in procuring that the Company entered into a Lease at an undervalue with the

defender, David Maguire breached his duty to promote the success of the

3) David Maguire placed himself in a position where his interests conflicted or

[9] In relation to the defender’s knowledge, it is said to have been aware of having

obtained the benefit of the Lease with the Company as a consequence of David Maguire’s

breach of fiduciary duty. The defender is said to be fixed with David Maguire’s knowledge

by virtue of David Maguire being a shadow director, a de facto director or “the person

authorised by it to negotiate and agree the terms of the Lease”. The defender is averred to

have acquired the Lease in bad faith and was not, in those circumstances, entitled to retain

[10] I have had regard to the note of arguments and chronologies produced by each

party, to their Joint Statement of Agreed Legal Principles, which I need not repeat, and to

[11] The defender summarises the pursuer’s position as follows: that the Lease was

entered into as a result of David Maguire acting in breach of his fiduciary duties to the

Company and that the defender is impressed with the knowledge of the breach of duty by

[12] The pursuer’s case was argued to be irrelevant on a number of bases. Senior

Counsel for the defender, Mr Barne QC, presented his submissions in a number of chapters

which differed from (but were understood to cover those in) the defender’s note of

argument (and of which he was not the author), as follows: (1) the pursuer’s averments of

breach of fiduciary duty on the part of David Maguire were irrelevant (“the section 175(3)

argument”); (2) for the purposes of the remedy of reduction and the averments of bad faith,

the material time was the entry into the Lease and, as a consequence, the averments of

David Maguire’s subsequent refusals to terminate the Lease were irrelevant (“the material

time issue”); (3) the averments of bad faith were lacking in specification (“the attribution of

knowledge issue”); (4) there was no basis on which reduction could be granted, largely

because the pursuer had no averments that restitutio in integrum was possible (“the

reduction issue” ); and (5) the pursuer failed to address the issue of mora, taciturnity and

The defender’s arguments anent alleged breach of fiduciary duty

Does the pursuer have relevant averments to establish breach of fiduciary duty by David Maguire?

[13] While the defender had several distinct arguments as to why the pursuer’s pleadings

of breach of duty were irrelevant, the principal argument was advanced in reliance on the

terms of section 175(3) of the 2006 Act. I deal with ancillary criticisms (e.g. insufficient

[14] It may first assist to understand the averred factual foundation of the pursuer’s case.

At the heart of the pursuer’s case is an allegation of breach of fiduciary duty on the part of

David Maguire and of which it said the defender was aware at the material time. It is not

uncommon for a case of breach of fiduciary duty to be constructed on the basis of conduct

on the part of the allegedly defaulting director which was unknown to the pursuer at the

material time. There are such features in the present case: the factors identified in

subparagraph (2), (9), (10), (15) to (17) of paragraph [5], above, all describe clandestine

conduct on the part of David Maguire. Furthermore, all of those factors concerned David

Maguire’s actions in furtherance of the interests of the defender and to the detriment of the

Company’s interests. The detriment to the Company arises in two distinct ways. First, the

Lease entered into was ostensibly at a lower rent than the other offers made (recorded at

para [5(4)]): a rent of £80,000 per annum (being the figure referred to in the two offers)

produces an average rent of £6,667 per month whereas the rent passing under the Lease has

been £4,333 per month since its inception. While the defender argues that it is not possible to

compare the rents arising under a short lease (like the Lease) and a longer lease (as

envisioned in the offers), that is a matter for proof. Secondly, the Company is effectively

trapped in a Lease which, by reason of the subsequent deadlock between the pursuer and

David Maguire, it is unable to terminate. Its efforts to increase the rent are similarly

thwarted. In my view, it is no answer to argue, as the defender does, that the Lease was

entered into on the “advice” of professionals. Placed in its factual context, the “advice” was

clearly in support of a short-term let to enable a full marketing campaign of the Premises.

