Neutral Citation Number: [2018] EWHC 600 (Ch)
Case No: HC-2015-3994
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
BUSINESS LIST (ChD)

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 21/03/2018

Before :

HHJ DAVID COOKE
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Between :

	LRH Services Ltd (In Liquidation)	Claimant	
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	Raymond Arthur Trew (1)
Jason Marcus Brewer (2)
Derek O'Neill (3)	Defendants	

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Ian Wilson QC and Rebecca Zaman (instructed by Gateley Plc) for the Claimant 
Hugh Jory QC and Chris Dunk (instructed by Baker Botts (UK) LLP) for the First Defendant 
The Second Defendant appeared in person
Hilary Stonefrost (instructed by  Stephenson Harwood LLP) for the Third Defendant

Hearing dates: 21-24, 27-28, 30 November and 1 December 2017 
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Judgment Approved
HHJ David Cooke : 
1.	In this case the claimant company ("LRH" or "the company"), acting by its liquidators, brings claims for breach of duty against three former directors arising out of a reorganisation entered into on 23 September 2009.
2.	In very broad outline to set the scene, LRH was at all material times a wholly owned subsidiary of Contracting Solutions Group (Holdings) Plc ("CSGH"), having been acquired by that company in 2007. There was one other direct subsidiary, Contracting Solutions Group Ltd ("CSG"). Mr Trew was a substantial shareholder in CSGH and a director of LRH. Mr O'Neill was also a substantial shareholder and was the finance director of LRH. Mr Brewer was not a shareholder in CSGH or a director of any of its group of companies prior to the reorganisation.
3.	LRH did not trade itself, but it had two subsidiaries of its own that did so, Lorien Resourcing Ltd ("Resourcing") and Lorien Engineering Solutions Ltd ("Engineering") together with a number of  dormant subsidiaries. LRH was however the tenant of a number of commercial properties, some of which were occupied by Resourcing and/or Engineering. Another such property was occupied by Lorien Customer Focus Ltd ("LCF"), which had been a subsidiary of CSGH but had in 2008 been sold to OOH Media Group Ltd ("OOH"). Mr Trew and Mr Brewer were the directors and shareholders of LCF and OOH.
4.	The effect of the reconstruction was:
i)	Resourcing and Engineering were transferred to a new company, Aim Plus Ltd ("Aim Plus") in which Mr O'Neill and Mr Trew had substantial shareholdings. Aim Plus also acquired the dormant subsidiaries and their valuable accrued tax losses.
ii)	Various credit and debit balances between LRH and other group companies, and between LRH and certain external creditors, were transferred by novation to Aim Plus.
iii)	LRH reduced its capital to £1, cancelled its share premium account and capital reserve and paid a dividend of £21,317,726 to CSGH, satisfied by the transactions above. In connection with this, Mr Trew made a statutory statement of solvency under Companies Act 2006 s 643.
iv)	The principal assets left in LRH were its leasehold premises. Its ability to satisfy the rents payable was for the most part dependent on continuing receipt of payments from the occupiers. An "onerous leases" reserve of £689,378 was made in its balance sheet, backed by balances stated to have a value of £689,379, ie matching the reserve plus the remaining £1 share capital.
v)	Aim Plus entered into an agreement called a "Warranty and Compensation Deed" under which (inter alia) it and its subsidiaries were permitted to occupy the properties used by Resourcing, and it agreed to use its reasonable endeavours to procure assignments of those leases and in the meantime while the licence subsisted pay a licence fee equal to LRH's rent liability under them.
5.	The liquidators' case is that the reserve made was grossly insufficient in the circumstances, and in any event it was unsupported because the majority of the assets purportedly retained to back it were not in reality worth the values ascribed. They allege that no sufficient steps were taken to ensure that the payments previously made by Resourcing and LCF could be relied on to continue. LRH quickly became unable to meet its liabilities under its leases, because LCF, which was already in default, ceased to pay anything in respect of the unit it occupied. There is an issue whether it was ever subject to any legally binding sublease or other obligation requiring it to do so. After a few months, Aim Plus was released by a separate agreement from the obligation to seek assignment of the leases, and it thereafter terminated its licence to occupy all of the properties Resourcing was paying for, except one which was retained and for which an assignment was eventually made.
6.	The result, the liquidators say, was that LRH had nowhere near enough assets or income to meet its liabilities. It was temporarily supported by cash transfers of about £145,000 from CSG, its fellow subsidiary, but these were made without obligation and CSG has made claims in the liquidation to recover them on the basis they were loans. LRH went into liquidation in November 2010 on the petition of one of the landlords.
7.	The liquidators' claim, again in broad summary, is that all three defendants were in breach of their duties of care and skill and to promote the success of the company, by devising and implementing a reorganisation which left LRH with onerous liabilities but insufficient assets or secure income to meet them. Mr Trew and Mr Brewer are also alleged to be in further breach of the same duties by taking no proper steps to protect the company's position after the reorganisation.
8.	The defendants' positions are, in equally broad terms:
i)	Mr O'Neill resigned as a director on the day of the reorganisation part way through the series of meetings and resolutions to implement it and before the solvency statement was made (and so before the reduction of capital and dividend were resolved upon). He denies any responsibility for those steps. In any event, he says he considered the provision made was sufficient to cover liability for those properties that were unoccupied or occupied by unrelated entities, and there was no need to make further provision as he considered there were legally binding obligations on LCF and Resourcing to pay the rents on the properties they were occupying, which he had relied on legal advisers to put in place, and no circumstances suggesting they were not financially able to comply with those obligations.
ii)	Mr Trew said that he had relied on Mr O'Neill and the internal accountants to prepare the financial documents relating to the reorganisation. He expected Resourcing to continue to meet the rents on the properties it occupied or was paying for until the end of LRH's leases of them. He had relied on an assumption that if LCF did not pay for the property it occupied, it would be supported by funds from CSG, which he controlled at the time. 
iii)	Mr Brewer was appointed a director after the solvency statement was made by Mr Trew (acting as sole director). He says that he took no part in devising or implementing the reorganisation including, specifically, the solvency statement. On his pleaded case, which is disputed, he did not become a director until after the resolutions to implement the reduction of capital and dividend, and so he denied responsibility for those steps also.
iv)	Each defendant says that insofar as he was involved he acted reasonably and properly and on the basis of professional advice in making the provision he did and retaining the assets he did to meet it.
9.	Further, Mr Wilson argued that the solvency statement was wholly invalid because Mr Trew had not in fact formed the opinions stated in it or could not properly have done so, which would have the result that the reduction of capital was void and any dividend declared in reliance on it was unlawful. There is an issue whether this point is open to him on the pleadings, which I address below. 
10.	At the outset I should make clear that the liquidators have not pleaded a case that the whole reorganisation, together with the subsequent transactions such as the release of the Deed of Warranty and Compensation, was devised with the purpose and deliberate intention of enabling the shareholders to walk away from the lease liabilities, taking the valuable trading assets and leaving LRH to become insolvent. Their complaints are focussed more narrowly on the way in which the directors exercised their powers in the steps taken in devising and implementing the reorganisation itself.
The witness evidence 
11.	I heard evidence from Mr Richardson, one of the liquidators, though in the usual way he had no direct knowledge of events in relation to the reorganisation and so could only speak to matters arising during the liquidation and what could be derived from such contemporary documents as had been recovered.
12.	Mr O'Neill and Mr Brewer filed witness statements and gave oral evidence. Mr Brewer elected, after he had given his evidence, not to attend the remainder of the sessions devoted to evidence, saying that he would return only for closing submissions on the last two days. In the end he did not do that either, sending a message that he had nothing to add to submissions by other parties.
13.	Mr Trew had not filed a witness statement. He had originally been advised by solicitors, but shortly before the time directed for his witness statement to be served his solicitors came off the record. He did not comply with that direction or seek any extension of time, despite being reminded by the claimant's solicitors. He reinstructed his solicitors only a few days before trial, with the result Mr Jory and Mr Dunk were able to file a skeleton on the day before trial. Mr Jory made an application at the opening that Mr Trew be allowed nevertheless to give evidence at trial, though even that was not supported by any proposed witness statement. I allowed him to give evidence on condition his evidence in chief was limited to verifying his statement of case, and that any cross examination on behalf of the other defendants did not turn in to an invitation to expand upon that and effectively deliver the evidence he should have but had failed to disclose in a witness statement as directed.
14.	Mr O'Neill called a number of witnesses of fact; Mr Gerald Thornton who was the financial controller of the CSGH group at the time and Mr Richard Thacker and Mr Peter Drown who were partners in a firm of accountants, Vantis, engaged to advise on the structure of the reorganisation. He served a witness statement from Mr Jeremy Gledhill of KPMG, who advised on tax aspects of the reorganisation, but Mr Gledhill was not called for cross examination.
15.	In addition there was expert accountancy evidence, from Mr Phillip Sykes for the claimant and Mr Doug Hall for Mr O'Neill, who were instructed to express an opinion on the approach a director should take in assessing a company's assets and liabilities and determining an adequate and proper provision for liabilities prior to a reorganisation, in general and in the specific circumstances of LRH. Unfortunately, this evidence was of limited assistance since it very largely consisted of the experts' views on the legal standards applicable in the light of the Companies Act 2006 and reported cases and on matters of fact such as whether the directors acted reasonably in forming a particular view, all of which are for the court and not experts to determine.
16.	So far as the witnesses of contemporary fact are concerned, I accept that generally the non-party witnesses for the defendants did so with a view to assisting the court to the best of their recollection, which was inevitably hampered because the relevant events were some 8 years ago. I am bound to say however I felt Mr Thacker's evidence was somewhat cagey and guarded when it came to the way in which the liabilities of LRH were considered, and he went out of his way to minimise the significance of his own efforts to persuade the solicitors acting that provisions were not required and to put forward innocent explanations of some emails that appeared to me to be strained and unlikely readings of them.
17.	Mr Brewer's written evidence was lacking in detail and his oral evidence showed little by way of specific recall of the relevant matters and what his personal role was. My general impression of him was that he had an eye to the bigger picture of the deal being done and the potential rewards to him, but he paid little attention to the process involved and the steps he was required to take to implement it, beyond attending when needed to sign documents.
18.	Mr Trew and Mr O'Neill were in my view the driving forces behind the creation of the group and the reorganisation in question. They are both qualified accountants and directors with considerable experience over many years and in many companies. Mr Trew did not appear to be a man of detail either, and it appeared from his evidence he paid scant regard to the distinctions between one company and another. He wanted to implement the reorganisation, but left all the detail of the steps to do so to Mr O'Neill and could say very little about why any of them had been taken or, for instance, what considerations had led to the conclusions expressed in the solvency statement, other than he had left it all to Mr O'Neill. To the extent he did claim to recall any of the specific details, in my view his evidence could not be relied on as soundly based. He tended to respond to questions about such matters by seeking to evade them or stating what he would have assumed was the case, rather than any actual recollection.
