Neutral Citation Number: [2009] EWHC 786 (Ch)
Case No: HC07C03026
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 22/04/2009

Before :

THE HON MR JUSTICE FLOYD
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Between :

	(1) COBBETTS LLP
(2) LEE CROWDER  (a firm)	
Claimants	
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	MARK REGINALD STUART HODGE	Defendant	

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Thomas Lowe QC and Julian Greenhill (instructed by Cobbetts LLP) for the Claimants
John Randall QC and Shakil Najib (instructed by Anthony Collins Solicitors LLP) for the Defendant

Hearing dates: January 26th – 30th, February 2nd, March 11th  2009
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Judgment
Mr Justice Floyd : 
1.	The first claimant, Cobbetts LLP, which is a solicitors’ limited partnership, came into existence as a result of a merger of the business of the second claimant, Lee Crowder (“LC”) and another firm, Cobbetts in 2003.  By this action the claimants seek to recover from Mr Mark Hodge, the defendant, shares in one of LC’s clients, Envirotreat Limited (“EL”). They allege that the shares in EL were obtained by Mr Hodge, at a time when he was an employed partner of LC, in breach of duties he owed to LC not to profit personally. Accordingly, the claimants allege that the shares in EL are held on trust for the claimants, and that they are entitled to an account from him of the benefit he received from them.
2.	Mr Hodge denies the claim on a number of grounds.  Firstly he says that the acquisition of the shares was not a breach of any duty he owed to LC.  In particular as an “employed partner” he was not subject to any of the express duties of partners contained in LC’s partnership deed.  His admitted duties of good faith and fidelity as an employee did not prevent him from acquiring the shares.  Secondly he says that he obtained the consent of LC to the acquisition of the shares, with the result that the claimants are not entitled to complain now of something which they sanctioned at the time.  Thirdly Mr Hodge says that the shares were given to him as remuneration for future work which he would do in his own capacity.  Finally he says that, if he is found liable for the return of the shares, he is entitled by counterclaim to equitable allowances for the amounts paid by him for the shares; and for the time and skill expended by him in enhancing the value of the shares. The only issue of quantum which is now before me is that relating to the first of these allowances.
The factual background
Mr Hodge’s engagement with LC
3.	Mr Hodge was offered the position of “employed partner” with LC with effect from 26th April 1999 by a letter from Mr Muth of LC dated 19th April 1999.  The letter attached a copy of LC’s partnership deed (“the Deed”).  The letter stated that Mr Hodge was to:
“(a) observe all rules of professional conduct which apply to you in any capacity; 
(b) observe the firm’s practices and procedures set out in the office manual…; and 
(c) observe the relevant provisions of the Deed.” 
4.	The letter pointed out that, for taxation purposes, employed partners had been employed on a Schedule E basis, but that Mr Muth had no objection in principle to Mr Hodge being dealt with on a Schedule D basis. The letter provided that in the event of an inconsistency between the letter of appointment and the Deed, the letter should prevail. 
5.	Mr Hodge’s letter of appointment provided for payment by means of a salary plus commission payments on newly introduced business.  This is a factor relied upon by the claimants in support of their argument that Mr Hodge was in law a partner rather than an employee. In his second and third years, however, Mr Hodge was paid a much enhanced salary without a commission. 
6.	The relevant provisions of the Deed are as follows:
“Definitions and interpretation
1.	…..
“Employed Partner” has the meaning given to it in clause 8.
“Equity Partner” means a Partner who has contributed to the capital of the Partnership.
“Junior Partner” means a Partner who is entitled to a fixed share of the Net Profits in any Accounting Period but excludes any Partner who is an Equity Partner
“Partners” means the parties hereto and any other person or persons admitted to the Partnership (including a Junior Partner) who agree by entering into a deed of accession (substantially in the form in Schedule 3 or in such other form as the Partners may from time to time agree) to be bound by the terms hereof …. but specifically excludes an Employed Partner and references to a “Partner” shall be construed accordingly.
“Partnership” means the Partnership formed by the Partners under this agreement as varied at any time…. 
Employed Partner
8.	The Partners may, subject to the agreement of a special majority, appoint a person as an employee of the Partners who is to be known, and held out, as a partner (an “Employed Partner”). An Employed Partner shall not be required to contribute to the capital of the Partnership and shall not be entitled to:
(A)	share in the Net Profits; or
(B)	attend meetings of the Partners; or
(C)	take part in the management or conduct of the Partnership; or
(D)	sign any cheques relating to any account in the Firm Name; or
(E)	any sum in excess of the remuneration and other benefits stipulated in such Employed Partner’s contract of employment.
An Employed Partner will at all times be an employee of the Partners and shall be entitled to...[ provisions for an indemnity]”
7.	Clause 20 provided for the duties of Partners: for example to devote all their time to the Partnership, to promote the Partnership Business and to declare gifts.  Clause 22 provided that Partners should not engage directly or indirectly in any business other than that of the firm.
Envirotreat Limited 
8.	EL was a client of LC, engaged in the business of remedying land pollution. The directors and principal shareholders were a Mr Neil McLeod and his wife Karen McLeod.  Karen McLeod was closely involved in the running of the firm: she and her husband operated closely together as a team.  The technology operated by EL was the subject of patent protection in the name of the McLeods.  There was an informal licence in favour of EL.  
9.	Over the years, EL had had difficulties raising sufficient capital to expand its business.  In due course, in about August 2000, the company approached BDO Stoy Hayward (“BDO”) to prepare a report on its solvency, but BDO’s insolvency department passed the matter on to a corporate finance partner with a view to seeing whether finance could still be raised.  BDO considered a number of approaches to raising finance.  Ultimately, EL instructed BDO to compile a Private Placing Memorandum (“PPM”).  The accountant at BDO with principal responsibility for the PPM was Mr Alan Ward.  
10.	Mr Ward was anxious to point out in his evidence that it was not BDO’s function to act as a broker.  Nevertheless is quite clear that BDO were active in sending out summaries of the investment opportunity and, subsequently, the PPM.
11.	Mr Ward recommended that Mr Hodge of LC be instructed to act in relation to the sale of the shares, and introduced Mr Hodge (with whom he had worked previously) to EL.
12.	Before the PPM could go ahead, EL needed to restructure its relationship with a company called Rowe Technology.  Rowe Technology had enjoyed exclusive sales and marketing rights in respect of the EL business. In addition it had rights with respect to the raising of capital. The existence of the relationship with Rowe Technology in this form represented an obstacle to the PPM.
13.	LC’s letter of engagement was dated 23rd October 2000 and addressed to Mr and Mrs McLeod.  It confirmed that LC had been asked to act in relation to (a) the sale of minority shares in EL; (b) the re-negotiation of existing agency arrangements; (c) the subscription for new shares in the company as part of a primary funding round and (d) the licensing of IPR.  Mark Hodge was to have day to day conduct. 