The averments about the two offers (each at a rent of c £80,000 per annum) are capable of

providing further support for the pursuer’s case that the company’s intention at the time

was that any let of the Premises in June 2015 was to be short-term and that the Lease is a

[15] Furthermore, the factors recorded in sub paragraphs (2), (3) and(7) of paragraph [5],

above, about David Maguire’s ambitions to secure a lease of the Premises, are capable of

supporting a case that David Maguire, aware of his ability to thwart any attempt by the

Company to terminate the Lease in September 2015, procured the Lease as a vehicle to

achieve what he wanted, which was occupation of the Premises. The clandestine features

already referred to are capable of adding weight to such a case, as do the averments of the

defender’s own statement (recorded in paragraph [5(19)]) that he would take full advantage

of the situation (ie the impasse between him and the pursuer). Indeed, that averment is

telling in two respects: the implication is that his intention is to take full “advantage” of the

situation (the use of “advantage” is capable of constituting an acknowledgement that the

effect of the impasse is detrimental to the interests of the Company); and it is his, ie David

Maguire’s, intention to do so. That part of David Maguire’s statement is capable of

supporting a case that his actings evidence a concerted (and, possibly, continuing) intent to

act in a manner that is in conflict with the obligation he owes qua director to the Company

[16] Under reference to section 175(3) of the 2006 Act, Mr Barne submitted that the

pursuer had not identified a relevant breach of duty. He argued (i) that chapter 2 of Part

10A of the 2006 Act (“chapter 2”) was a complete code of the fiduciary duties which

replaced any common law duties, but (ii) that the effect of section 175(3) of the 2006 Act was

to exclude any liability on the part of the defender as the Lease concerned a transaction with

the Company. After the pursuer’s reply, which included Mr McIlvride QC’s reference to the

discussion (at paras 66 to 68) of the Court of Appeal in Burns v Financial Conduct Authority

[2017] EWCA Civ 2140 (“Burns”), in his second speech Mr Barne’s position became more

fluid on the issues of whether chapter 2 constituted a “complete” code of director’s fiduciary

duties, whether it displaced all common law duties and as to the precise scope of the carve

out in section 175(3). As I understand Mr Barne’s final position, it was that section 175(3) of

the 2006 Act excluded from the scope of the duty imposed in section 175(1) any transaction

with the company (ie “the literal reading”, as described by the Court in Burns).

[17] In considering that submission, I start by noting that chapter 2 begins with section

170 which, under the rubric “scope and nature of general duties”, provides inter alia that the

“general duties” specified in sections 171 to 177 “are based on certain common law rules

and equitable principles as they apply in relation to directors and have effect in place of

those rules and principles as regards the duties owed to a company by a director” (emphasis

added). While this is not the occasion to explore the question of whether the code in

chapter 2 is “complete” such as to preclude any duty outwith its scope arising under the

common law (a suggestion made in passing in submissions), it is clear that chapter 2

expresses in statutory form a general or core code of fiduciary duties imposed on all

company directors as a matter of law: section 170(1). It is precisely on that basis that the

defender invokes the exclusion (if that is what it is) in section 175(3) of the 2006 Act. He was

able to do so, because the chapter 2 duties apply as a matter of law. For that reason, the

defender’s contention that the pursuer does not expressly aver any of those duties has no

force. In any event, as I have him noted, Mr McIlvride had, in fact, referred to and relied on

section 177 in the 2006 Act in the course of his oral submissions. Again, Mr Barne took no

objection, in my view rightly, to the pursuer’s reliance on one of the statutory duties in