19.	Mr O'Neill in my view did have a detailed knowledge and understanding of the matters involved at the time and was intimately involved in the design of the reconstruction. He said in evidence he had been a director of hundreds of companies over a period of 30 or more years, including the listed company he and Mr Sawyer sold out of before they were introduced to Mr Trew specifically to provide increased management resource, which no doubt was with a view to floating CSGH in due course. Mr O'Neill showed at the time a clear appreciation of the commercial and factual realities, and is evidently a sophisticated and experienced businessman. However, when it came to answering questions in detail about what he had done and what consideration he had given to particular matters, he tended to become vague and, in my view, evasive at points that might prove adverse to him, claiming for instance not to understand the difference between a lease and a licence and to have assumed that any document prepared by lawyers was a "legally binding agreement" without any regard to the nature and extent of the obligations it created. He is in my view much more intelligent and commercially aware than the impression his answers sought to convey, and I regret to say that in many respects I do not believe that he told me the whole truth as best he could.
The relevant law 
20.	The Companies Act 2006 introduced a procedure by which a reduction of capital, previously only possible with the approval of the court, may now also be effected (s 641) "in the case of a private company limited by shares, by special resolution supported by a solvency statement". S 643 provides:
“643 Solvency statement
(1) A solvency statement is a statement that each of the directors—
(a) has formed the opinion, as regards the company's situation at the date of the statement, that there is no ground on which the company could then be found to be unable to pay (or otherwise discharge) its debts; and
(b) has also formed the opinion—
(i) if it is intended to commence the winding up of the company within twelve months of that date, that the company will be able to pay (or otherwise discharge) its debts in full within twelve months of the commencement of the winding up; or
(ii) in any other case, that the company will be able to pay (or otherwise discharge) its debts as they fall due during the year immediately following that date.
(2) In forming those opinions, the directors must take into account all of the company's liabilities (including any contingent or prospective liabilities)…
(4) If the directors make a solvency statement without having reasonable grounds for the opinions expressed in it, and the statement is delivered to the registrar, an offence is committed by every director who is in default.”
21.	In the present case, Mr Trew was the only director at the time the statement came to be made, by virtue of Mr O'Neill's resignation a few minutes before that point was reached. It was not intended to wind LRH up, so the content of the statement was required to address its present position (subsection (1)(a)) and its ability to pay or discharge its debts as they fell due in the following 12 months (subsection (1)(b)(ii)).
22.	In BAT Industries Plc v Sequana [2016] EWHC 1686 (Ch) Rose J held (para 325) that the reference in subsection (1)(a) to a company being found to be unable to pay its debts was not to be regarded as a cross reference to a potential finding by a court under s 123 Insolvency Act 1986 for the purposes of a winding up petition. Sequana is under appeal, so the Court of Appeal may presumably address whether that is correct in due course. Rejecting a submission that the directors must assess contingent or prospective liabilities on a worst case basis she said:
“327  I hold that the opinion that the directors must form is not whether, if calamity were to strike on some or all fronts, the company might be unable to pay its debts nor is it whether the court would have jurisdiction to wind up the company under section 123 of the Insolvency Act on a petition issued on the day the solvency statement was signed. The test is not a technical one but a straightforward one applying the words of the section. The directors must look at the situation of the company at the date of the statement and, taking into account contingent or prospective liabilities, form an opinion as to whether the company is able to pay its debts. 
(iv) Taking into account contingent and prospective liabilities
328  This issue is linked with the previous question. The Claimants submit that the directors must take account of the contingent and prospective liabilities by assuming that they will have to be paid in full. They must consider the possible quantum of the liability when it is ultimately payable. The Defendants submit that this taking into account refers only to the need to ensure that proper provision is made in accordance with the accounting rules for potential liabilities. If a prospective liability is not sufficiently certain to merit a provision in the accounts, then there is no need for the directors to consider it. 
329  Again, I do not accept that either of these constructions is right. I consider that the test to be applied is the same as was adopted by Sir Andrew Morritt C when he was considering the construction of the same wording in section 123(2) of the Insolvency Act 1986 in BNY Corporate Trustee Services Ltd and others v Neuberger Berman Europe Ltd (on behalf of Sealink Funding Ltd) and others [2010] EWHC 2005 (Ch). Andrew Morritt C said: 
"31. … the requirement 'to take account of contingent and prospective liabilities' cannot require such liabilities to be aggregated at their face value with debts presently due. Such inclusion would be commercially illogical; an obligation to pay £100 today has a higher present value than an obligation to pay £100 in five years. Had the simple aggregation of present and prospective liabilities been intended the subsection would have provided that the amount of its liabilities 'include its contingent and prospective liabilities'.
32. Third, subject to the foregoing, the subsection is silent as to what 'taking into account' a prospective liability involves. On the one hand a prospective liability cannot simply be added at its face value to the present liabilities of the company; on the other it cannot be ignored. In my view, the content of 'taking account of" must be recognised in the context of the overall question posed by the subsection, namely whether the company is to be deemed to be insolvent because the amount of its liabilities exceeds the value of its assets. This will involve consideration of the relevant facts of the case, including when the prospective liability falls due, whether it is payable in sterling or some other currency, what assets will be available to meet it and what if any provision is made for the allocation of losses in relation to those assets."
330  The test is not a technical, all or nothing one, but a question to be posed by the directors to themselves considering the nature of the contingent and prospective liabilities, what assets will be available to meet them and what provision (in a non-technical sense) has been made for that purpose.”
23.	Thus, in taking contingent and prospective liabilities into account, the directors must consider all the circumstances relevant to whether a liability will fall on the company. They are not bound to assume that it will, irrespective of the relative likelihood of a different outcome, or to assume that if it does, the liability will necessarily be of the maximum amount foreseeable, irrespective of the relative likelihood of it emerging as a lower figure. 
24.	Importantly, the directors must also consider what assets will be available to meet liabilities, including future liabilities, or as Rose J put it what "provision in a non-technical sense" has been made for them. Such provision may be by way of setting aside or holding specific assets, or it may be by way of putting in place arrangements intended to generate income or assets in the future from which the liabilities will be met. The directors must be able to form the opinion that those assets or arrangements will be sufficient to discharge the company's liabilities as they fall due, for the next 12 months.
25.	This inevitably involves matters such as:
i)	The nature of the assets and any difficulty that might be encountered in realising them. If for instance they consist of debts receivable, the directors must address the risk of dispute or default by the debtor.
ii)	If future receivables are relied on, how certain is it that they will be received, or to put it the other way around, what are the risks they may not be? A trading company may be dependant on future trading profits. If it is, the directors must consider how confident they can be that the required profits will be realised. The same applies to reliance on other receipts, such as rents (or licence fees) for property or licence payments for intellectual property; the directors must consider whether there is any reason to think these payments may not be continued. Insolvency of the payer is one risk, but not the only one. More fundamental risks include whether the payer is legally obliged to continue to pay at all or has any ability to terminate its payments, and whether there is any risk of default for reasons other than insolvency.
26.	There is an issue concerning the extent, if any, to which the directors may have regard to the prospect that the company will receive funds by way of contribution from investors or related parties, when it has no present entitlement to them. I deal with this below, after setting out the relevant evidence to make the point and its relevance understandable.
27.	In the circumstances of this case, the liability of LRH to make payments of rent and service charge to landlords until the end of its leases, and to satisfy other obligations under the leases such as repairing covenants, was not in doubt. Forming an opinion that the company would be able to meet those liabilities required the directors to consider the security of the arrangements made and assets retained in order that it could do so, and of any risks inherent in them. In doing so they were not obliged to make a worst case assessment but a realistic commercial one having regard to all the circumstances known to them.
28.	The general duty to promote the success of the company is set out in s 172 Companies Act 2006 which, as with the other duties set out in Chapter 2 of Part 1 of that Act, codifies and replaces the previous similar common law rules: see s 170(3). S 172 provides:
“172 Duty to promote the success of the company
(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—
(a) the likely consequences of any decision in the long term,
(b) the interests of the company's employees,
(c) the need to foster the company's business relationships with suppliers, customers and others,
(d) the impact of the company's operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
(2) Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.
(3) The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.”
29.	It is to be noted that the requirement is to promote the success of the company for the benefit of the members, not to promote the interests of the members directly, which may be a different thing. An obvious instance where there may be divergence is in consideration of distributions, which are of immediate benefit to members but may adversely affect the ability of the company to succeed. Further, the reference to the benefit of "the members as a whole" is not to cast the interests of members in contradistinction to those of the corporate entity, but to make clear that the directors must aim to provide, through the success of the company, benefits to all the members rather than any one group or class of them. This might require a balance to be struck if, for instance, different class rights mean that some policy choice might have a differential benefit as between classes.
30.	Success of the company for the benefit of members requires it to be able to meet its liabilities to creditors, since if it does not do so it is liable to be wound up, putting an end to its business and, necessarily, its "success". No doubt there may be circumstances in which the directors conclude it is in the interests of members to cease trading and wind up, but that is not the general case and even if it is an objective settled on in a particular case, it is in the interests of members that there should be a surplus of assets to distribute in the winding up. "Success" of the company in that context may be interpreted as producing such a surplus; it could not in my judgment lie in having previously distributed assets to the extent that it was left with a deficit.
31.	The liquidators' primary case is thus that it is not necessary to show that any direct duty on the directors to consider the interests of creditors and regard them as paramount has arisen. Alternatively however Mr Wilson submits that if it is necessary to rely on such a duty it has arisen because the test formulated by Rose J in Sequana has been met:
“377  To say that my house is on the verge of burning down seems to me to describe a much more worrying situation compared to one in which there is a risk which is something more than a remote risk of my house burning down. Similarly, giving the words their natural meaning, a test set at the level of 'a real (as opposed) to remote risk of insolvency' would appear to set a much lower threshold than a test set at the level of being 'on the verge of insolvency' or of 'doubtful' or 'marginal' solvency. But I agree with the conclusion of Mr Randall QC in HLC Environmental [[2013] EWHC 2876 (Ch)] that the authorities appear to treat these and all the other formulations as different expressions of the same test. Having reviewed the authorities I do not accept that they establish that whenever a company is 'at risk' of becoming insolvent at some indefinite point in the future, then the creditors' interests duty arises unless that risk can be described as 'remote'. That is not what the cases say and there is no case where, on the facts, the company could not also be accurately described in much more pessimistic terms, as actually insolvent or 'on the verge of insolvency', 'precarious', 'in a parlous financial state' etc. 
378 The essence of the test is that the directors ought in their conduct of the company's business to be anticipating the insolvency of the company because when that occurs, the creditors have a greater claim to the assets of the company than the shareholders... I agree with the statement of Norris J in Frohlich that the underlying principle is that: 
"The acts which a competent director might justifiably undertake in relation to a solvent company may be wholly inappropriate in relation to a company of doubtful solvency where a long term view is unrealistic". (emphasis added)”
32.	That too may be considered further on appeal in Sequana, but for the present I accept it as stating the law.
33.	As to duties of care and skill, s 174 provides:
“174 Duty to exercise reasonable care, skill and diligence
(1) A director of a company must exercise reasonable care, skill and diligence.
(2) This means the care, skill and diligence that would be exercised by a reasonably diligent person with—
(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and
(b) the general knowledge, skill and experience that the director has.”