14.	LC’s letter of engagement did not expressly require LC to assist in finding investors. But LC had an established ethos of “adding value” for clients wherever possible, and, as part of this, had a practice of introducing clients to investors whenever appropriate.  Mr Hodge was aware of this practice.
15.	The fundraising was intended to benefit from the Enterprise Investment Scheme, so that investors subscribing for shares would be eligible for tax relief, provided they remained invested in the company for three years.
16.	It was the view of the McLeods, recorded for example in a letter from Mr Ward to a potential investor in October 2000, that the value of EL was approximately £3m.  The value of the company was attributed largely to the patents it held.
17.	In the course of 2001 LC assisted EL with the negotiations with Rowe Technology. This also involved a restructuring of EL.   Mr McLeod was nevertheless looking to the future.  On 26th April 2001 he emailed Mr Ward of BDO with his thoughts after visiting a Roadshow organised by OFEX, a competitor market to the AIM which had clearly excited his interest.  He communicated his view that one of the five key elements for achieving a successful flotation was the need to bring on board appropriate personnel at board level, an element which he described as “absolutely essential”.  
The PPM
18.	In October 2001 BDO informed LC that they (BDO) were now looking to raise £500,000 of finance for the company. 
19.	Also in October 2001, Mark Hodge was told that there was no prospect of his becoming an equity partner in LC.  As a result, he gave six months’ notice of his resignation from the firm.  In consequence his engagement would cease in April 2002.  He continued to work for LC, including working on the EL file, during his period of notice.
20.	By November 2001 EL was running on the basis of directors’ loans: as a trading company it had run out of money. The McLeods were not being paid their salaries. Their financial position was precarious.
21.	In November and December 2001 the drafting by BDO of a short investment summary and the longer placement document continued. Mark Hodge was also asked to draft a formal licence agreement to deal with the licensing of the IP rights from the McLeods to EL.  BDO were at the same time trying to interest investors. Mr Ward of BDO committed himself to subscribe to some shares at the offer price. In the end he agreed to subscribe for 21,000 shares at the subscription price for £50,400.
22.	The work for EL in relation to the offer was on a contingent basis, as unless the money was raised there were no funds in the company to enable the advisers to be paid. In January 2002 the firm issued a credit note to EL for £30,000 worth of fees incurred to date.
23.	On 8th January 2002 Graham Young, another chartered accountant at BDO, who was working with Mr Ward on the PPM, sent a first draft of the PPM to Mark Hodge for review.  He said that he wanted to get going with the verification, by which is meant the rigorous checking of every statement made in the document. 
Meetings in January 2002
24.	Between 14th and 22nd January 2002 it was Mr Hodge’s oral evidence that he had a number of contacts and meetings with the McLeods and Mr Ward.  There is a very significant dispute on the evidence between Mr Hodge on the one hand and Mr Ward and Mr McLeod on the other.  The dispute is important, because Mr Hodge’s case is that he was offered inducements at this early stage by the McLeods to become involved with EL in the future, and that these arrangements were effectively in place, although not legally binding, from January. The inducements included, according to Mr Hodge, offering to Mr Hodge 5% of the issued share capital of EL after the placement. By contrast, the McLeods and Mr Ward say that Mr Hodge demanded these benefits for himself as a condition of introducing investors at a later date, immediately prior to the closing date for the PPM and at a time when, without these investors, the PPM would have been a failure and the McLeods would have risked financial ruin.
25.	Mr Hodge’s account was in more detail as follows.  At the beginning of the week January 14th-18th 2002, Mr Ward sought to persuade Mr Hodge to become involved in seeking investors for EL.  He initially refused, but within a day or two Mr Ward approached him again, saying he had spoken to the McLeods.  The McLeods had said that Mr Hodge’s skills were just what EL needed. Mr Ward enquired whether Mr Hodge would be interested in a minority shareholding or non-executive directorship (NED).  This time, Mr Hodge expressed interest.  A meeting was held later in the same week at which the McLeods put a more detailed proposal involving a three year NED and a minority shareholding of 5% subject to a “ratchet” linking the shareholding to the price achieved on a subsequent flotation. At a further meeting on 22nd January 2002, Mr Hodge says that a firmer proposal was put to him and he agreed to it.  At this meeting it was also agreed, according to Mr Hodge, that Mr Ward would be granted additional shares at par, so as to bring his total shareholding up to 5%. These arrangements, he said, were finalised in the afternoon of 22nd January 2002, together with loan arrangements with the McLeods to help Messrs Ward and Hodge pay for the shares.  At the end of the meeting on 22nd January Mr Ward and Mr Hodge discussed the fact that Mr Ward was paying over £50,000 for his shares, whereas Mr Hodge was receiving all his at par.  Mr Hodge and Mr Ward made a gentleman’s agreement, whereby Mr Hodge would pay Mr Ward half the cost of Mr Ward’s investment if the company floated for more than £30 million. 
26.	Mr Hodge said he could date all these matters by reference to the fact that a credit note was issued to EL on 14th January, the BDO email from Jayne Hutchings dated 18th January and the conclusion of the deal with Rowe Technology on 22nd January, as to which see below.
27.	I will return to this fundamental dispute as to what occurred when I have summarised the remaining history.
28.	On 18th January 2002 Jayne Hutchings, a tax adviser in BDO sent an email to Graham Young, also of BDO.  In the email Jayne Hutchings says that she will look at “the ratchet agreement”.  The email is timed at 11.56, and is concerned primarily with the tax implications of agreements relating to IP rights relating to EL.  Mr Hodge placed great reliance on this email as referring to the ratchet agreement in connection with his shares, and thus dating the conclusion of his agreement to some date before 18th January 2002. 
29.	Mr Hodge maintained his position that the only ratchet agreement under discussion at the time of which he was aware was that involved in his agreement with the McLeods concerning his shares. 
30.	After the evidence had closed, and after final speeches, a further document emerged which showed that on 16th January 2002 Graham Young in BDO’s corporate finance department referred to a ratchet table concerned with Anthony Howat, at that time a potential  investor via the PPM.  The ratchet operated so as to increase a subscribed-for shareholding by increasing percentages depending on the valuation achieved.  The document discusses the tax implications for Mr Howat, and records that a copy is sent to Jayne Hutchings and another tax consultant at BDO for their thoughts on the tax implications for a Mr Howat. I allowed the document to be introduced: I had already nurtured serious doubts as to whether the ratchet referred to in the Hutchings email could be one affecting the Hodge/Ward shares.