[18] Turning to section 175(3), on which Mr Barne relies, it is noted that in the absence of

full argument, the English Court of Appeal in Burns refrained (at paras 67 to 68) from

expressing a concluded view on the question of whether the exclusion in section 175(3) was

confined to transactions between the company and the director concerned (as was argued

before the tribunal on behalf of the applicant director in that case) or whether the literal

meaning was to be preferred (extending the exclusion of the scope of the duty in

[19] Chapter 2, headed “General Duties of Directors”, of the 2006 Act articulates a core

body of duties which apply as a matter of law to all company directors including “shadow

directors (see sections 170(5) read together with the definition of “shadow” director in

section 251) and de facto directors (see section 250, which defines “director” as including

“any person occupying the position of director, by whatever name called”). In relation to

section 170(5), there was no suggestion that the common law duties corresponding to

sections 175(1) or 177(1) did not apply to shadow directors. Turning to section 175, this

expresses in statutory form the long–established common law duty of directors to avoid a

situation of actual or potential conflict between his or her interests and those of the

company, and which was articulated in forceful and unequivocal terms by Lord Chancellor

Cranworth in Aberdeen Railway Co v Blaikie Brothers (1854) 1 Macq 461; 17 D(HL) 20 (at

pages 471 and 473), and affirmed by Lord President Hamilton in Commonwealth Oil & Gas v

Baxter 2010 SC 156 (at paras 73 and 74). The stringency of the duty is repeated in

section 175(1): “A director of a company must avoid … a position of conflict of interest”

(emphasis added). In the light of the mandatory character of the rule in both its common

law and statutory form, any statutory exception should, for obvious reasons, be construed

consistently with the scope of that duty and its interrelationship with the other core duties.

[20] Having regard to chapter 2 as a statutory code of the general duties of directors, each

duty should not be considered in isolation from the others but, where necessary, should be

construed consistently with, and complementing, the other duties. In part, this is to ensure

that the statutory duties are at least co-extensive with the like duties imposed on company

directors under the former common law rules. Accordingly, an interpretation which may

result in a lacuna of the protection of companies the code is intended to confer, at least

invites further scrutiny as to whether that interpretation is the correct one.

[21] In their oral submissions Senior Counsel both referred to section 177. In relation to

the subject-matter of section 177, it has long been the case that in certain circumstances

directors may enter into a contract or property transaction with the company of which they

are a director (“self-dealing”) so long as they declare their interest in the proposed

transaction or arrangement. Consistent with breadth of the common law duty section 177

replaces, the statutory duty to inform the company extends to any interest “in any way,

directly or indirectly” in a proposed transaction. The purpose of imposing a duty on a

director to inform the company of his or her interest was to enable the company either to

approve or refuse approval of the proposed transaction. Where the director’s interest comes

to light after conclusion of the transaction in which he has an interest, the company may

ratify the transaction or, alternatively, it may take action to remedy breach of the director’s

[22] It respectfully seems to me that section 175(3) is designed to disapply the otherwise

mandatory duty in section 175(1) to enable this kind of permitted self-dealing (and

disclosure of which is the subject-matter of section 177). (Other forms of self-dealing,

including substantial property dealings, loans etc attract special rules, none of which is said

to apply here.) Prima facie, therefore, section 175(3) is concerned with transactions involving

directors and it does not extend to transactions with non-director third parties. Read

consistently with what is disclosable in section 177(1), section 175(3) is not in my view

confined to transactions between the director and the company. The passive voice in

section 175(3) is intentional. To read section 175(3) as confined to transactions between the

company and the director, as I understood Mr McIlvride’s submission at one point to be,

would introduce a conflict between this subsection and the wider scope of section 177(1).