34.	Mr Wilson also relies on the duty to avoid conflicts of interest, set out in s 175:
“175 Duty to avoid conflicts of interest
(1) A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company…
 (7) Any reference in this section to a conflict of interest includes a conflict of interest and duty and a conflict of duties.”
35.	It is not disputed that these duties applied at all stages in the consideration and implementation of the reconstruction, and in its aftermath, to the directors for the time being in office. Thus, it was the obligation of Mr Trew when making the solvency statement to comply with these duties, but it was also his responsibility and that of Mr O'Neill to do so in all the planning and arrangements that led up to the reorganisation. Further, the  content of the general duties is not limited to the matters expressly required by statute to be  addressed in the solvency statement. Thus it may be relevant to consider the company's position over a longer term than 12 months.
36.	Ms Stonefrost points out that after a director resigns in general he ceases to be subject to those duties to the company, save to the limited extent set out in s 170(2), which is not said to be in issue here. But that does not mean that he ceases to be liable for any acts he may have done prior to his resignation that were in breach of duty at the time.
37.	In relation to Mr O'Neill, his duties while he was a director extend in my judgment to consideration of the foreseeable consequences of the actions he took, notwithstanding he expected and intended to resign before they came about. Thus, his duties required him to consider whether it was in the interests of the company to enter into the reorganisation that he was instrumental in planning for, even though the key decisions, or some of them, were planned to be taken after he had resigned. He knew perfectly well, I am satisfied, that the carefully orchestrated set of steps he had arranged for were likely to be followed through without any real possibility that they would be meaningfully reconsidered or re-analysed after his own resignation by either Mr Trew, who would remain as a director but had either not considered them in detail or to the extent he had was in practice committed to carry them through, or Mr Brewer, who was to be appointed in the course of the series of meetings but (as both Mr O'Neill and Mr Trew were well aware) had taken no steps to find out in advance about the substance of the transactions he would be signing up to.
38.	Mr Wilson reserves the right to argue, if the case goes further, that the absence of reasonable grounds for the opinions expressed renders the solvency statement wholly invalid. Rose J concluded in Sequana that this was not so and it was sufficient for the statement to be valid that the directors had in fact honestly formed the opinion stated, provided they had applied the correct test in doing so. He accepts that as binding at first instance.
The factual background
39.	In this section I will set out the factual background in some more detail than I did in introduction, though it is still of necessity an edited version of the fairly substantial documentary and witness evidence.
40.	CSGH was formed in 2007 with a view to acquiring CSG and LRH. CSG was then a private company controlled by Mr Trew, Mr O'Neill and a Mr Sawyer (against whom the liquidators do not make any allegations). Mr O'Neill says in his witness statement that he and Mr Sawyer were introduced to Mr Trew in 2006 by Mr Drown of Vantis after they had sold out of a previous public company, in order that they could provide additional management resource to CSG. LRH was a public company quoted on AIM and was acquired by way of public offer, after which it was converted to a private company. 
41.	CSG's business was in providing services to individual contractors working in the IT sector through service companies, in order to reduce their tax. LRH  did not trade itself, but had at the time 3 trading subsidiaries, Resourcing, Engineering and LCF. Resourcing was a recruitment company. LCF was a digital marketing company, developing new technology to produce personalised mailshots for large third party customers.
42.	After the merger, Mr Sawyer became chairman and Mr O'Neill Group Finance Director. They each held 17% of the shares in CSGH. The rest were predominantly held by Mr Trew and his family connections. Mr Bob Morton, previously a substantial shareholder in LRH, held a loan note for £4.5m issued by CSGH. The financial affairs of the group were managed by a team based in Leeds under Mr O'Neill's direction and headed by Mr Gerard Thornton. 
43.	Although the intention was for the companies to benefit from working together so that the group could be built up and sold or floated, it appears this did not work out as anticipated. LCF was loss making and felt not to fit with the other businesses and in November 2008 was sold to Mr Trew (through a new company, OOH) for £1. Mr O'Neill ceased to have any formal involvement with LCF, though he met Mr Trew regularly for group board meetings and was to some extent kept informed of its progress.
44.	During 2008 the directors were also advised that floating the group was not feasible while CSG remained part of it. It seems its business was regarded as too different from that of Resourcing, and there are suggestions its tax reduction structures may have been thought likely to be challenged by HMRC. In 2009 they therefore approached Mr Drown to devise a reconstruction to separate the two sides. Initially he considered structures that would move CSG outside the group, but eventually settled on a scheme to move Resourcing and Engineering out to a new company, Aim Plus, in which Mr Trew Mr O'Neill and Mr Sawyer would hold shares. Mr O'Neill and Mr Sawyer would give up their shares in CSGH so that Mr Trew (and his family) would be left as owning that company, though he brought in Mr Brewer as director with a view to selling CSGH to him in future.
45.	As part of the reorganisation, Lloyds Bank, which had provided secured facilities to the CSGH group, had to be persuaded to transfer its facilities to the new group under Aim Plus. It would cease to be a lender to CSGH and its remaining subsidiaries (CSG and LRH). It was intended that CSGH would obtain a new facility of £500,000 from Handelsbanken. Mr Trew said that he received an offer of such facilities on the day before completion, though that is not otherwise in evidence and I have no documents to show whether it in the event materialised. 
46.	Lloyds had thus to be persuaded that it would be to its advantage to be lender to the new Aim Plus group and give up any security it held over the companies left behind.
47.	Further, Mr Morton was to give up his loan note payable by CSGH and accept an equivalent note from Aim Plus. He was not party to formulating the proposal and so also had to be persuaded it was in his interest to accept the new group as his debtor.
48.	The reorganisation involved a complex series of steps, which I will not attempt to set out in full or even in summary. Though Vantis were the principal strategic advisers, the directors also retained KPMG to advise on tax aspects, and Hammonds as solicitors to prepare the documentation. The key elements of the proposal were summarised on what Mr Drown referred to as a "steps paper", which took the form of a spreadsheet which started on the left with a summarised balance sheet of each company involved, and then showed, in columns across the page, the effect of a series of steps to move assets, liabilities and shareholdings between those companies, resulting in final balance sheets which were shown in the right hand column. This document evolved through various drafts between the Spring of 2009 and eventual completion on 23 September as the proposals were developed, and the underlying figures changed over time as they were bound to do to reflect trading and other events.
49.	Mr O'Neill resigned at an early stage during the extended series of meetings documented as being held on that day over the course of the completion process. There was then a period in which Mr Trew was the sole director of LRH, during which he made the solvency statement. At some point thereafter Mr Brewer became a director, though the minutes do not expressly record when this was. However he accepted in his evidence (and I find) that he was physically present at all relevant stages and that by reason of his signature on certain of the documents he must have been appointed by the time resolutions were considered to effect the capital reduction and distribution based on it, that he had participated in the board meetings relating to those matters and was the person referred to in one of them as "the Finance Director".
50.	The effect of the reorganisation so far as LRH was concerned would be, as noted above, that its shareholdings in all its subsidiaries would be transferred away so that the trading subsidiaries, Resourcing and Engineering, and the dormant subsidiaries would become subsidiaries of Aim Plus. Further, with the exception of a residual balance of about £339,000 due from CSGH, all its balances previously due to and from other companies would be transferred away by novation. There were a number of these, principally with Resourcing, Engineering and CSG, which no doubt arose at least in part because LRH did not at the time have its own bank account so that any monies receivable by it were paid to the account of another company and payments to be made by it, for instance to its landlords, were made by other companies (mainly Resourcing) and recharged.
51.	LRH would however remain the owner of its leases, and subject to liability under them to the various landlords. Mr Wilson divided them into groups as follows:
i)	"The Poyle Properties", ie three units on an industrial estate at Poyle near Heathrow:
a)	Unit 4, held on lease from Steelcase Plc and occupied by LCF. LRH was liable for rent of some £320,000 pa, plus VAT and service charge resulting in a quarterly payment obligation of just over £100,000.
b)	Unit 14, held on lease from a nominee company referred to as Segro, and sublet to Steelcase.
c)	Unit 17, held on lease from Hilti (GB) Ltd and similarly sublet to Steelcase.
ii)	"The Resourcing Properties", ie four different sets of premises that were (or may have been) occupied by Resourcing and for which, in practice, Resourcing was discharging the rent and other liabilities to the landlords:
a)	Third Floor 107-112 Leadenhall St London. This was Resourcing’s principal office. The quarterly rent was approximately £133,000.
b)	First Floor, Trent House, Fradley Park Lichfield, with a quarterly rent of almost £43,000.
c)	Unit 3.1 City Park Cornbrook Manchester, with a quarterly rent of about £17,500.
d)	Unit 24 Metropolitan House, Cornbrook Manchester, with a quarterly rent of £4,760. This property may have been unoccupied.
iii)	"Chertsey", ie Rutherwyk House in Chertsey, with a quarterly rent of about £24,500, which was unoccupied at the beginning of 2009.
52.	The holdings at Poyle resulted from what was referred to as a "lease swap". It appears that originally LRH rented units 14 and 17, which were occupied by LCF. Steelcase was the tenant at Unit 4 but was not occupying it. LCF wanted larger premises, so a deal was done in which Steelcase sublet Unit 4 to LRH and took subleases itself of Units 14 and 17 (though it does not seem to have occupied them). In practice, Steelcase did not pay the rents due on those units, but LRH was regarded as having to pay a net amount of about £45,000 quarterly to Steelcase, being the £100,000 due less the aggregate rents receivable for Units 14 and 17 of about £55,000.
53.	That of course left LRH liable to pay the headlease rents on Units 14 and 17 (also £55,000) as well as its net payment to Steelcase, so its quarterly outgoing was still £100,000. In order to meet that it had in practice to continue to receive £100,000 per quarter from LCF.
54.	In practice as LRH had no bank account of its own, all these payments were made on its behalf, either by LCF paying direct or by LCF paying Resourcing, which in turn paid the various landlords. 
55.	Importantly, the "lease swap" arrangement included a cross default term in the subleases of Units 14 and 17 by which Steelcase could terminate those subleases if LRH defaulted on its rental obligations for Unit 4. If exercised, the result would be that LRH's liabilities increased from £100,000 to £155,000 per quarter, because it would remain liable on all three units to its landlords but lose the subtenancy income from Steelcase.
56.	When LCF was sold to OOH in 2008, the sale agreement contained provisions for a licence to occupy unit 4 to OOH and/or LCF, under which OOH and LCF were to pay a licence fee equal to the rent and service charge due to Steelcase under the lease. Mr O'Neill and (by implication) Mr Trew rely on this document as showing that at the date of the reorganisation they reasonably believed there was a binding obligation on OOH and LCF to discharge all liabilities due under the lease of Unit 4. I refer to this licence and its effect in more detail below.
57.	So far as the Resourcing Properties are concerned, three of them (Leadenhall St, Unit 3.1 and Trent House) are referred to in one of the key reorganisation documents, a Warranty and Compensation Deed ("the Warranty Deed", D 3/747) to which LRH, Aim Plus and CSGH were parties. The principal purpose of this deed was to provide the mechanism by which Resourcing and Engineering became subsidiaries of Aim Plus, by cancellation of their existing shares held by LRH and issue of new shares to Aim Plus, and "compensation" in the form of assumption by Aim Plus of various liabilities novated to it.