31.	Neither side wished to call or recall any witness to deal with this document.  Mr Randall did not accept that this document necessarily referred to the same ratchet as Jayne Hutchings’ subsequent email.   It does seem to me that Mr Hodge is mistaken in thinking that the email of 18th January was referring to his ratchet agreement.  That, of course, does not preclude the possibility that the meetings did take place in January as Mr Hodge suggests, but it removes one of the main reasons which he put forward for dating the meetings at that time. 
32.	On 22nd January 2002 signatures to the agreements with Rowe Technology were achieved. This was a significant event, as obtaining a deal with Rowe Technology had been a difficult and protracted process.  
33.	On 28th January 2002 a resolution was passed preparatory to the fundraising.  The resolution divided the existing 100,000 shares of £1 each in EL into 1 million shares of 10 pence each and then increased the authorised share capital 1 million to 1.25 million shares of 10 pence each. A board meeting was held that day which, amongst other matters approved the draft PPM and accompanying verification notes.
34.	The PPM sought to raise £600,000 if fully subscribed from the placing of the 250,000 new shares at £2.40 a share. The new shares would be equal to 20% of the ordinary share capital of the company. The minimum subscription was set at £408,000 or 170,000 shares. 
35.	The PPM also provided for an employee incentive scheme.  The document indicated that the effect of the incentive scheme would be to dilute existing shareholdings by up to 15%. There was no mention in the PPM of additional shares being issued to either Mr Hodge or Mr Ward. 
36.	The PPM originally specified a closing date of 15th February 2002, which was later extended to 15th March 2002.   As the first closing date approached, the investment opportunity was not attracting much interest.    
37.	Mr Hodge was certainly involved in seeking investors by 15th February, as he sent out the PPM to some contacts at this date.  He mentioned the opportunity to Mr Rimmer, a former partner at LC, and who was still retained by the partnership in the role of consultant.  Mr Hodge told Mr Rimmer that he was intending to invest. He also discussed the investment with Mr Dartnell of Total Asset Finance. 
38.	As the extended deadline approached it appeared that the minimum subscription was not being reached.  

Mr Bradshaw and Nurton Developments
39.	A potential large investor, possibly to the extent of the entire minimum subscription, was Mr Bradshaw of Nurton Developments.  Mr Bradshaw was interested in, but not committed to investing in EL, at least via the PPM.   Mr McLeod received a letter on the morning of 13th March 2002 from Nurton confirming that Nurton would not be pursuing its interest.  
Mr Rimmer’s involvement and the 7th March email
40.	Mr Rimmer confirmed his commitment to investing in EL to Mr Hodge shortly before 7th March 2002, and sent a cheque for his investment for £50,400 to BDO. 
41.	On 7th March 2002 Mr Hodge sent Mr Rimmer a long email. The dated version of this email emerged shortly before the trial: up to this point an undated version (probably printed off prior to being sent) was the only one available.  The claimants’ witnesses had not, up to that point, accepted that the email could have existed before the closure of the PPM. 
42.	Section A of the email summarised the proposed shareholders’ agreement, identifying the non-executive directors as Glyn Pitchford, Mark Hodge and John Rimmer.  Alan Ward was identified as a consultant, but it was said that he would ultimately become finance director, as in due course he did.  Mark Hodge was to “actively promote the Company, devise corporate strategy, initiate joint ventures etc. seek to maximise return to shareholders.” 
43.	Section B of the email dealt with the performance ratchet. It justifies quoting  in full:
“Mark will subscribe for 10% of the equity for £50,400. (5% being held on trust for Alan [Ward]).
This will be subject to a one way straight-line performance ratchet (downwards) if a valuation on sale or float does not achieve a minimum of £30 million.
i.e. (1) Sale/Float price up to £3m = 1.67% (i.e. subscription price under the placing).
(2) Sale float £30m and above = 10%
(3) Sale/Float between £3m and £30m – straight line %age ratchet between %ages at (1) and (2)
To the extent that shares are subject to the ratchet they will be gifted to Neil and Karen.”
44.	Of course, 10% of the equity at the flotation price would cost more than the quoted sum of £50,400.  Assuming the issued share capital is 1.25 million shares, 10% of the equity would be 125,000 shares, which would cost £300,000. 
45.	The sum of £50,400 would only purchase 21,000 shares or 1.68% of the 1.25 million shares. This is approximately the percentage shareholding that Mr Hodge would end up with if the sale or float raised £3 million or less. So if EL did not increase in value, Mr Hodge would end up with about 21000 shares for which he is stated in the email to be paying the full subscription price.    
46.	Mr Hodge was asked:
“Q.	If the company did not move from its state at the time of placing, there would not be anything unfair in your £50,400 giving you 1.67%, would there?
A.  Well, you could pose the question like that.  I think that must be right.”
47.	The impression given by the ratchet agreement in the email is that Hodge and Ward were getting shares which were worth what they had paid for them at the time. To the extent they were getting any more shares, they were subject to a ratchet which depended on upward performance of the company after the fundraising.  
48.	This email was relied on by Mr Hodge to suggest that there had been disclosure to the partners of the fact that he was to receive a non-executive directorship and shares at a discount from the subscription price.  
49.	Mr Rimmer entered into a Consultancy Agreement for a remuneration of £1000 a month with effect from 12th March 2002.
Mr Dartnell
50.	On 8th March 2002 Mark Hodge emailed Mr Dartnell of Total Asset Finance.  He stated that another investor (in fact Mr Rimmer) had confirmed his investment of £50,400 or 1.67% of the equity at £2.40 a share. He informed Mr Dartnell that the total raised to date was £215,000 against a minimum under the PPM of £408,000, leaving a shortfall of £200,000.
51.	Mr Hodge offered a deal to Mr Dartnell.  Mr Dartnell was to subscribe for 80,500 shares representing 6.44% of the equity.  However as Mr Dartnell’s EIS allowance had been used up for the year, Mr Hodge himself would effect the subscription on Mr Dartnell’s behalf and would account for the tax relief to Mr Dartnell.  In addition Lee Crowder and BDO would pay “commission” to Mr Dartnell of £10,000 and £20,000 respectively.  Although the documents do not record Mr Dartnell’s reaction to the suggestion, he did not pursue it, and it is not difficult to see why. It could scarcely be proper for anyone apart from the beneficial owner of the shares to claim the tax relief under the EIS.
52.	This email of 8th March was copied to Mr Ward.  Although Mr Rimmer is not mentioned by name, Mr Ward did not really dispute that he knew that Mr Rimmer was committed to invest by this date. 
53.	Mr Hodge was discussing another potential investment with Mr Dartnell at the same time: in a company referred to as PLS.  Mr Dartnell invested in that company on 22nd March.  He did not in fact commit funds to EL until the following tax year, on 8th April 2002, after the closing date of the PPM.  On 25th March Alan Ward confirmed that he had notified investors that share certificates would not be issued until later “as one investor will be investing in the following tax year”.  