The conflict would arise because a transaction in which the director has an indirect interest

(as contended here, via David Maguire’s averred involvement qua director (in some form) of

the defender), would be disclosable under section 177 but prohibited under section 175(1). I

agree with the approach of the Court of Appeal in Burns that section 175(3) is not to be read

so restrictively and that the literal interpretation is to be preferred. Given the

interrelationship between section 175(3) and 177, the consequence of that conclusion reflects

the outcome in Burns. While in Burns the Court of Appeal accepted that the applicant’s

conduct did not fall within section 175(3), that conclusion was of no avail to the director

concerned. It is evident in the Court of Appeal’s discussion of this issue that it regarded the

section 171 and 177 duties as closely connected (see, eg, from para 71ff). It traced the

common law cases articulating these duties, which are now found in the core chapter 2

duties, and found that, to the extent that the applicant fell outwith section 175(1), because

she was within the exception in section 175(3), she was caught by section 177: see the

discussion at paragraphs 71 to 76, especially the conclusion at paragraph 76 in Burns. In

contrast to Burns, in this case there was no subsidiary argument as to the nature of the

“interest” that was disclosable under section 177. While neither of these provisions is

specifically averred in either parties’ pleadings, both parties accepted in oral submissions

that the chapter 2 duties applied and both referred to these specific provisions in their

submissions. Counsel simply differed as to the scope of the exception in section 175(3). In

the light of that common approach and the fact that the chapter 2 duties apply as a matter of

law, it matters not – at least in a case in the commercial court – that there is no express

reference to these provisions in parties’ averments. Both Senior Counsel fully understood

[23] For completeness, I should record that the consequence of a breach of the duty in

section 177 was left relatively unexplored in submissions, but I note Lord Drummond

Young’s helpful discussion of this issue in Dryburgh v Scott Media Tax Ltd [2014] CSIH 45; SC

651 (at para 26). In particular, he noted that the obligation of a director to avoid placing

himself in a position of a conflict of interest with a company was a continuing duty, as was

that to inform the company if such a conflict of interest arose. The purpose of imposing a

duty on a director to inform the company was to enable the company either to authorise

that breach or to take action to remedy it. The failure in that duty was a separate breach of

fiduciary duty. It was on the basis of breach of that duty that the court in Dryburgh held that

director’s failure to consider that obligation to inform was attributed to the company, with

the result that that state of (attributed) ignorance constituted an error in the mind of, or

attributable to, the company and such as to postpone the start of prescription under

section 6(4)(a)(ii) of the Prescription and Limitation (Scotland) Act 1973. There was no

suggestion in parties’ submissions that reduction was inapt as a means to remedy any

[24] For the reasons explained in the next section of this Note, I do not accept the premise

that the material time is confined to the period culminating in the grant of the Lease. As

noted above, at paragraphs [14] and [15], in substance, the pursuer’s case includes (i) the

continuing effect of the deadlock, for which there are sufficient pleadings to infer that this is

to the detriment of the Company (the inability to terminate what was intended to be a short-

term let at less than market rate), and to the obvious benefit of the defender, (ii) taken

together with averments that are capable of a instructing a case that David Maguire brought

about that situation, and (iii) that he has continued that state of affairs during the period in

which he has (on the averments) unambiguously aligned himself with the business and

interests of the defender. This is, in my view, a case capable of falling within one of the

chapter 2 duties, whether that be the duty to promote the interests of the Company, to avoid

a conflict of interest or the related duty to disclose such conflicts under section 177.

[25] Accordingly, the factors in the pursuer’s averments are capable of supporting the

necessary inference to establish a breach on the part of David Maguire of the duty to

disclose his interest in the Lease (assuming there are relevant averments to characterise his

actings as having the requisite qualities qua director of the defender), and which on the

pursuer’s approach was the vehicle by which the interests of the Company are adversely

[26] The defender contends that the material time is the entry into the Lease and that any

averments of conduct thereafter are “necessarily irrelevant”. Having regard to the

particular features just described, I do not accept that submission. The adverse

consequences of the Company being unable to terminate a lease which is detrimental to its

interests are of a continuing nature. The matters recorded in subparagraphs (21) and (22) of

paragraph [5] are capable of demonstrating both the ongoing nature of the detriment as a

consequence of David Maguire’s involvement in the defender (‘he intended to procure’ that

the rent due to the Company would be diverted away from the Company’s account), and

that the detriment has become more acute (because rent arrears accrue). Accordingly, I do

not accept that the “material time” is confined to the period leading up to or culminating in

the entry into the Lease. The question of “material time” is a question of fact or, at least, can

(as here) be highly fact-sensitive. The subsequent conduct is capable of casting prior

conduct in a particular light, potentially supportive of the pursuer’s case.