58.	Clause 5.2 provides that "[LRH] and [Aim Plus] shall use their reasonable endeavours to obtain [landlords' consent] to assign the Properties [ie the three referred to above] to either [Resourcing or Engineering] or such other member of [Aim Plus's] group as [Aim Plus] shall direct]". Clause 6 provided that any member of Aim Plus's group was permitted to occupy the Properties as licensee for a period until the earlier of 
i)	The transfer of the leases, and
ii)	"the date if any on which [the occupier] is obliged to cease occupation of the relevant property under the terms of this Agreement".
During the licence period Aim Plus was to pay a licence fee equal to the rents payable by LRH to its landlords, and generally observe the other terms of those leases. There was no express provision for termination of the licence by any party, and so no elaboration of the circumstances in which an occupier might be "obliged to cease occupation" of a property.
59.	The fourth property, Unit 24, was not mentioned in the Warranty Deed, and no other arrangement, documented or otherwise, is alleged to have been made in relation to it.
60.	In practice after completion it does not appear that any substantive steps were taken in relation to the assignment of Unit 3.1 or Trent House. Hammonds collected together the documents required to approach the various landlords but were apparently instructed by Mr O'Neill in early 2010 not to make any such approach. According to Mr Drown's witness statement this was because Mr O'Neill was concerned about the lawfulness of the occupation by companies other than LRH, though it is hard to see this can have been the real reason. Mr O'Neill denied in evidence that he had any such concern, and it was plainly already known at the time of the reorganisation that the landlords had not previously given their consents. The most likely inference, bearing in mind what happened shortly afterwards, is that Aim Plus did not have any real intention of taking an assignment of these leases, with the possible exception of Leadenhall St. The solicitors did seek consent to assign Leadenhall St, although not until October 2010, some 12 months later and after the issue of the winding up petition. The assignment of that property was concluded after liquidation by the liquidators first appointed.
61.	On 9 April 2010 LRH and CSGH (both now acting by Mr Brewer) and Aim Plus (acting by Mr O'Neill) entered into a deed of variation by which Aim Plus was released from its obligations under (inter alia) clause 5.2 of the Warranty Deed (ie the obligation to seek an assignment of the three leases) and, by clause 3.1, an additional provision was inserted entitling Aim Plus to terminate the licence to occupy, and so its liability to pay the rent, of any of the licensed properties on one week's notice. The variation agreement provided for a release payment of £300,000 to LRH, receipt of which was stated to be acknowledged, though in fact the payment was made to CSGH against an invoice raised by it. None of the witnesses could give any reason for this; insofar as it had been previously convenient for other companies to deal with funds on behalf of LRH when it had no bank account that ceased to be the case on the reorganisation because LRH did then open an account with Handelsbanken. The £300,000 was never paid to LRH and is now irrecoverable as CSGH has been dissolved. The evidence before me does not show what happened to this money.
62.	There is no explanation how the figure of £300,000 was arrived at. Mr Wilson submits that it was substantially less than the potential exposure created for LRH under the leases of the Resourcing Properties by releasing Resourcing from its obligations to cover rents by paying a licence fee. In this respect:
i)	In his closing submission he said that no account should be taken of Leadenhall St, because the lease was guaranteed by CSG and was in due course assigned to Resourcing. But the release document did not make any different provision for Leadenhall St, so that as between LRH and Resourcing the latter could have vacated it on 7 days’ notice without recourse just as it did for two other properties. Further, the guarantee by CSG was a protection to the landlord, but did not reduce LRH's exposure since if CSG had been called on to pay under the guarantee it would have had a right of recourse against LRH as principal debtor. The lease ran until March 2018 so the potential exposure was to just under 8 years rent at about £500,000 pa, £8m in all. If whoever came up with the figure of £300,000 did so considering that in practice this liability could not fall on LRH, they must have done so on the basis that it was expected Resourcing would take an assignment of Leadenhall St. If they had that much knowledge of Resourcing’s intentions, they are in my view likely also to have known of its intention to abandon Trent House and Unit 3.1 in the near future.
ii)	Mr Wilson takes no account of Unit 24, since that was never the subject of the licence agreement in any event.
iii)	The potential liability for Trent House was about £42,000 per quarter for the remainder of the lease including VAT, so £35,000 net. I do not have a copy of the lease to see how long that was, but I note that the immediate landlord, Punch Taverns, has proved in the liquidation for just over £677,000 (E/144). Given that it appears rent was paid up to and including June 2010, it would be reasonable to infer that the commitment outstanding at the date of release in April could not have been less than that amount plus one quarter's rent, so about £712,000.
iv)	Rent due for Unit 3.1 was about £17,500 per quarter (£14,580 net of VAT but excluding service charge) and the lease ran for 25 years expiring in July 2020 (see the rent review memorandum at D 2/270). At the date of release there were therefore 40 quarters remaining, with a potential liability of at least £580,000.
63.	The effect of the deed of release was therefore that LRH was exposed to a risk that Aim Plus would terminate its licences and leave liabilities of at least £1.29m (£5.29m if Leadenhall St is included) to fall on LRH, in return for a payment of £300,000. 
64.	Mr Brewer signed the release on behalf of LRH and was its sole director at that date, Mr Trew having resigned four days beforehand. Mr Brewer appeared to have little if any recollection of it however, or what it was to achieve. He was referred to clause 5.2 of the Warranty Deed in relation to seeking assignment and asked if he had been aware of it as a director of LRH, as to which he could only say he expected he would have been. He could not recall any steps taken by himself, or Mr Trew or Mr O'Neill, towards any such assignment. He had no recollection how the £300,000 figure had been produced, and said he assumed it had been received by LRH, but only because the variation deed acknowledged receipt. He cannot therefore have taken any steps to ensure the money actually reached LRH.
65.	Mr O'Neill on the other hand maintained that this figure had been the subject of hard negotiation between himself and Mr Brewer, with him initially offering a lower figure and Mr Brewer seeking a higher one. He was unable to say why Mr Brewer could not recall this. If there had been such a negotiation, it would be to Mr Brewer's advantage to say so and give details of why he had to accept a compromise figure, given that he is accused of neglecting his duties as a director of LRH.
66.	There is no evidence of any involvement of solicitors or anyone else on behalf of LRH in negotiating or preparing the variation deed. Mr Drown said this document was prepared by Hammonds, though it does not have any solicitor's name on it. If so, they would have been acting for Aim Plus and not LRH. The document path printed on it suggests it is the first and only draft, since it includes a reference to "v1-0". There is no correspondence disclosed leading up to it (and none was referred to in evidence by any witness), though it is difficult to believe that the subject of such a release can have been raised, explained and negotiated without generating at least some email correspondence between parties who were clearly accustomed to communicating in this way, if it were not something that they were already anticipating.
67.	I conclude that the most likely explanation is that this document does not represent a genuine renegotiation of previous arrangements between parties acting at arms' length, but is something that Mr O'Neill simply presented to Mr Brewer for signature as a pre-arranged measure. I am not however in a position to make any finding as to when they had arranged it, though one is bound to suspect it may have been an undocumented intention at the time of the reorganisation. The figure in it was not, I find, negotiated but simply one stipulated by Mr O'Neill inserting it in the document he produced. He has offered no basis for that figure, and it is evidently very much smaller than the potential liability from which Aim Plus/Resourcing were being released, even if it was being assumed they would take an assignment of the Leadenhall lease. In the circumstances I conclude it was devised by Mr O'Neill to give the appearance of paying value to release an onerous obligation and enable Aim Plus and its subsidiaries to cease paying for the properties they had no intention of occupying, as and when it suited it to do so. 
68.	I do however find, contrary to Mr Wilson's submission, that on the evidence before me the £300,000 was effectively received by LRH. Although there is no obvious commercial requirement for it to have permitted payment to its parent company, there is no legal reason why such a payment, with its permission, would not operate as a discharge, and it must be accepted that Mr Brewer as the sole director of LRH at the time gave that permission and accepted payment by that means, by means of the receipt clause in the document. In principle it was a matter between LRH and its parent to ensure the funds were passed on to LRH. In the absence of any pleaded case that these arrangements were entered into with the prior intention of keeping the funds away from LRH, I have no basis to find that Mr O'Neill, who by this point was under no relevant duty to LRH, is responsible for the fact that they were not so paid on. Mr Brewer, of course, was under duties to LRH in relation to this transaction, including the chosen means of payment.
69.	In the event, Resourcing continued to discharge the rents on all four properties until the payments due in June or July 2010, ie for the quarters ending in September 2010. I note this had the effect of covering the 12 month period after the reorganisation that was expressly addressed in the solvency statement. Mr O'Neill informed Mr Brewer on 18 October 2010 (D 4/1048) that "we are moving out of the Manchester offices this weekend, please accept this as notice of termination". This may have related to Unit 24 as well as Unit 3.1. The tone of this email suggests that it is merely confirmation of something Mr Brewer knows to expect. There is no similar document relating to Trent House, but presumably it was vacated no later than about this time.
70.	The Chertsey property was vacant at the beginning of 2009, but in June 2009 an agreement was reached to sublet it to Portman Travel Ltd, on terms that LRH would contribute half the rent for the first four years thereafter. The total payable each quarter under this arrangement was £32,240. £200,000 was placed into an escrow account, from which £12,500 per quarter was to be drawn and put towards the rent contribution. LRH had to find separately the balance of £19,740. 
The onerous lease provision
71.	The provision eventually made in the steps paper, which served as the interim balance sheet of LHS at 23 September 2009, was £689,378. There is no document setting out exactly how this amount was derived, save that the steps paper itself shows a starting figure of £1,790,333, to which two adjustments are made in columns headed "onerous lease XS" and "P8 Transactions to reverse", under which the provision is reduced by £1,086,075 and £14,880 respectively.
72.	It is however possible to infer what the provision comprised by tracing its evolution. Mr Thornton gave evidence that he compiled and reviewed this provision monthly. He was taken to a spreadsheet (D 2/518) showing his workings for April 2009 which showed a total provision of £2,069,184, made up of £1,727,733 in respect of Chertsey and £341,451 for dilapidations at various properties. His notes against Chertsey include "could this be prudently reduced post assignment?" which was evidently in anticipation of the deal with Portman.
73.	The equivalent sheet for May 2009 (D 2/518) shows a total of £1,899,254 made up of £1,656,918 for Chertsey and £242,336 for the various dilapidations. The variations, he said, were due to the passage of time, which reduced the remaining liability at Chertsey, and other various transactions that affected the dilapidations reserves.
74.	The same sheet shows a further calculation of two possible adjustments to this provision. The first is in respect of a partial release of the Chertsey provision by virtue of the deal with Portman, which must by then have been agreed in principle. It is based on retaining provision of £516,000 for the rent contributions (equivalent to two years rent, or four years at 50%) plus £55,000 for other estimated costs, so £571,000 in all, which would allow £1,085,919 of the £1,656,919 held to be released.
75.	The second is in respect of "Poyle Rent" to June 2014, the end of the headlease from Steelcase to LRH of Unit 4. Against this a figure of £1,792,726 is put, noted as "Max potential costs ex any other office costs/legals etc if no contribution received".