Discussion with Mr Cox
54.	Mr Hodge approached Mr Cox, a partner at LC, for approval of the “commission” payment being made to Total Asset Finance. 
55.	There is a dispute about when this discussion took place, and what information there was on the file concerning Mr Hodge’s proposed involvement with EL.  Mr Cox says he was approached towards the end of the day on the 7th March and reviewed the file overnight, meeting Mr Hodge on the morning of the 8th and giving the approval. Mr Hodge says that the approach was on the 8th, and that a printed copy of his email sent to Mr Rimmer at 7.30 the previous evening was on the file. Much effort was expended on attempting to ascertain what was on the file at that time and when it was subsequently retrieved from archive for transmission to Mr Hodge by LC. 
56.	In the end I was not persuaded that the nature of the arrangements then contemplated between Mr Hodge and EL was brought to Mr Cox’s attention on either 7th or 8th March 2002.  Firstly, I found Mr Cox’s account of how the approval of the commission took place over two days to be more credible than that of Mr Hodge. Secondly, the focus of the file review was the approval of the commission, not Mr Hodge’s personal arrangements.  It is accordingly entirely plausible that, whatever, was on the file, Mr Cox did not focus on it.  Thirdly, despite Mr Hodge’s practice of pre-printing emails before sending them, it seems unlikely in the light of all the evidence that a print (or a pre-print) of the email of 7th March was on the file. Fourthly, even if a draft of the shareholders’ agreement had reached the file, it is entirely plausible that Mr Cox did not study this.  Even if he had studied it, it would not have revealed that Mr Hodge was to receive shares at par.
57.	I find that once the approval of the commission payment to Total Asset Finance had been obtained, Mr Hodge obtained Mr Dartnell’s commitment to invest in the following tax year in whatever amount was necessary to meet the minimum subscription.  Mr Hodge did not accept that this was so.  But without a firm commitment from Mr Dartnell the minimum subscription would not have been reached.  It would not have been appropriate to go on and execute declarations of trust of the shares held by Mr Hodge, or possible to calculate the number of shares which were to be allotted to them, as the number depended on the extent of the subscription under the PPM.  
Meetings on 12th and 13th March
58.	I now come to the claimants’ witnesses’ account of how the shares came to be allotted to Mr Hodge.  Mr McLeod’s evidence is that on 12th March 2002 he received a call from Mr Hodge and was summoned to a meeting at LC’s offices. Mr McLeod and Mr Ward’s evidence at least in their witness statements, is that at the meeting on 12th March 2002 Mr Hodge and Mr Ward said that they were able to secure further investment from Mr Rimmer and Mr Dartnell, but their investment was conditional on EL retaining Mr Hodge and Mr Ward as advisors.  Mr Hodge and Mr Ward were only prepared to be retained by EL if they were allotted 10% of the equity of EL at par value. EL was told in substance that if they wanted the PPM to reach the minimum subscription, they would have to agree to allot these shares to Mr Ward and Mr Hodge.    They allege that at a further meeting on 13th March 2002, the McLeods accepted Mr Hodge’s conditions. Mr Ward, whilst disapproving of this behaviour by Mr Hodge, went along with it.
59.	At 10.25 on 13th March Neil McLeod informed Mark Hodge and Alan Ward by email that he had heard from another large potential investor (the Bradshaws of Nurton) that they would not be investing. He asked “Have we actually secured the minimum placing?”
60.	On 13th March 2002 a special resolution was passed by EL to increase the authorised share capital by a further 250,000 shares to 1.5 million shares.  Mark Hodge dated the document recording the special resolution. 
61.	A total of 122,600 shares were issued at par to Mark Hodge prior to the placing.  71,800 of these shares were issued to Mr Hodge in his own right, representing 5% of the 1.436 million shares to be in issue after the placement.  50,800 were issued to Mr Hodge as nominee for Mr Ward, being the balance required to bring Mr Ward’s total shareholding (once the 21,000 shares Mr Ward was to receive via his subscription under the PPM were taken account of) to the same number of shares as Mr Hodge. 
62.	Payment for the 122,600 shares at par was made by Mr Hodge and Mr Ward from a loan made for that purpose by the McLeods. A cheque for the appropriate sum of £12,260 was made out to Mr Ward on 31st March 2002 and paid through his bank account. 
63.	A shareholders’ agreement was entered into, at some point shortly after Mr Dartnell’s investment was received in April, which set out the position as far as Mr Hodge’s shareholding as follows:
“3.4	Shares not forming part of the Placing held by Mark Hodge details of which are set out in Schedule 1 are subject to transfer at nil value to Neil and Karen McLeod ratably as follows:
Exit event £0 consideration = 122,600
Exit event £30,000,000 consideration = 0
(and a pro-rata number of shares (straight-line) in between £0 consideration and £30,000,000 consideration).”
64.	This arrangement differed from that set out in the e-mail of 7th March. The differences can be accounted for, at least in part, by the fact that, at this stage, it was known how many par shares had been allotted, so that the ratchet could be expressed in terms of numbers of shares, rather than percentages of equity.  Secondly, the email of 7th March, in providing for retention of 1.67% of the shares in any event, was allowing for the fact that someone (in fact Mr Ward and not Mr Hodge) was subscribing for that amount of shares at the full subscription price.  Those shares were not to be paid back, and the ratchet mechanism had to allow for this.  Under the shareholders’ agreement, Mr Ward’s full price shares were outside the ratchet.  
65.	There are however important differences with the arrangement in the shareholders’ agreement.  The ratchet now only deals with the par shares (those outside the placement).  The ratchet now has no floor at a £3 million exit price.  If the company is worthless, therefore, all the par shares have to go back to the McLeods.  But if the company remained at the £3 million level at the exit event,   10% of the par shares would be retained by Mr Hodge. Mr Hodge would be left with 12,260 shares.  This would represent less than 1% of the equity.  
The dispute about how the par shares came to be allotted
66.	There is a striking absence in this case of any documentary record to support the factual contentions of either side in relation to how the par shares came to be allotted.  The resolution of the dispute as to the way in which the par shares came to be allotted has therefore, in the end, to be analysed principally by reference to the oral evidence given by the witnesses, and inherent probabilities.  I should therefore start by stating briefly the view I formed of the three major witnesses, Mr McLeod, Mr Ward and Mr Hodge.
67.	I did not think that Mr McLeod had a very clear recollection of the events surrounding the allocation of the par shares.  He seemed uncertain about many matters surrounding the fundraising: so much so that I did not find his certainty about the precise way in which the shares came to be allocated very convincing. Moreover he had originally suggested that the email to Mr Rimmer, which disclosed a version of the share and ratchet agreement, must have been later than the meetings of 12th and 13th March.  When it was made clear that it must have existed on 7th March, he saw nothing which needed changing in his original evidence – although it clearly did.  Given the vagueness of Mr McLeod’s evidence, and the close involvement of Karen McLeod in the affairs of EL, I find it surprising that she was not called to give evidence.  The claimants must have been aware of the importance of trying to date these events without a documentary record.   Mrs McLeod was at the time of the trial alive and well and able to travel.