[27] The defender argues that the pursuer’s averments of bad faith are lacking in

specification. Part of the defender’s argument, as I understood it, was that the only means

by which David Maguire’s knowledge could be attributed to the defender, such as to put it

into bad faith, was predicated on establishing that David Maguire was a shadow or de facto

director or (put shortly) the controlling mind of the defender. As parties approached it, this

was the means (if established) for attribution of David Maguire’s knowledge to the

defender. On the question of attribution of knowledge, the parties referred to passages in

Dryburgh, supra (at paras 22 and 23) and El Ajou v Dollar Land Holdings plc [1994] 2 All ER

685 (at 696A). The discussion in the latter case was inapposite to the facts in this case,

concerned as it was with the attribution of knowledge in large, highly structured companies.

The phrase “directing mind and will” of the company is referred to with approval in

Dryburgh as a possible basis to attribute the state of mind of an individual to a corporate

body. As I understood Mr Barne’s submission, it was not to contest the applicability of that

formulation as a matter of law, so much as to argue that the pleadings were not capable of

satisfying that test. This involved a reprise of his argument as to the “material time”, ie

because he wished to exclude consideration of any conduct which post-dated the grant of

the Lease (eg as in para[5(21)]) being invoked. I have already explained why, on the whole

pleadings, I regard the issue of the material time as encompassing conduct after the Lease

was entered into and that, on these averments, this is quintessentially a question of fact and

for which proof is essential. It could not be said ab ante that the pursuer’s averments in this

issue were necessarily irrelevant in the usual Thomas v Thomas-sense.

[28] Many of the other factors, neutral in themselves (eg such as David Maguire’s

acquisition of domain names referable to the Premises and the use of one of these by the

defender (para [5(10)] or David Maguire’s provision of advice (para [5(9)]), acquire a

different complexion when viewed in combination with more colourable factors, and are

capable of instructing attribution of David Maguire’s knowledge of these matters to the

[29] The defender’s argument did not address factors (19), (20) and (21) recorded in

paragraph [5], above. In my view these are small, but significant, passages from the

pursuer’s pleadings. At a board meeting of the Company, it is averred that David Maguire

stated in terms that the pursuer will be “stuck with me as your tenant for life”. That

statement is capable of supporting an inference that David Maguire presented himself or his

interests as indistinguishable from those of the defender. The significance is in the use of

“me” (ie David Maguire) in combination with “your tenant” (ie the defender). The

statement, especially if viewed in the context of David Maguire’s conduct, suggests a

complete identity between his interests and those of the defender, and where the result of

David Maguire’s conduct (including his part on securing the grant of the Lease and

subsequent refusal to agree to the Company terminating it) has been to the Company’s

financial disadvantage. The statement recorded in that averment is consistent with the

other averments about a deadlock which has subsisted between the pursuer and David

Maguire and from which there are averments to infer that the defender has benefitted for

more than three years. Of equal significance are (i) the statement that David Maguire

would “procure” that the rent payable by the defender would no longer be paid into the

Company’s account (para [5(21)]), and (ii) the fact that that statement was thereafter carried

into effect (para [5(22)]). These factors are capable of supporting a number of inferences, eg

that David Maguire controlled the defender’s payments and bank account (for which the

factors in para [5(16) and (14)] provide additional support), that David Maguire exercised

sufficient sway over the defender to procure that it breached the principal obligation of a

tenant to pay rent. In my view, these averments are in themselves capable of instructing a

case that David Maguire exercised very significant control over the defender or was acting