76.	Mr Thornton said:
i)	The starting figure of £1,790,337 in the steps paper most likely corresponded to the £1,899,254 held in May, as adjusted for movements in the period in between. 
ii)	The "P[eriod]8 transactions" probably represented miscellaneous normal movements during September.
iii)	The "Onerous lease XS" adjustment was the release of the provision for Chertsey calculated by him in May as set out above. The difference of about £150 in the amounts is presumably because of a revision of the costs he had estimated as part of the retained provision.
iv)	The calculation he had performed in respect of "Poyle Rents" was to show that if a provision was to be made in respect of Unit 4, the existing total provision would need to be increased by £706,807 (described as "provision shortfall" and being the additional provision for Unit 4 less the amount released for Chertsey).
77.	Mr O'Neill said that although he had not retained any relevant documents and he had no specific recollection, he was confident that the provision eventually retained was made up of the reduced amount for Chertsey and another sum for Unit 24, being less than a full provision because the property had just been refurbished and was expected to be let in the near future, and that the element previously held for dilapidations had been released because they were properly liabilities that would be borne by the occupiers and not LRH. However this was not put to Mr Thornton, who might be expected to have been able to confirm it, and I consider it unlikely to be true, because 
i)	It was not mentioned in his witness statement.
ii)	Although Unit 24 was not mentioned in the Warranty Deed, it appears to have been expected that Resourcing would continue to pay for it, at least for the time being, since it continued to do so. 
iii)	If there was some different arrangement being made for it, by which it was to be left out of the Warranty Deed, Resourcing would pay for it but not be obliged to do so, and provision would be made by LRH, I would expect that to have been something he would have been able to describe in more detail.
iv)	The rent at Unit 24 was about £4760 per quarter and there were over 10 years outstanding on the lease, so a total exposure exceeding £190,000. 
v)	Mr O'Neill had not mentioned in his witness statement any steps being taken to relet Unit 24 and gave no details in his oral evidence, and no explanation why it could have been concluded that reletting was such a certainty that either no provision, or a particular reduced amount, could have been appropriate.
The provision made evidently cannot have included anything like full provision for this exposure, and there is no evidence in the documents of any consideration at any stage of a basis of a lesser provision. I consider it more likely that Mr O'Neill came up with his explanation in the course of his evidence, to counteract a potential gap in the case he was presenting that he had been entitled to assume Resourcing would continue to occupy and pay under the licence arrangement, when it was pointed out that that arrangement did not include Unit 24.
78.	It must have been that case that, at the time Mr Thornton was working on his May spreadsheet, he had reason to think that a provision might be required in respect of Unit 4 because there was a possibility that LCF might not pay some or all of its "contribution" to the liabilities at Poyle. None of the defendants has given any evidence of any such consideration, save possibly Mr O'Neill, who said in his witness statement (B/50 at para 64) that he had asked Mr Trew "about the financial standing of LCF and was advised by Mr Trew no provision was required."
79.	It is not clear exactly when the spreadsheet was produced. Although it refers to May 2009, if intended for the May management accounts it presumably would have been worked on in June, and the notes of the possible additional provision may have been added then or thereafter. It does appear that some of the figures were calculated as at September, since there is a reference in the note to the Chertsey provision that "55 months" are outstanding, which would have been correct at September but not at May. It does not necessarily follow that they were entered on the spreadsheet in September; the figures might have been calculated forward to that date as the likely effective date of the reorganisation. 
80.	It is however clear that at some point between about June and September 2009 some discussion was going on about the provision to be made and whether it should include an element in respect of the Poyle leases. There is a limited amount of documentation about it, but virtually no evidence from the witnesses as to how it came about. I do not consider it credible that this consideration was limited to Mr Thornton; figures of the size he had noted would have a significant impact on the reorganisation and it is simply not believable that he would have forgotten about them or concluded at the time that they should be ignored without discussion with Mr O'Neill at least.
81.	Mr Thacker, who had devised the structure of the reorganisation and noted in it the need to make a solvency statement and consider contingent and prospective liabilities, and specifically to demonstrate the ability to comply with its obligations under the leases, sent an email to Hammonds on 3 August (D 3/644) referring to a section of the notes to the Companies Act 2006 dealing with the treatment of preference shares in such a statement and saying "I think by extension you can argue that if at the date of signing the solvency statement any sublessee has not defaulted and nothing indicates a default in the next 12 months you are justified in ignoring the contingency".
82.	It is evident from this that there had already been some discussion between them about possible provision for LRH's lease liabilities. Mr Thacker confirmed in evidence that he was relying on an assumption that there was a binding legal obligation in place on another company occupying each of the properties obliging it to cover the rents, though this was not something he or his firm had investigated as that would be for the directors to do. 
83.	The solicitor evidently did not agree that the position was so straightforward, and replied to the effect that since there was no direct relationship between the head landlord and the (assumed) subtenant "there is a risk that the original tenant [meaning LRH] could be liable". Mr Thacker pressed the point, saying "surely it cannot be right, in assessing the quantum of the contingency for solvency purposes to ignore what is presumably a legally enforceable agreement with the subtenant and its ability to meet its obligations over the next 12 months?". The solicitor in turn responded that the directors needed to "assess all contingent liabilities… this will include all liabilities under old leases where [LRH] has now sublet the properties…in the event the subtenant defaults… The directors must have reasonable grounds for the …opinions expressed in the solvency statement… therefore… should the directors take the view that the contingent liability under its old leases is valued at nil…this decision should be based on information that objectively justifies the decision reached, eg a review of the accounts of the subtenant or a review of the credit rating/covenant strength of the subtenant."
84.	All of this email chain was sent or copied to Mr O'Neill. It evidently led to a telephone conversation between him and the solicitor on 4 August (see D 3 639) It appears from the email exchange that a time was arranged for a meeting to discuss the issue. There is however no evidence from any source as to what happened at that meeting. Thereafter the issue is not mentioned again in correspondence with the solicitor, so far as can be seen from the evidence before me. Mr O'Neill can however be taken to have been fully aware of the solicitor's advice, and also of the assumption Mr Thacker and the solicitor were both making that the premises had been "sublet" to a "subtenant". Since (a) there is no reason to think the solicitors would have changed their advice, which was plainly correct, but (b) the solicitors did not mention again or provide in the documentation they prepared for any review of the provision or consideration of evidence such as they had recommended be obtained, it is reasonable to infer they were instructed by Mr O'Neill, probably at that meeting, not to pursue the matter further and that it was something he would deal with.
85.	It is apparent from Mr Thacker's emails that there was an imperative in the transaction to keep the provision down if possible. The effect of doing so would be to increase the dividend that could be paid up from LRH to CSGH. He confirmed this in evidence, saying that the reason was to reduce group indebtedness as much as possible. He made the point that the reorganisation did not result in the immediate payment of cash to any shareholder. Their interest of course was in structuring the group so that LRH could be sold or floated with Mr Trew retaining CSGH, and no doubt minimising any remaining debt due to LRH would improve the value of one or both of these resulting entities. It also of course had the effect of minimising the assets potentially available to LRH to meet its liabilities.
86.	It is apparent that the directors were aware of the existence of potential liabilities in LRH, and that they saw part of the merits of the proposed structure as lying in the opportunity to separate the trading entities from those liabilities. This was something they were keen to stress to those who had to be persuaded to agree to the reorganisation and whose commercial interest was in the strength of the Aim Plus group that would emerge from it.
87.	On 31 March 2009 Mr Drown sent an email to Mr Morton (D 2/516), copied to Mr O’Neill. Mr Morton would have to agree to any reconstruction because of the rights attached to his loan note. The structure under consideration at that point involved the sale of CSG out of the group. He told Mr Morton:
“CSG would be sold, together with one wholly owned subsidiary, being [LRH]. That company would have no assets but potential 'hits' from two onerous property leases and a Rank Xerox lease. The property leases are Poyle (occupied by [LCF] which is no longer part of the group) and Chertsey which, fingers crossed is in the process of being sublet… to an unrelated party with a decent covenant. What we would then have is a new holding company… and two wholly owned and cash generative subsidiaries… A nice clean company that can then be developed for a listing or sale…”
Mr O'Neill was at pains throughout his evidence to say that he never considered the Poyle leases to be onerous, but only Chertsey and Unit 24. But this email shows that Mr Drown appreciated that there was a risk of LCF, which was not part of the group, ceasing to meet the lease liability at Poyle and so leaving LRH exposed, and that he was keen to stress to Mr Morton the benefits of being invested in Aim Plus as a 'clean' company separated from that risk. Mr O'Neill as a shareholder in the same company would stand to benefit similarly, of course.
88.	I note Mr Drown was telling Mr Morton that LRH would have "no assets" although it had "potential hits". He was not asked about this, but even if it is not to be taken quite literally it suggests he was interested in at least minimising the assets within LRH such that there would be an advantage elsewhere if the "potential hits" were received by that company. Mr O’Neill was copied in to this email, and so was aware of the views Mr Drown was expressing. Given how closely he worked with Vantis in preparing the structure, I have no doubt he would have been consulted about what was to be said. While no doubt there was an incentive to obtain Mr Morton's agreement, I do not think it likely that Mr Drown would be putting forward to Mr Morton a position that his client did not agree with. There is nothing in the documents to indicate Mr O'Neill disagreed with any of it, and I do not consider it plausible that he would have done so. I note Mr Trew a few months later said to Mr Drown (D 2/532) "In my opinion yes we need to get rid of [LRH] because of the baggage it has". Mr Drown in cross examination was cagey about what this might refer to, suggesting it could be the number of dormant subsidiaries, but I do not think that is plausible. There is no other mention in the documents of these subsidiaries being a problem requiring LRH to be got rid of, and indeed they were not got rid of themselves but were transferred to Aim Plus for the benefit of their tax losses. The more likely inference is that he was referring to the contingent liabilities in LRH itself.
89.	The reference to a Rank Xerox lease was to liabilities for leased photocopiers, which it appears had been incurred by LRH although the copiers themselves seem to have been used by CSG, LCF or Resourcing. Mr O'Neill said that the copiers were no longer used, but the potential liability was of the order of £250,000. In the event shortly before the reorganisation he negotiated with Xerox a termination settlement of £50,000 payable in instalments, which he said he had orally agreed with Mr Trew would be borne equally by LCF and Resourcing. There is some evidence that those companies did in fact pay the instalments, but at the time of the reorganisation neither the remaining liability of LRH under the settlement nor the agreement that it would be paid by the other companies was documented or reflected in the steps sheet accounts. There is however no pleaded claim in relation to that exposure.