68.	Mr Ward struck me as more reliable, but I think his written evidence was dramatised in a way which his recollection did not justify.  He said in his first witness statement that he was shocked and surprised when Mr Hodge raised with the McLeods his demands. Once it was clear that Mr Hodge had emailed him with details of one version of the ratchet well before the meeting, at a time when they were in very frequent communication, this simply cannot have been the case.  He must also have been well aware, well before the 12th and 13th March, that it was intended by the McLeods to involve Mark Hodge in the company.  
69.	Mr Hodge was a somewhat argumentative witness, which does not of itself reflect adversely on the overall credibility of his evidence.  I do think however that he was trying too hard to tie his account of events to the rather thin documentary trail, as shown by his misplaced reliance on the Hutchings email. It is perhaps not surprising that, as a lawyer, he sought to argue his defence.  But in so doing I think he has convinced himself of a version of events which is inaccurate in important respects. 
70.	I reject the McLeod/Ward account of meetings in March to the extent that it recounts that a gun was placed to the McLeods’ heads.  I do so for a number of reasons:
i)	The allegation is an extremely serious one, amounting in effect to blackmailing the McLeods.  As such, although it needs only to be established on the balance of probabilities, it requires clear evidence to displace what is the inherent unlikelihood of such disreputable conduct: se Hornal v Neuberger Products [1957] 1 QB 247.
ii)	The evidence of Mr McLeod and Mr Ward was far from clear.  In fact Mr McLeod’s evidence in the witness box was vague, in contrast to the extreme allegations in his witness statement; and in a significant respect Mr Ward’s evidence changed;
iii)	Once it is accepted, as it has to be, that the email to Mr Rimmer was dated 7th March, it simply cannot have been the case that the whole package of Hodge’s and Ward’s involvement was sprung on the McLeods at the last minute.  
iv)	Mr McLeod’s email of March 13th, which simply enquires whether the minimum subscription had been reached, is inconsistent with the McLeod/Ward version of events.  If Mr McLeod had been told that Mr Hodge had an investor who could bring about the minimum subscription, and that what was required in return was that the McLeods issue shares, an email in these terms would not have been sent.  All that was left on Mr McLeod’s account was for him to sign up to the deal under which Mr Hodge would bring in the extra investor.
71.	Equally, I am unable to accept Mr Hodge’s account in full.  There was no finalised agreement in January 2002.  Had there been one it is inconceivable that there would have been no mention of it in the PPM, as its effect would have been significantly to dilute the shares of other investors.  This would not have been tolerated by BDO, or gone unnoticed by an experienced corporate lawyer such as Mr Hodge.  I think that, faced with very serious allegations, Mr Hodge has tried rather too hard to link his account to the available documentary record.  I have already pointed out that his reliance on the Hutchings email has turned out to be misplaced.  
72.	Mr Hodge’s original account was that he believed the agreement with the McLeods was in February.  I think that this is far more likely to have been when discussion of Mr Hodge’s potential involvement in EL happened in fact.  As the original closing date in mid February approached, Mr Hodge was approached by Mr Ward to see if Mr Hodge could use his personal contacts to assist with fundraising.  Mr Hodge was initially reluctant to do so.  Mr Ward went back to the McLeods and discussed the possibility of offering Mr Hodge some form of involvement in EL.  Mr Hodge agreed.  Matters were left on that very general basis whilst efforts were made by Mr Hodge and BDO to raise the remaining investment. 
73.	I am justified in going this far by, amongst other things, the evidence which Mr Ward gave as follows.  Mr Ward accepted that there came a time when the fund raising was not going well after he had sent round initial circulars.  This must have been late January of early February 2002.  He said he asked whether Mr Hodge and LC had got any contacts that they would like him to send the paperwork to as well.  He knew Mr Hodge was leaving LC.  He accepted that he went back and discussed the position with the McLeods; that he discussed with them the fact that “Mark and LC had got contacts which could be used” and that “Mark had got the skills that would be useful in the future with the company”.  From that time forward it was agreed between the McLeods, Mr Ward and Mr Hodge that at least Mr Hodge would play a role in EL after he left LC. Thus when the email of 7th March indicates that Mr Hodge will play a role in EL in the future, this was something which had been established for some time.
74.	However, I do not think that the evidence goes as far as to establish that the issue of shares at par was discussed, far less agreed in January or February.  At this time the evidence suggests that Mr Hodge and Mr Ward were speaking in general terms of investing in EL, from which it is fair to infer that they were going to subscribe for shares at the subscription price, as Mr Ward in fact did. I do not accept Mr Hodge’s evidence that there was already in place an agreement for them to take up 10% of the equity, or as to the basis on which these shares would be paid for.
75.	The email from Mr Hodge to Mr Rimmer of 7th March is clearly the basis for the shareholder’s agreement.  The claimants’ suggestion is that the reference to a 10% shareholding for Hodge and Ward, subject to a ratchet, is something which the McLeods were not yet privy to.  The email was a preliminary to the demands which Mr Hodge was planning to make on the 12th March.  Mr Hodge contends that it reflected in broad terms what had already been agreed.
76.	I do not think that it is probable that Mr Hodge would have written to Mr Rimmer and Mr Ward in these terms if it was something which had not yet been raised with Mr Hodge’s clients, the McLeods.  I think the email represents a stage in the negotiation of the shareholders’ agreement, albeit not copied to the McLeods.  In my judgment, the McLeods did not hear for the first time of the suggestion that Mr Ward and Mr Hodge should receive shares at par at the 11th hour meetings as they suggest. 
77.	The position was nevertheless that negotiations over Mr Hodge’s and Mr Ward’s shareholdings were occurring at a time when Mr Hodge was in a position, through having secured the commitment of Mr Dartnell, to make the PPM reach the minimum subscription.  It is not in my judgment established that Mr Hodge went as far as expressly to suggest that he would not bring in Mr Dartnell if he did not get his shares.  Mr Hodge was negotiating the package which he was to receive for his involvement in EL after he left LC, at the same time as agreeing the shareholders’ agreement and completing the other arrangement for the closure of the PPM.  To the McLeods it must have been difficult to distinguish Mr Hodge’s work as solicitor for the company, his work in bringing in the last critical investor, his work towards the shareholders’ agreement and the negotiations he was conducting to receive shares in EL.  I accept Mr McLeod’s account to the extent that he must have felt pressurised in the circumstances, over the last days before the closure of the PPM, into accepting the deal with Mr Hodge and Mr Ward. 