[30] In relation to David Maguire’s status vis-à-vis the defender, ie as a shadow or de facto

director of it, or as its controlling mind or authorised agent, I start by noting that a less rigid

approach is supported by the more recent cases than hitherto to the drawing of hard

boundaries between the status as a shadow or a de facto director. In other words, it is no

longer correct as a matter of law to treat the actings as a shadow or de facto director as

mutually exclusive: see the helpful and considered discussion of Arden LJ (as she then was)

in Smithton v Naggar [2014] EWCA Civ 939; [2015] 1 WLR 189 (“Smithton”) at paragraphs 20

to 45), and which must be understood as superseding the approach in older cases such as

that of Millet J in Re Hydrodam (Corby) Ltd [1994] BCLC 180 at 182-183e, relied upon by the

defender. I gratefully adopt Arden LJ’s analysis, especially her observations in Smithton that

“the real issue in some contexts will be whether the acts demonstrate the

“must look at the cumulative effect of the activities relied on. The court should look

at all of the circumstances ‘in the round’ (per Jonathan Parker J in Secretary of State for

Applying those observations to the averments in this case, David Maguire’s actings are

consistent with his having assumed the status of a director: he promoted the defender from

the start; he secured the Lease in its favour; he held (and holds) himself out to others as the

owner of the business the defender runs from the Premises; he has procured the defender’s

apparent breach of the fundamental obligation of a tenant to pay rent, seemingly with

impunity, because, by reason of the deadlock between the pursuer and David Maguire,

David Maguire is able to thwart any action by the Company to terminate the Lease (or, by

inference, to sue for breach). Approaching the matter in the round, I am persuaded that the

pursuer has sufficient averments to instruct David Maguire acting in the capacity of a

director of the defender, and whose knowledge may be attributed to the defender for the

[31] The same point underpins the defender’s last two arguments, the reduction issue

and the mora issue, namely, that essentially the onus was on the pursuer to make averments

in respect of these issues. In short, it was argued that, as a matter of relevancy, it was

incumbent upon the pursuer to aver that if reduction were granted,

(iii) that the rights of bona fide third parties would not be affected.

It was also said in relation to the mora issue that the defender having raised the issue of

delay, (in the form of a plea of mora, taciturnity and acquiescence), the pursuer’s case was

[32] As I understood Mr Barne’s submission, he accepted that (i) was concerned with

internal ratification and there was nothing in relation to that in this case. He did refer to the

Company’s acceptance of the payment of rent (up until late 2018) as indicative of

ratification. The pursuer required to aver when it knew what it knew and why it was

accepting rent. The same point was made about the requirement (ii) for restitutio. Brief

reference was made to Spence v Crawford 1939 SC (HL) 52 (“Spence”). Separately, Mr Barne

argued that given the delay in raising the proceedings, it was incumbent on the pursuer to

plead when he became aware of the facts to establish a conflict of interest. Where a plea of

mora was raised, it was incumbent upon the other party to respond. The pursuer had not

[33] I begin by observing that reduction is an equitable remedy. It provides the context

in which the doctrine of restitutio in integrum may arise. The purpose of the doctrine is to

put parties, so far as possible, into the position which they occupied before the impugned

transaction. Spence was a case of a director’s action for reduction of a contract of his shares

to a fellow director. This was resisted inter alia on the basis that the pursuer could not make

restitutio (eg because the company’s capital had been increased and the shares returned

(consequent upon reduction) would no longer have the same controlling interest; that the

defender had relieved the party seeking reduction of obligations to the company’s bankers,

which would be hard to reverse without financial detriment to the defender etc). The House

of Lords found that reduction should be granted, that the factors did not preclude reduction

and that a remedy could be fashioned which respected the doctrine of restitutio.

[34] In my view, the case of Spence is a classic illustration of the equitable character of

reduction and which affords sufficient scope for the exercise by the court of its discretion in

respect of the remedies to follow, if the ground on which reduction proceeds is established.