90.	Mr Drown made a similar point in an email to Mr Morton on 2 July 2009, by which time the proposal was to transfer Resourcing and Engineering out of the existing group, which would require Mr Morton to accept novation of his loan note to Aim Plus. Mr Drown also acknowledged the Poyle leases to be onerous (D 3/581, copied to Mr O'Neill and Mr Trew):
“The final part of the plan is to separate out [Resourcing and Engineering] from [LRH and CSG] which will continue to be owned by CSGH…
You may recall there were some onerous property (Poyle and Chertsey) and other operating leases (Rank Xerox) on assets that are not used by CSGH and which would remain with [LRH]. The business of [CSG] has been shrinking somewhat… and as a result it is not generating any cash… [CSG] remains open to attack from HMRC…
Derek [O'Neill] is speaking to Lloyds to get their approval…”
91.	As this indicates, another essential element was that Lloyds Bank should agree to transfer its existing facilities from CSGH to Aim Plus. A presentation document prepared for Lloyds (D 3 582) dated 17 July 2009 included the following:
“Overview of restructuring
… Reasoning: … Contingent liabilities within CSGH are distanced from Newco [ie Aim Plus] …
CSGH contingent liabilities
•	There are a number of contingent liabilities within [LRH] and [CSG]
•	[LRH]
o	Properties 
•	Poyle property if LCF were to fail – rent £327k pa-5 years left
•	Poyle old property (sublet to Steelcase) if Steelcase were to fail – rent £130k pa- 4.5 years left 
•	Chertsey property if new tenant Portman Travel were to fail – rent £260k pa- 4.7 years left 
•	Manchester (empty self-contained unit) – rent £13k pa-11 years left
o	Other 
•	Photocopiers – £550k being value of disputed payments …”
That presentation shows that the directors were aware of LRH's exposure on Unit 24 (the empty Manchester unit referred to) but made no mention of the other Resourcing properties, which would be consistent with Resourcing continuing to discharge the rents for them.
92.	Ms Stonefrost on behalf of Mr O'Neill sought to present this as the bank taking a "worst-case" view, but this is of course not the bank's document but one presented to it, identifying risks from contingent liabilities of companies in the group to which the bank was presently lending but to which its proposed new borrower would not be exposed. Separating the new business from these risks is being presented to the bank as one of the reasons for the transaction. I accept that there may have been an incentive to magnify the degree of risk involved in order to persuade the bank of the advantage of being distanced from it. Nonetheless it shows that the directors were aware that the risk existed and its potential magnitude in the worst case. As before, Mr O'Neill as shareholder in Aim Plus would be advantaged by this separation in the same way as the bank. 
Liability to meet the lease costs
93.	Both Mr O'Neill and Mr Trew said in their oral evidence that they acted at all times in the belief that there were at the date of the reorganisation enforceable obligations on third parties to meet the costs payable under the Poyle and Resourcing leases until they came to an end, and there was no reason to believe that the entities liable would not continue to comply with those obligations. I have described above the arrangements made in the reorganisation documents in relation to the Resourcing properties. 
94.	In respect of Unit 4 at Poyle, I referred above to the obligation in the agreement for sale of LCF by CSGH, made in 2008, to grant a licence at completion. Mr O'Neill did not mention anything about this in his witness statement, but in his submissions later to the expert he said there had been a legally binding obligation on LCF to pay the rent. He disclosed a draft version of the sale agreement a few days thereafter, and shortly before trial produced a copy of that agreement as executed. The terms in relation to the Poyle property are substantially amended from the draft.
95.	The executed sale agreement is dated 14 November 2008 (E/213). The parties are LRH, defined as "the Seller", and OOH, defined as "the Buyer". LCF, defined as "the Target", is not itself a party. Clause 4 deals with obligations on completion of the sale of shares (which took place immediately after signature) and clause 4.6 provides that "Upon Completion the Property Provisions in Schedule 4 shall apply". This is a mistype; the relevant provisions are in Sch 3. That schedule includes a section headed "Poyle Property Provisions", beginning:
“Following the date of this Agreement the Seller shall grant the Poyle Licence to the Buyer and/or the Target and either may enter the Poyle Property and occupied as licensee of the Seller on a non-exclusive basis for the permitted use under the Poyle Lease (but for no other purpose) for the Poyle Licence Period.”
It does not appear that a separate licence document was envisaged, or at least not one to be delivered on completion since clause 4 does not list any such document as one to be delivered on completion. There is no evidence that any separate licence document was ever entered into. The definitions section provides that "the Poyle Property" means unit 4, "the Poyle Licence" means a licence on the terms set out in that schedule, and the "Poyle Licence Period" is a period from the date of the sale agreement to 18 June 2014, when the lease of unit 4 would expire.
96.	The schedule goes on to provide that during the licence period "the Buyer and Target" must on the due date for payment of rent under the lease "or immediately on demand" pay a licence fee equal to all rents and other sums payable under the lease, and indemnify the Seller against consequences of non-payment or breach of any other covenant in the lease. It recites that the licence does not operate as a demise and that neither the Buyer nor the Target should have exclusive occupation. There is no provision for termination by the Buyer or Target, but there is provision for termination by the Seller in the event of breach of the licence terms, or service of any notice by the landlord requiring possession or vacation by the licensee.
97.	It does not appear that there was any intention to seek to have the lease transferred to OOH or LCF. Provisions to seek consent for such an assignment contained in the draft sale agreement did not appear in the final version. There is no evidence that any attempt was ever made to seek such consent or take any other steps towards assignment.
98.	Clause 13 of the sale agreement provides that "No person who is not a party to this agreement may enforce any term of this agreement" and excludes the provisions of the Contracts (Rights of Third Parties) Act 1999 in relation to the agreement itself "or to any agreement or document entered into pursuant to this agreement."
99.	Because LCF was not a party, the contractual position was on the face of it that although LRH had agreed that OOH and/or LCF could occupy the premises, the terms of the licence could only be enforced by OOH. Further, although the obligations to pay the licence fee and to indemnify against liabilities arising under the lease were expressed to be given by both OOH and LCF, they were only enforceable against OOH.
100.	Mr Wilson submitted that the covenant of OOH was not one that could be relied on, because it was a newly incorporated shell company with no assets other than the shares it acquired in LCF for £1. On behalf of Mr Trew and Mr O'Neill it was submitted that it was nevertheless reasonable to rely upon the covenant because in practice OOH had the resources of LCF as its subsidiary available to it and neither OOH nor LCF itself would be likely to default in complying with the terms of the licence because that would mean that LCF would no longer have its trading premises available to it.
101.	However, the vulnerability of these arrangements is amply demonstrated by what happened shortly after the reorganisation, in that:
i)	On 1 January 2010, OOH transferred the shares in LCF back to CSGH, apparently for the £1 it had originally paid. OOH's accounts at 31 December 2009 (D 4/889) show that it had no other assets of any substance and shareholders' funds of only £210, and
ii)	Although payments were made (by CSG) in respect of the rents due on unit 4 up to January 2010, thereafter no further payment was made and it appears that LCF must have moved to other premises at some time between then and the second half of 2010, when it was sold to an unconnected American company for £3m.
102.	Whether or not he had originally intended any such manoeuvre, Mr Trew was thus able to achieve a position in which LCF could abandon the premises as and when it suited it to do so and the only person contractually liable to make payment under the licence arrangements, i.e. OOH, was left as an empty shell by the simple expedient of transferring the shareholding in the operating company LCF from OOH to another of his vehicles for a nominal sum.  He could have done this at any time. LRH was left liable under the lease without apparent effective recourse against OOH or any other entity.
103.	In relation to the Resourcing Properties (other than Unit 24) the Warranty Deed created, on the face of it, an obligation on Aim Plus to seek an assignment of the leases and pending assignment to pay a licence fee equal to the rents due under the leases. There is a similar contractual issue to that with the licence to LCF in that the contracting party is the new parent rather than the occupying company itself (Resourcing), although in this case the occupying group members were permitted to have third party enforcement rights (cl 10.8). Exercising these might have made them directly liable for the obligations under the licence, but there is no evidence that they ever did so.
104.	Mr Wilson criticised the obligation to use reasonable endeavours to obtain consent to assign as too weak, pointing out that Aim Plus was a newly incorporated company and might have difficulty persuading landlords to accept its covenant, as indeed it did, initially, when licence to assign Leadenhall St was sought.
105.	But in principle and as far as LRH's position was concerned, it would not matter too much whether the licence had been assigned, as long as the obligation to pay the licence fee continued and the entity liable to do so, ie Aim Plus, was good for the money. That of course would fall to be assessed for these purposes at the date of the reconstruction. I did not understand Mr Wilson to submit that, as at that date, the directors of LRH ought to have concluded that Aim Plus's contractual obligation was not sufficiently strong to be accepted without provision. Although it was a newly incorporated company just as OOH had been when it acquired LCF, its position seems to me to have been materially different, in that it had a number of shareholders rather than only one effective owner, it had taken on substantial liabilities as part of the reorganisation including a loan note liability to Mr Morton and the shareholding it acquired in Resourcing and Solutions was worth a substantial amount, in contrast to that held by OOH in LCF. Thus although it would have been possible in principle to move the operating companies under a different holding company it would be in practice much more difficult than in the case of OOH.
106.	Mr Wilson did however submit that it could not reasonably be assumed that the obligation to pay the licence fee would continue until the end of the leases, if they were not in fact assigned in the meantime. This was because the licence fee was payable "during the period of the licence to occupy", and by clause 6.3(b) of the Warranty Deed the licence would come to an end on "the date if any on which the relevant member of the [Aim Plus] group is obliged to cease occupation of the relevant Property under the terms of this Agreement".
107.	The Warranty Deed as originally entered into did not have any provision for termination at the option of the licensee (though as seen above such a provision was introduced when it was varied the following April). But, Mr Wilson argued, the licensee would be obliged to cease occupation if the licence fee was not paid or any other term of the licence not observed. I do not accept that submission; the licence contains no provision for automatic termination on such an event, and if there was such a breach it would be a matter for LRH whether it elected to treat it as repudiating the licence or to keep the licence in force and sue for the continuing licence fee.
108.	Mr Wilson further submitted that the licensee might be obliged to vacate if the landlord objected to its occupation and directed that it must be ended. It seems to me however that there are reasons why it might reasonably be concluded this did not in practice represent a substantial risk to LRH; a landlord seeking to take such action without terminating the lease would simply put itself in the position of denying its tenant the resources relied on to pay the rent.
LRH assets after the reorganisation: the inter- company balance due from CSGH
109.	The largest asset in the balance sheet immediately after the reorganisation was the sum of £339,739 due from CSGH. Mr Wilson submitted this could not properly have been relied on as an asset at its face value because its terms were not documented, suggesting that its existence or payment terms might be disputed if it came to be called on. But given the references to it in the completion documentation, to which CSGH was a party, it seems to me unrealistic to think CSGH had not thereby acknowledged that the effect of the reorganisation transactions was to leave it indebted to LRH for that amount. Further, in the absence of documentation to the contrary it would be likely to be found that the loan was repayable on demand. It has not been suggested that, at the time, the directors of LRH ought to have concluded that CSGH could not pay if called on. It cannot now do so, having been since dissolved, but it is not suggested the directors should have anticipated that.
110.	Mr Wilson did submit it was strange that no effort had apparently been made to collect in this debt, or treat the payments made after the reorganisation by CSG as having been made on account of it. That he said suggested it was never intended to be repaid. But I do not consider this advances his case; as I have said above he has not pleaded a case that the defendants deliberately set out in advance to leave LRH unable to pay the lease liabilities, so the claim proceeds on the basis not that this asset was a sham or was intended to be subverted later, but that nevertheless the directors were in breach of duty in regarding it (and the others remaining) as sufficient to match the liabilities.