78.	On 13th March a resolution was passed increasing the share capital of EL by a further 250,000 shares. There were now enough shares to accommodate Mr Ward’s and Mr  Hodge’s shares. 
79.	On 15th March Mark Hodge executed declarations of trust in respect of the shares he held for Alan Ward and his wife and Graham Young. 
Mark Hodge leaves the partnership
80.	On 5th April 2002 Stephen Gilmore, the senior partner of LC, sent a circular email around LC’s offices stating that Mark Hodge would be retiring from the partnership on 30th April having expressed a desire to work more closely with certain of his clients.  His finishing date would be 12th April and he would take holiday from then until 30th April.  The email confirmed that Mark Hodge had done his utmost to secure an orderly completion of all his matters in the intervening period and made a significant contribution to the profitability of the practice during his period of notice.  The email also confirmed that Mark intended to set up his own practice as a solicitor and that he was to take on a number of non-executive directorships.
81.	In June 2003 EL agreed to rescind the ratchet.  In the course of a letter which confirmed the rescission of the ratchet, Mr McLeod wrote:
“The ratchet system (which was insisted on by Karen and myself prior to granting these shares) was introduced to ensure that both Alan and yourself would make the necessary commitment through to flotation.”
82.	By December 2005 Mr Hodge and the McLeods had fallen out. In December 2005 Mr McLeod wrote a letter of complaint to the Law Society about Mr Hodge.  It made no complaint about the matters of which Mr McLeod now gives evidence in this action. Mr McLeod explained that the complaint was concerned with other matters.  Moreover, on the less dramatic account which I have accepted of the events surrounding the issue of the shares to Mr Hodge, it is perhaps less surprising that the incident is not mentioned.
83.	Mr Ward became a director of EL in July 2004 when he left BDO. In 2006 he became Company Secretary.  In early 2007, when Mr McLeod informed Mr Ward that he intended to attempt to recover the shares from Mr Hodge, Mr Ward decided to surrender his shares in EL.  He transferred his shares to Mr and Mrs McLeod in October 2007.  Mr Ward who had acted as Finance Director of EL after leaving BDO also left his position at around that time.  A compromise agreement was reached under which Mr Ward was to receive £30,000.  One of the obligations he undertook under that agreement was to provide a witness statement and other relevant assistance to Cobbetts for the purpose of its proceedings against Mr Hodge.
Was Mr Hodge a partner?
84.	Mr Hodge will be a partner in LC if he and LC are “carrying on business in common with a view of profit”: see the Partnership Act 1890, section 1. The question of whether persons are in partnership is a question of substance and not form: the label which the parties choose to give to their relationship is not determinative: see Stekel v Ellice [1973] 1 WLR 191.   In particular a “salaried partner” may or may not be a partner. 
85.	The claimants rely on a number of factors as pointing towards the conclusion that Mr Hodge was, in substance a partner:
i)	The fact that Mr Hodge was to be afforded a significant degree of autonomy, for example in the generation of new business, and that this was regarded as an important part of his appointment. 
ii)	The basis of payment set out in his letter of appointment, which includes commission. In substance they argue that this amounts to Mr Hodge being entitled to a share of the profits. 
iii)	Mr Hodge was taxed on the basis of Schedule D, like the other true partners. He attended partners meetings.  Moreover he was represented by an employee of LC to be a partner (and not an employee) on a mortgage application.
iv)	The reference in the letter of appointment to observing “the relevant provisions of the Partnership Deed”.  They submit that, by setting out their relationship in reliance on the Deed, the claimants were entering into a partnership, not a relationship of employer and employee. Moreover, if Mr Hodge was not a partner, there were no relevant portions of the Deed for him to observe.
v)	In summary the claimants submit that one should not construe the partnership deed acontextually, but interpret the actual arrangement as a whole as one in which Mr Hodge and the other partners agree to join together to carry on business with a view of profit.
86.	Mr Randall draws attention to the clear terms of the partnership deed, and in particular clause 8.  Whilst he recognises that this is not conclusive, he says that there is nothing in the substance of the actual relationship to alter that position, either at the time that Mr Hodge’s employment commenced or subsequently.
87.	I have come to the conclusion that Mr Hodge was not in law a partner in LC.  Whilst not conclusive, the Deed is powerful evidence that the intention of LC was to distinguish clearly between partners and employees and to place Mr Hodge in the latter category.  The degree of his autonomy was consistent with that of a senior solicitor employee.  He did not receive a share of the profits in the sense in which that expression is used in partnership law: his remuneration did not depend on the gross profits of the partnership. The decision to place Mr Hodge on Schedule D tax was something arranged for his benefit, but did not alter the nature of the relationship. The reference in his letter of appointment to the relevant provisions of the Deed does not make him a partner, nor does it make provisions which do not apply to employee partners apply to him.
Duties owed by Mr Hodge
88.	The claimants say that Mr Hodge owed LC a duty not to allow his personal interests to conflict with those of LC and not to take a secret profit from his work.  As the case developed it was the latter duty which the claimants relied on principally. 
89.	Although I have held that Mr Hodge was not a partner, that is not the end of the question of whether Mr Hodge owed any fiduciary duty to LC arising out of his employment. Unlike the relationship of trustee and beneficiary, the employment relationship is, of course, not a fiduciary relationship as such.  However, as Elias J pointed out in Nottingham University v Fishel [2000] ICR 1462, employment may provide the context in which fiduciary duties may arise from the surrounding circumstances.  
90.	In Fishel Elias J had to consider whether work opportunities which came to an academic in the course of his employment had to be passed on to the university.  It was argued on the basis of Industrial Developments Consultants v Cooley [1973] 1 WLR 433 that the opportunities came to the employee whilst he was employed, and were of interest to the employer, and accordingly could not be pursued without full disclosure.  At 1495E Elias J said this:
“The important feature of the Cooley case, which is clearly implicit in this judgment, is that the defendant had a specific duty to secure contracts of this nature.  Once that duty is undertaken, he cannot pursue the opportunity for himself, even though the third party wishes to engage him in his own right.  He no longer has a private capacity but must act at all times in his employer’s interests, even where the opportunity comes to him wholly independently of his employment.”
91.	In rejecting the case that the academic had made secret profits, Elias J said:
“The short answer to this point is that Dr Fishel did not develop his connections with the clinics abroad by representing that he was acting on behalf of the university, nor did the opportunities to do the work arise because of his university connection.  On the contrary, the clinics were indifferent to his university links. He did not use his university links to gain benefits he would not otherwise have gained.”