As I understand the defender’s position, the requirements of restitutio were presented as

effectively an absolute requirement. If the party against whom reduction is sought cannot

be restored precisely to his position ab ante, the remedy of reduction must be refused.

Notwithstanding the issues said to preclude restitutio in Spence, in that case the House of

Lords confirmed that reduction was appropriate. It achieved the equivalent of restitutio by

upholding reduction of the contract for the sale of the shares and by requiring the party

seeking reduction to pay compensation (taking into account certain factors). That case

provides an example of the court exercising its discretion pragmatically and flexibly to

fashion a remedy to achieve a sufficiently restorative state of affairs reflective of, but not

exactly replicating, parties’ positions prior to the entry into of the impugned deed. The

issues in Spence arose after proof and on its facts it is a fortiori the circumstances in the

instant case. While the defender takes a plea of mora, he does not in fact advance any

specific matter as preclusive of restitutio. The reduction issue is presented purely as an

[35] In my view the rigidity inherent in the defender’s argument is not consistent with

the case-law generally, or with the observations in, or outcome of, Spence, or, indeed with

the well-recognised equitable character of reduction and the doctrine of restitutio (as

illustrated in Spence). Of the remedy of reduction and the doctrine of restitutio, Lord Wright

“The principles governing that form of relief are the same in Scotland as in England.

The remedy is equitable. Its application is discretionary, and, where the remedy is

applied, it must be moulded in accordance with the exigencies of the particular

After citing with approval the observations of Lord Blackburn in Erlanger v New Sombrero

Lord Blackburn is careful not to seek to tie the hands of the Court by attempting to

form any rigid rules. The Court must fix its eyes on the goal doing ‘what is

practically just’. How that goal may be reached must depend on the circumstances

of the case. But the Court will be more drastic in exercising its discretionary powers

in a case of fraud than in the case of innocent misrepresentation..…. There is no

doubt good reason for the distinction. A case of innocent misrepresentation may be

regarded rather as one of misfortune than one of moral obliquity. There is no deceit

or intention to defraud. The Court will be less ready to pull a transaction to pieces

where the defendant is innocent, whereas in the case of fraud the Court will exercise

its jurisdiction to the full in order, if possible, to prevent the defendant from enjoying

the benefit of his fraud at the expense of the innocent plaintiff.” (Emphasis added.)

In respect of restitution, Lord Wright observed: “But restoration is essential to the idea of

restitution.” After instancing case of fraud, Lord Wright continued (at pp 77-78):

“Though the defendant has been fraudulent, he must not be robbed nor must the

plaintiff be unjustly enriched, as he would be if they both got that what he had

parted with and kept what he had received in return. The purpose of the relief is not

punishment, but compensation. The rule is stated as requiring the restoration of

both parties to the status quo ante. But it is generally the defendant who complains

that restitution is impossible. But the Court can go a long way in awarding

restitution if the substantial identity of the subject-matter of the contract remains.”

Lord Wright examined in detail a number of examples from the case-law illustrating the

court’s flexibility in the application of the restitutio doctrine. He concluded (at p 78):

“Certainly in the case of fraud the Court will do its best to unravel the complexities

of any particular case, which may in some cases involve adjustments on both sides.”

[36] Early in his speech in Spence Lord Thankerton observed (at para 70) that the doctrine

of restitutio “is not to be applied too literally”. Thereafter he undertook an extensive

examination of a number of cases, the purpose of which was to illustrate the court’s

flexibility in the application of the doctrine. He noted that these cases showed that “the

doctrine (i.e. of restitutio) relates to the restoration of the defender to his pre-contract

position, and the above statements as to the modifications of the doctrine relate to what the

defender is to get”. While acknowledging that each case will turn on its own circumstances,