The £150,000 directors' loan
111.	Mr O'Neill did not give any evidence in his witness statement as to how the alleged loan came about. He told his valuation expert later that LRH had made loans to Mr Trew, Mr O'Neill and Mr Sawyer, and that Mr O'Neill had received £50,000 on 22 June 2009. In his oral evidence, Mr O'Neill said that Resourcing (not LRH) had made payments of £50,000 each to the three men, intended to be on account of future dividends and so treated as loans until such dividends were in fact declared. This liability had been novated to LRH as part of the reorganisation. This cannot be a complete explanation, because Resourcing of course would never have been in a position to pay any dividends to those individuals, since they were not shareholders in Resourcing at the time or even expected to be after the reorganisation. 
112.	In Mr Trew's defence he asserted that these loans had in fact been repaid, by deduction from the consideration paid to Mr Trew by Mr Brewer on the purchase of shares in CSGH in April 2010. Mr O'Neill said in his own defence that he had been informed by Mr Trew that this was so.  But there is no evidence of any such deduction and a mere reduction in the price of shares in the holding company would not discharge debts due by the selling shareholder (let alone anyone else) to a subsidiary without a separate transaction to waive them, and Mr Trew did not even suggest there had been any such transaction. 
113.	Mr Brewer denied there had been any reduction in the price he paid, or any obligation on him (or any other arrangement) to discharge any sums due from the former directors to LRH. There is no explanation why Mr Trew should have taken it on himself to make arrangements to settle debts due by the other two, and it is particularly unbelievable that he would have intended to pay on their behalf without making some arrangement with them beforehand that he would do so and (presumably) be reimbursed. And yet Mr O'Neill's defence is couched not in terms of his having agreed in advance that Mr Trew should pay off his liability, but that Mr Trew had simply told him he had done so, impliedly after the event. Mr Trew said he had no arrangement, and had taken no steps, to be repaid by either of the others for the £100,000 he had supposedly foregone on their behalf, though at the same time he is presumably in need of money since he maintains his financial inability to conduct the litigation. Mr O'Neill said he had not taken any steps to repay Mr Trew. I conclude, on the balance of probabilities, that the alleged repayment arrangement is a fiction by Mr Trew. I do not believe that Mr O'Neill had any genuine belief in its existence when he filed his defence.
114.	The evidence in relation to these loans gives rise, in my view, to considerable suspicion that they may have been created or dealt with with a view to the liabilities being "lost" in the reconstruction. On the assumption that these monies were paid out by Resourcing, the practical effect of the reorganisation documentation is that the directors might say, if asked by Resourcing, that the benefit of their obligation had been transferred to LRH. They may have hoped that LRH would never be in a position to demand repayment, or that if it did they could say there was no such liability, or it had not in fact been assigned to LRH (because no assignment or novation was documented in the reorganisation), or it had disappeared by some means such as that put forward by Mr Trew. I note that when asked about it by the liquidator, Mr O'Neill at first did not respond (saying subsequently he had not had time to reply to the letter before it was overtaken by events) and later advancing the defence above. But, I repeat, the liquidators have not brought a case alleging a scheme in advance to leave LRH insolvent.
115.	The question for me is whether the directors, considering the matter in good faith in the best interests of LRH, could properly have relied on the £150,000 as an asset available to meet its liabilities. In my judgment they could not, for two reasons:
i)	There was no documented or clear basis for the existence of a liability of £150,000 in the first place. Responsible directors asked to accept the personal obligation of three individuals to pay £50,000 each, in the absence of existing clear documentation (and it is not suggested any existed) would have ensured they obtained a clear acknowledgment, to forestall just the sort of arguments to evade liability as have in the event been raised.
ii)	Even if satisfied the liability existed, they did not take any steps to novate it to LRH. Other liabilities were expressly novated or assigned, but not this one. If they had done so, there would have been the opportunity to obtain an acknowledgment by the debtors, so dealing with the first point as well. 
Recovery of this sum would have been essential to be able to meet the liability for the Chertsey lease, which was a certainty. Without taking the steps above LRH was left substantially exposed to arguments that the debt relied on did not exist, was disputed in some way or was not due to LRH in any event.
Other assets of LRH
116.	The remaining asset of LRH at completion was the balance in the escrow account relating to the Chertsey property. It is accepted that this was properly regarded as an asset at its face value.
The financial position of LCF
117.	The shares in LCF were, it appears, considered to have little value when they were sold to OOH for £1 in 2008. Its accounts for year ended 31 December 2008 showed it had lost £455,000 in that year and had remaining shareholders' funds of £669,000 (D 3/815). These were not signed off until 29 October 2009, so after the reorganisation, but Mr Trew accepted in cross examination that there would have been monthly management accounts available to him throughout the relevant period. Mr O'Neill could have had access to these, if he had asked.
118.	LCF continued to be loss making in 2009; its accounts for that year showed a further loss of £531,000 in the period with shareholders' funds falling to £138,000 (D4/921). It appears also to have been running out of cash; at the year end it had £19,000 cash at bank (down from £115,000 at the end of 2008) and a deficit on current assets of £204,000 (compared with a surplus of £277,000 at the end of 2008). Again, the monthly management accounts would have shown this continued deterioration in the period running up to the reorganisation.
119.	Mr Trew was plainly aware of this position. I am satisfied that Mr O'Neill was aware of it, at least in general terms, because Mr Trew said they would have discussed it when they met at Lorien group board meetings. Mr O'Neill would have had more particulars if he had asked Mr Trew in any detail about LCF, or to be shown the management accounts he must have known were produced. They were both also aware of Mr Trew's opinion that LCF was at risk of failure- in an email to Mr Drown and copied to Mr O'Neill on 6 June 2009 Mr Trew discussed the potential cash flow in CSGH after the reconstruction and said (D 2/533) "Let's have a look at CSGH cash outflow between now and 30 June 2010… Poyle rent and rates … (RBS now want a personal guarantee from me which I will not give. As a consequence they won't increase the £500k cap. As a result LCF will fail) £425k". What this means is that RBS were refusing additional facilities to LCF, without which it would fail and CSGH (in fact its subsidiary LRH) would face a liability of £425,000 in the coming year for rent at Unit 4. I accept, as Mr O'Neill said in cross examination, that the context is a negotiation of the structure of the reorganisation in which Mr Trew had an incentive to play down the value of the entities he would emerge with, but it shows there was a real potential cash problem that LRH directors were aware of and needed to consider if LRH was continuing to rely on payment by LCF.
120.	Further, it appears that LCF in fact stopped payment toward the Poyle rents in or about June 2009. There was conflicting evidence about the exact method of payment and the extent of any default, with Mr O'Neill in particular maintaining that LCF was only liable to pay the net amount due to Steelcase of about £45,000 (ie the unit 4 rent less rent receivable on units 14 and 17), and further that the various landlords were late in submitting rent invoices, and since no sensible business would pay until invoiced there had been no default before such an invoice was received and due for payment. LCF was of course liable to pay not just £45,000 but the whole £100,000 due for Unit 4; any netting off against rent for Units 14 and 17 happened within LRH. Further, LRH needed the whole £100,000 if it was to pay the sums due to its landlords of those units.
121.	It seems to be accepted (and in any event I find) that LCF did not in fact make any payment in June 2009. Its ledgers (D 5/1156) show the whole of the rent and service charge for the quarter from June to September 2009, amounting to £100,000, as outstanding. It is true the ledger entries are dated 30 September 2009, but that is because they were made on a new accounts system set up after the reorganisation. There is no reason to think they do not accurately reflect information carried over from the previous computer system. That would have been reflected in the monthly management accounts seen by Mr Trew and available to Mr O'Neill.
122.	On the other hand, Mr Wilson accepts that it appears that the landlords of units 14 and 17 were paid for that quarter, by someone. I agree with him that the likely inference is that some other group company, probably Resourcing, made those payments and has not, for whatever reason, recharged them to LCF. No doubt it was the case that payments were being routed through Resourcing while LRH had no bank account, but even if it was the expectation that LCF would provide funds for three separate payments (net rent to Steelcase plus the two other rents) the fact that it did not pay the first and other companies had to fund the other two and were not repaid is a strong indication of cash problems at LCF. 
123.	Mr O'Neill's position was that he was not aware of any default by LCF, because he had not been chased by Steelcase alleging any arrears of rent prior to the reorganisation. He suggested, based on inferences from later invoices, that Steelcase and the other landlords may have been late submitting their invoices so that as at 23 September, if they had not been paid, there was no default. Even if there had been a default, he said, it would not have affected his due diligence conclusion because the question was not whether LCF had actually paid but whether it could do so, and on that he would have accepted Mr Trew's word that there was no need to make any provision.
124.	I do not accept it is likely that the landlords' invoices were so late that no one was aware of any non payment by LCF before the reorganisation date. The invoices from Steelhouse for rent and service charge on Unit 4 were dated 12 August and  29 July respectively (see D 3/833). There is no direct evidence of the dates of invoices from the landlords of Units 14 and 17, but I do not regard it as reliable to infer from the fact that some later invoices were sent late that earlier ones were also, or to accept Mr O'Neill's self serving evidence that both landlords were notoriously slow in invoicing.
125.	Even if no invoices had in fact been received, Mr O'Neill's evidence at its highest shows that he made no enquiry what accrued rent was outstanding from LCF or to the various landlords. If he had done so he would have discovered there was £100,000 accrued but unpaid, and that at least £45,000 would have to be paid immediately (Steelcase's invoices were over a month old) and the remainder likely very soon because the other landlords could invoice at any time, especially if they were already nearly three months late in doing so.
126.	It is likely that if he had made any real enquiry into LCF's ability to pay, for example by looking at its management accounts, he would have found it was seriously in doubt, to say the least. This may be inferred from the fact that in the months after the reorganisation when Steelcase pressed hard for the rents outstanding on Unit 14 Mr Trew had to negotiate for time to pay and then made payment in two instalments, but from CSG rather than LCF (£70,000 on 3 December and £75,000 on 22 January 2010). There is no reason to think that LCF's liquidity was any better in the period before the reorganisation.
What consideration was given to the extent of the provision?