92.	Later he said:
“Dr Fishel was not being paid by the outside bodies because they were grateful for the service he provided in his capacity as a university employee; they were paying him pursuant to their own independent contractual arrangements with him.  In my opinion the fact that he was also doing this work in pursuance of his university duties does not convert him into a fiduciary.  It was not by virtue of that position that he did the work, nor was it because of his position that he was remunerated for it.  It would be strange if contractual duties also gave rise to fiduciary duties where the employer benefited from a breach but not where he did not.” 
93.	Mr Randall QC, who appeared for Mr Hodge with Mr Shakil Najib, relies on these passages.  He says that Mr Hodge was not offered the shares because he was at the time acting as solicitor for LC in connection with the placement.  He was offered the shares as part of an independent contract to secure his services for the future.  
94.	It is of course not improper for an employee to make arrangements for his future employment or business activity whilst still employed.  However “preparatory activity”  is not always an answer to an allegation of breach of fiduciary duty or the duty of fidelity as Moses LJ pointed out in Helmet Integrated Systems v Tunnard [2007] FSR 16 at [30] - [32]:
“I agree that it is insufficient merely to cloak activities with legitimacy by describing them as preparatory.  The first task…is to identify the employee’s obligations.  Once these have been identified, the court is in a proper position to discern whether the activities of an employee undertaken in pursuance of a plan to be fulfilled on his departure is in breach of his duty to his employer or not”
95.	Under the original letter of instruction LC were to act in relation to the subscription for new shares in the company as part of a primary funding round.  Part of his duties involved providing legal and drafting advice in relation to the conclusion of the shareholders’ agreement. On a narrow reading, the retainer might be said not to include the obtaining of investors. But Mr Hodge was in charge of the relationship with EL, and was not strait-jacketed by the letter of instruction.  He was aware of LC’s wider policy of adding value for clients, and had sufficient authority to implement this policy when appropriate to do so.  He had been employed as a generator of new business – Mr Rimmer described him as a “grinder and finder” - and this applied no less to the authority which he had in the context on ongoing relationships. He was placed in a position of trust and responsibility by LC. It was therefore both within the scope of LC’s retainer for Mr Hodge to assist in finding investors, and within the scope and course of Mr Hodge’s employment to do so.  Thus Mr Hodge was certainly acting within the scope and course of his employment when he started to seek investors in February 2002: and this activity was something within the scope of LC’s retainer and for which they might expect to be paid.  
96.	That the seeking and introducing of investors was within the scope and course of Mr Hodge’s employment, and within LC’s retainer, is made clear by the actions in relation to Mr Dartnell.  It was LC and not Mr Hodge who, with BDO, contributed to the commission payment to Total Asset Finance.   
97.	Mr Hodge was also acting within the scope and course of his employment when giving advice in relation to the shareholders’ agreement. 
98.	It follows in my judgment that, in carrying out these specific duties for LC, Mr Hodge owed fiduciary duties not to place himself in a conflict of duty and interest, and more particularly not to make any secret profit out of carrying out those duties.  If one asks whether Mr Hodge could have himself charged a commission for introducing investors, or for any aspect of the work in relation to the closure of the PPM, the answer is clearly “no”.
Did Mr Hodge breach his duty to LC?
99.	I have rejected the dramatised account given by Mr McLeod and Mr Ward of the events of 12th and 13th March.  Mr Hodge did not therefore expressly make his work in finding investors conditional on being allotted shares at par.  There was no overt blackmail of this kind.  This would have been a gross breach of duty, and one which Mr Randall on behalf of Mr Hodge rightly made no attempt to defend. 
100.	However, on the view which I have taken of the facts, Mr Hodge would not in fact receive any shares if the PPM did not succeed.  As the final closing approached, and as it became clear that the minimum subscription would be reached, he negotiated for himself an agreement whereby he would receive 5% of the issued capital, subject to the ratchet.  He held the key to a successful closing, and negotiated his deal, with the ratchet as finally enshrined in the shareholders’ agreement, in circumstances where the McLeods felt pressurised by all the circumstances I have described into accepting it.  The question is whether this is enough to establish a breach of Mr Hodge’s duty not to make any profit out of carrying out his duties for LC.
101.	In my judgment it is enough. The rule that a fiduciary shall not make a profit is a strict one. The fiduciary should not, without informed consent, place himself or herself in a position where he or she makes a profit from carrying out activities to which the duty applies. The reason is straightforward: the duty of loyalty requires that all of the profit from carrying out that work goes to the employer. At the same time as he was acting for LC in finding investors in EL so as to meet the minimum subscription for the private placement, he should not have been negotiating for himself a deal under which, if his efforts succeeded, he would own 5% of the equity in EL. The opportunity came to him whilst and because he was acting for LC, and in the course of specific duties in relation to the issue of EL’s shares.  Negotiating this deal for himself was the antithesis of acting in accordance with the single minded duty of loyalty which the law imposed on him in acting as LC’s fiduciary in connection with the issue of these same shares. 
102.	One can test this proposition by supposing that Mr Hodge had gone to Mr Cox when Mr Hodge asked LC to pay Total Asset Finance the commission for introducing an investor, and said “I am due to get 5% of the equity if the minimum subscription is reached for 10p a share instead of £2.40.”  In my judgment it is at least a reasonable possibility that Mr Cox would have refused to approve the commission, or suggested that Mr Hodge contribute to it.  But Mr Cox took that decision to pay the commission believing, at most, that Mr Hodge was simply an investor in EL already contributing his own money on the same terms as everyone else.  
103.	It is true that LC’s fees were at risk if the PPM did not succeed, and this would have provided a rationale for LC to pay the commission to Total Asset Finance even if Mr Hodge had revealed the true position.  But LC were entitled to assume that their fiduciary was not receiving a benefit as well.  It is, in my judgment, highly significant that the email of 7th March does not reveal the true position in that respect.
104.	It is no answer to say that LC would not invest in shares, or that the shares would not have been offered to LC.  The law imposes a strict rule precisely because of the difficulty of enquiring into questions such as these.
105.	It is also no answer to say that that 5% equity might turn out to be worthless, because, equally, it might turn out to be extremely valuable.  Either way Mr Hodge was not entitled to take the shares without the informed consent of LC.  If there were any extra benefits to be derived from the work in completing the PPM, they were benefits for which he was liable to account to LC. 
106.	I cannot accept that the obtaining of the shares was purely preparatory to Mr Hodge’s subsequent involvement with EL.   It is correct that Mr McLeod described the shares as being “in respect of service to be provided by Mr Hodge”.  But Mr Hodge’s conduct cannot, to borrow Moses LJ’s phrase, be cloaked with legitimacy by describing it as preparatory, that is to say as related only to Mr Hodge’s future remuneration.  The acquiring of the shares was too closely bound in with Mr Hodge’s existing duties for LC.  The opportunity to acquire the shares came to him by virtue of his employment, and by virtue of his involvement in the issue of the shares as part of his specific duties for LC. 