Lord Thankerton continued: “I may say broadly that, in my opinion, the defender who, as

purchaser, has been guilty of fraudulent misrepresentation is not entitled in bar of

restitution to found on dealings with the subject purchased which he has been enabled by

his fraud to carry out”. He concluded by upholding reduction of the share purchase

contract on repayment of the price paid for the shares, coupled with the other party making

certain countervailing payments. If, after proof in this case, the court finds the essentials of

the pursuer’s case established, on the spectrum of obliquity, a breach of fiduciary achieved

in a clandestine manner or persisted in over an extended period (if these features are found)

may make the case sufficiently analogous to the case of fraud figured in Lord Wright’s

discussion in Spence. In other words, depending on the facts, the court may feel more

inclined to exercise its jurisdiction “to the full” – ie, in the manner envisaged by Lord

Wright and to “mould” its relief “in accordance with the exigencies of the case”. Such an

[37] The observations and the outcome in Spence are redolent of the court taking a

pragmatic approach in the exercise of its discretion in the context of an “equitable

jurisdiction” (as Lord Wright described it). It is a fact-rich or fact-sensitive exercise (eg

because how restitutio is achieved “must depend on the circumstances of the case”), which

militates against this being capable of resolution at debate as a matter of relevancy. As Lord

Thankerton observed, it is generally the defender who complains of the impossibility of

restitutio. These comments are entirely consistent with the general rule of pleading in

Scottish cases, that he who asserts a state of affairs (here, the impossibility of restitutio and

other matters the defender preyed in aid) has the onus of pleading and proving that state of

affairs. Accordingly, the defender’s challenge in the form of the reduction issue is, in my

[38] In the light of these observations it is clear that it is for the party resisting reduction,

or who asserts that restitutio in integrum is not possible, to put this in issue in its pleadings.

In this case, that would be the defender. While Spence involved adjustments in order to

achieve a state of affairs as close to restitution as possible, it should be noted that that was

done after proof. In my view, having regard to the equitable character of the remedy and to

the court’s application of the doctrine of restitutio in a pragmatic and flexible way, it is

unlikely that a court would be able to resolve this matter on the pleadings even if the

defender had raised this. It suffices for the purposes of the argument presented at debate, to

reject the defender’s contention that the onus rests on the pursuer to aver that restitutio is

[39] Finally, in relation to the mora issue, the same rule of pleading just referred to

applies. In his note of argument the defender argues, under reference to Professor

Johnston’s book, Prescription and Limitation (2nd Ed., 2012 at page 401), that actions of

reduction must be brought “expeditiously”. While that is true as a generality, it does not

meet the fundamental point, which is that the onus of pleading mora rests with the party

taking the plea. The defender did not place any authority before the court which disapplied

the normal rule of pleading in Scottish actions already noted. Furthermore, there is no

general rule in the context of the plea of mora which operates like the rule special to

prescription, namely, that if a defender raises prescription the pursuer is bound to respond.

In relation to the criticisms of a lack of specification, being the omission of the pursuer to

plead precisely when he became aware of the asserted conflict of interest on the part of

David Maguire, in my view, there is no force in this criticism. It is predicated on the onus

argument advanced in respect of the mora issue. In any event, the pursuer has averments to

explain what assurances or actings on the part of David Maguire influenced him to refrain

from raising the present proceedings. Those averments are sufficiently specific to go to

[40] It follows that I reject the defender’s challenges to the relevancy and specification of

the pursuer’s pleadings and that the pursuer’s whole averments should be admitted to

probation. I shall put the case out By Order to determine further procedure.

	[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]
	Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> SOMERVILLE AGAINST 1051 GWR LTD [2019] ScotCS CSOH_61 (08 August 2019) URL: http://www.bailii.org/scot/cases/ScotCS/2019/2019_CSOH_61.html Cite as: [2019] ScotCS CSOH_61, 2019 Hous LR 66, [2019] CSOH 61, 2019 GWD 29-462

Scottish Court of Session Decisions