107.	I reject the argument based on Fishel.  Mr Hodge’s arrangements with EL were not independent contractual arrangements which owed nothing to his connection with LC or the specific duties he performed for them.  
 Did Mr Hodge make full disclosure?
108.	The burden of establishing informed consent for conduct which is said to amount to a breach of fiduciary duty lies on Mr Hodge: see Wilson v Hurstanger [2007] 1 WLR 2351 per Tuckey LJ at [36].
109.	Mr Hodge relied on the disclosure to Mr Rimmer and his discussion with Mr Cox.  
110.	I do not consider that such disclosure as Mr Hodge has established  to either Mr Rimmer or Mr Cox came anywhere near what would be required for informed consent.  Firstly I do not accept that even the detail contained in the email of 7th March was shown to or explained to Mr Cox.  Secondly, Mr Rimmer was not a partner, and was not the appropriate person from whom to seek consent.  Thirdly, the email of 7th March gave the impression that Mr Hodge was subscribing over £50,000 of his own money to buy shares, and that he was guaranteed to hold on only to the number of shares which that sum represented at the subscription price.  Any additional shares would depend on the performance of the company after the PPM.  That is not the arrangement which was in fact entered into.  Mr Hodge paid no money of his own beyond that which he borrowed from the McLeods. He bought no shares at the subscription price.  Even if it were the case that LC had expressed contentment with the email arrangement, the actual arrangement is so different that it would be wrong to infer consent.
111.	It follows that no question of estoppel can arise.
Remedy
112.	Mr Randall did not dispute that if I came to the conclusion that the shares were acquired in breach of fiduciary duty, that the remedy would be that the shares would be subject to a trust in favour of the claimants. He contended for an equitable allowance in respect of the work and skill expended by Mr Hodge in increasing the value of the shares for the benefit of the trust, as I explain below.
Equitable allowances
113.	It is well settled that a fiduciary may, even where held liable to account for a breach of duty, be given an allowance for expenditure incurred and for his work and skill applied for the benefit of the trust.  In Phipps v Boardman [1964] 1 WLR 993 at 1018 Wilberforce J. said this:
“Moreover, account must naturally be taken of the expenditure which was necessary to enable the profit to be realised.  But, in addition to expenditure, should not the defendants be given an allowance or credit for their work and skill?  … It seems to me that this transaction, i.e., the acquisition of a controlling interest in the company, was one of a special character calling for the exercise of a particular kind of professional skill.  If Boardman had not assumed the role of seeing it through, the beneficiaries would have had to employ (and would, had they been well advised, have employed) an expert to do it for them.  If the trustees had come to the court asking the liberty to employ such a person, they would in all probability have been authorised to do so, and to remunerate the person in question.  It seems to me that it would be inequitable now for the beneficiaries to step in and take the profit without paying to the skill and labour which has produced it."  
114.	In Guinness v Saunders [1990] 2 AC 663 at 700-701 Lord Goff expanded on the rationale underlying the award of an equitable allowance as follows:
“Plainly it would be inconsistent with this long-established principle to award remuneration in such circumstances as of right on the basis of a quantum meruit claim.  But the principle does not altogether exclude the possibility that an equitable allowance might be made in respect of services rendered.  That such an allowance may be made to a trustee for work performed in by him for the benefit of the trust, even though he was not in the circumstances entitled to remuneration under the terms of the trust deed, is now well established.  In Phipps v Boardman [1964] 1 WLR 993, the solicitor to a trust and one of the beneficiaries were held accountable to another beneficiary for a proportion of the profits made by them from the sale of shares bought by them with the aid of information gained by the solicitor when acting for the trust.  Wilberforce J. directed that when accounting for such profits not merely should a deduction be made for expenditure which was necessary to enable the profit to be realised but also a liberal allowance or credit should be made for their work and skill. …
It will be observed that the decision to make the allowance was founded upon the simple proposition that "it would be inequitable now for the beneficiaries to step in and take the profit without paying for the skill and labour which has produced it."  Ex-hypothesi, such an allowance would not in the circumstances be authorised by the terms of the trust deed; furthermore it was held that there had not been full and proper disclosure by the two defendants to the successful plaintiff beneficiary.  The inequity was found in the simple proposition that the beneficiaries were taking the profit although, if Mr Boardman (the solicitor) had not done the work, they would have had to employ an expert to do the work for them in order to earn that profit.
The decision has to be reconciled with the fundamental principle that a trustee is not entitled to remuneration for services rendered by him to the trust except as expressly provided in the trust deed.  Strictly speaking, it is irreconcilable with the rules so stated.  It seems to me therefore that it can only be reconciled with it to the extent that the exercise of the equitable jurisdiction does not conflict with the policy underlying the rule. And, as I see it, such a conflict will only be avoided if the exercise of the jurisdiction is restricted to those cases where it cannot have the effect of encouraging trustees in any way to put themselves in a position where their interests conflict with their duties as trustees.”
115.	The court therefore has a wide discretion as to whether to grant such an allowance.  It should not be granted where the fiduciary has been “guilty of any dishonesty or bad faith, or surreptitious dealing”: see per Lord Denning M.R. in the Court of Appeal in Phipps v Boardman: [1965] Ch. 992 at 1020.  It is not, however, the case that the allowance can be granted only where the conduct of the fiduciary cannot be criticised: see per Fox LJ in O’Sullivan v Management Agency Ltd. [1985] 1 QB at 428 at 467H-468A.  
116.	It will be seen that Wilberforce J distinguished between the expenditure incurred in making the profits, and the allowance for work and skill.  The cost of acquiring the shares falls into the first category and I think that Mr Hodge is entitled to an allowance for the cost of acquiring the shares, that is to say £7180.  
117.	The evidence establishes that Mr Hodge worked hard for EL, far harder than he was required to as a NED or under the terms of his consultancy agreement.  It is also clear that the fact that he had acquired the shares was used as a reason by EL for encouraging Mr Hodge (successfully) to render professional services at a discounted rate, and to do other work which he was not otherwise required to do. It is quite clear that EL were content to put the manner in which the shares were acquired behind them until the point came when they fell out with Mr Hodge and his shares became an inconvenience.
118.	It is easy to feel some sympathy for Mr Hodge, given his work for EL over a period of some three years.  But it seems to me that to award him an allowance on the facts of the present case would offend against the principles stated by Wilberforce J in Phipps v Boardman and by Lord Goff in Guinness v Saunders.   Mr Hodge did not simply omit to disclose the arrangement with EL.  As the 7th March email shows, he gave Mr Rimmer a misleading account of the basis of his acquisition of these shares.  Moreover, to permit an allowance in these circumstances would be to encourage fiduciaries to place their own interests ahead of those whom they serve.  For both those reasons I decline to order any allowance in the present case, beyond the cost of acquisition of the shares.