127.	Mr O'Neill's evidence of the steps he took to satisfy himself of the adequacy of the provision was in summary that
i)	He "went through" or "would have gone through" a file of all the accounts for each of the companies in the group with the other directors of the parent company, ie Mr Trew and Mr Sawyer.
ii)	He accepted that he would have had access through the finance department to management accounts as well as annual accounts of the CSGH group companies. The directors knew the businesses intimately in any event because they were their businesses (in LCF's case it was Mr Trew's business). He said he had looked at the management accounts for all the companies as part of his due diligence (cross examination on day 3, p 168) not expressly drawing any distinction between LCF and the other companies, though I accept he may have been intending to refer to the companies engaged in the reorganisation itself.
iii)	He did not himself know what the financial position of LCF was and did not have access to its accounting records because it was a private company controlled by Mr Trew of which he was not an officer. He had however asked Mr Trew whether any provision was necessary for its obligations and been assured that it was not. This would appear to be inconsistent with his having actually seen management accounts of LCF. It was not, he thought, up to him to form a view on the financial status of Mr Trew's company. He did however say he was aware that LCF was not a profitable company and regarded its problem as being that it was "ahead of its time" and had spent a great deal on investing in digital printing equipment. He said he did not regard it as likely to become profitable "within three months…but I have worked in many businesses where it is not all about profit, it is about future prospects. Did I believe this business had prospects? Definitely". I consider it most likely that he did not in fact see any management accounts of LCF, but even if he did, he was clearly not saying he relied on them to provide the comfort he would have required to assess for himself its ability to pay for the remainder of the lease.
iv)	He had not himself checked whether LCF was up to date in its payments for Unit 4, or whether LRH was up to date with meeting its own liabilities to landlords but assumed that they were because nobody had chased him about late payment:
“ I assumed that it -- it's always paid its rent before. I've assumed that -- okay, you know, 86 days after an invoice is due that it's been paid, and nobody's chased me -- somebody should have chased me.”
v)	He accepted that as finance director of LRH he should have known if it was in arrears with its obligations but said he was not in fact so aware. He accepted that Steelcase had sent its invoices for June rent and service charge on 29 July and 8 August but said that did not mean he had seen them, and he had also not had it drawn to his attention that there was any problem with payment outstanding to the Unit 14 and 17 landlords. He did not regard this as something he needed to check because "they [LCF] were paying directly", though he acknowledged that the payments were going through Resourcing and the liabilities were those of LRH. The effect of that of course is that as finance director of both companies he had access to the records and a proper interest in knowing whether these liabilities had been met.
vi)	Even if he had found out that payments were overdue it would not have affected his assessment of the balance sheet because "the due diligence is, can the companies afford to pay, not do they pay". 
vii)	He accepted that he had not documented this review at the time, or prepared any documentation to show he had followed the recommendations of the solicitors to base a decision on valuation of the contingent liability "upon information that objectively justifies the opinion reached, eg a review of the accounts of the subtenant, a review of the credit rating/covenant strength of the subtenant…". Nor had he taken any steps to arrange a letter of comfort from KPMG on the solvency statement, as Mr Thacker had suggested in an email in March 2009.
viii)	He relied on the fact that documentation had been put in place by lawyers on the sale of LCF to assume that it created a binding obligation on LCF to continue to meet the rents on Unit 4. He knew that this included provisions relating to the occupation of that unit. He did not ask the solicitors to review that documentation, or "go through the legals again" to do so himself at the time.
ix)	He relied similarly on the fact that the solicitors were instructed in the reorganisation in assuming that the documentation provided for a binding obligation on Resourcing to pay the rents on the Resourcing properties. He did not say he had instructed the solicitors to ensure this was so, or that they had in fact advised him this was so.
128.	Mr Trew had little if any recollection of any process of review of the accounts or the provision for lease liabilities. He was very vague indeed about his knowledge of any of the financial dealings of LCF in relation to the rents, saying he understood that LCF was making full payment of the Unit 4 rent to Steelcase and Steelcase in turn was paying the Unit 14 and 17 landlords. He accepted that LCF had not in fact paid the rent due in June and September 2009, though said he was not aware of this at the time. He had not himself considered the rent liabilities when making the solvency statement but "would have relied on Derek [O'Neill] and Vantis for that". No one has given any evidence that Vantis were instructed to advise on the rent liabilities so there can have been no basis for Mr Trew to assume they had done so.
129.	Mr Trew appeared to accept that during 2009 LCF had been suffering from cash flow problems. He agreed that it was loss making in 2009 but said he had brought in a new chief executive and "there were already signs that it was on the turnaround". Asked whether he had discussed these cash difficulties with Mr O'Neill he said:
“We would have -- we used to meet for the main Lorien board meeting every month, and we may have interim meetings in the middle.  I'm sure we would have discussed it in having a coffee.”
130.	He also said that the only document he had had in front of him when signing the solvency statement, and the only thing he had relied on in doing so, was the balance sheet, meaning the summary balance sheet in the steps paper.
131.	Mr Trew took the position consistently that no provision was required for rent obligations falling on either LCF or LRH because, if they could not pay, he would ensure that CSG did so. He accepted there were no guarantees or written obligations on CSG to do so but said there was no need for them because he controlled all the companies. 
132.	He could not recall specifically, when asked in cross examination or re-examination, whether he had been asked by Mr O'Neill about the financial standing of LCF and said that no provision was required. Asked in cross examination about this he said:
“Well, I would say so, because again I will go back,  there was no provision required because CSG would have acted as his bankers… ”
It was put to him that Mr O'Neill had made no mention of relying on support from CSG and had given the impression he had been assured LCF could meet its own liabilities. Mr Trew then said again that LCF had been turning the corner, but on being pressed whether Mr O'Neill had specifically asked whether a provision was needed he said:
“Yes, he probably did.  And I said there doesn't need to be a provision because it would get support from CSG.”
I took his to mean that if he had been asked about a provision, he would have told Mr O'Neill that it was not necessary because CSG would support LCF. Given Mr Neill's insistence that he had asked that question, it follows that he must have been given this answer, and therefore knew (a) that Mr Trew considered LCF was at least likely to be unable to pay itself and (b) it was Mr Trew's intention to support LCF from CSG. 
133.	Asked whether he had told Mr O'Neill that payments were not up to date Mr Trew said he did not know whether he had mentioned that or not, and then said, for the first time, that he had a contingency plan for payment which was a facility from Handelsbanken that he had been offered the day before the reorganisation, and he would not have signed the solvency statement without it. That had not been mentioned in evidence or pleadings before and the letter of offer was not produced. From what Mr Trew said, it appears to have been a facility to CSGH and its subsidiaries, so there is no evidence it would be available for LCF to draw on, and at best would only assist CSG (or CSGH) to provide the backup that Mr Trew said he was relying on. Mr O'Neill had mentioned nothing about such a facility, or about the availability of support from CSG being relevant to the question whether a provision should be made against LCF's obligations.
134.	Asked in re examination whether he could recall Mr O'Neill asking whether any provision was required for the rents Mr Trew maintained the same position, saying "Knowing Derek I would envisage that he did, but I would have said no, because I always had the backdrop of CSG".
135.	Mr Wilson asked about the terms of the solvency statement and in particular the statement that he had formed the opinion that LRH could meet its debts as they fell due for the following 12 month period. There was then the following exchange:
“ Q.  Is the effect of what you've been saying this morning, that your concern was not necessarily whether the                             company situation was such that it could pay, [but] whether the company's group members, CSG/CSGH, could be such the company would be able to pay?
 A.  Correct.
Q.  Thank you.  Did you take the view that provided LRH  could keep paying its debts for the first 12 months that that's sufficient to satisfy your duties as a director?
A.  It never entered my head.
Q.  You didn't consider LRH's position after the 12- month period?
 A.  No, I didn't.”
136.	In his final exchange with Mr Wilson, Mr Trew was asked about arrangements for repayment of any funding CSG might provide: 
“Q.  How was CSG going to be repaid by LRH?
 A.  I don't think -- if you've got a family of companies and
 it's under common ownership, you can do loan write-offs,
you can do all sorts of things.  There was not necessarily a plan to repay it.”
137.	It is clear in my view from this evidence that Mr Trew regarded it as open to him to treat all the companies he controlled as if they were effectively one resource and move money between them as and when it suited him. He knew that LCF (at least probably) could not pay its immediate and future liabilities for unit 4 and assumed he could properly cause CSG to pay it. He did not expect LCF to repay this support (and so was not counting on LCF turning its finances round and resuming payment) and assumed he could write it off when needed to balance the books.
138.	Realistically in view of the closeness of their connection, it must be inferred that Mr O'Neill was aware that this was the basis Mr Trew was operating on, either because Mr Trew expressly told him (as Mr Trew appeared to be saying in cross examination) or because he would have understood it anyway from their course of dealings.
Summary and conclusions in relation to the allegations before the reorganisation
139.	I did not find the evidence of either Mr Trew or Mr O'Neill satisfactory or credible on the material issues of the allegations against them. Mr Trew is himself an accountant and it is apparent from his general conduct of the affairs of the CSH companies and LCF, which he had arranged to be transferred to his sole control so that he could turn it round, that he was closely in touch with those businesses, their problems and prospects. I do not therefore believe that he was unaware that LCF had failed to pay the rent for June 2009. Indeed it is apparent from the stress he lays on the availability of assistance from CSG (and I find) that he was aware before the reorganisation that LCF would have difficulty with its cash flow and he would have to call on CSG to support it. I have no doubt he intended to make that funding available, at least in the short term, but he had given no commitment to do so and procured none from CSG. He had formed no intention of continuing that support beyond 12 months. He did not expect CSG to be repaid. Despite his denial, I consider there is a real suspicion taking the evidence as a whole that he approached the matter only on the basis he needed to ensure that LRH did not go into insolvency for 12 months, but it did not matter what happened to it after that.
140.	Mr O'Neill as I have said above is a sophisticated and commercially aware businessman. His evidence amounted to an almost complete absence of any consideration of the liabilities LRH was under and assertion of blind reliance on the effect of documentation he had not examined and the uncorroborated and unexplored assurance of Mr Trew that he need not provide against non payment by LCF. I do not believe for a moment that that was in fact the approach he took. As is shown by the correspondence with Lloyds and Mr Morton and his own involvement with negotiation of the Xerox liability, he and Mr Drown were keenly aware of the liabilities LRH was exposed to and the risks they represented. I have no doubt given his experience Mr O’Neill was well aware of the need for a "good covenant" if relying on payment from others. I am in no doubt that if he was genuinely interested in ensuring that LRH would be able to meet those liabilities he would have looked much more closely into what was necessary to ensure that it could do so.
141.	I do not believe Mr O'Neill was unaware that LCF had failed to make the payment due in June. He was in charge of the finance department that handled payment to all the landlords and, I am satisfied, would have known that payments were due to them but funding to make them had not been received from LCF. Even if it was the case that no steps were taken to obtain payment from LCF until invoices were received from those landlords, Steelcase at least had rendered invoices by early August. They may not have been chasing for payment, but I do not believe that Mr O'Neill or his finance department would have been so sanguine that they would have been unconcerned to take any steps to obtain funds from LCF to meet this before the reorganisation date. On the contrary, Mr O'Neill himself knew that LCF was unprofitable and, as Mr Trew said, had been told it was having cash difficulties. Had he been concerned to ensure LRH could meet its liabilities, he would have found out what the present position was and ensured that LCF's payments were not allowed to drift.
142.	The minimum starting point for any enquiry into whether LCF could be relied on would have been to find out whether it was presently up to date in its payments. On his own evidence, Mr O'Neill did not even do that but assumed that it must be because it had always paid in the past. Adopting the language he used himself, the question "do they pay" is relevant to the question "can they pay". He failed to enquire about actual payment, and made wholly inadequate enquiries about ability to pay.
143.	Mr O'Neill clearly knew that LRH's ability to meet its liabilities until the end of its leases critically depended on LCF continuing to make payments for Unit 4 until the end of the lease of that unit. He would have known and understood, I am satisfied, that this required (a) that LCF was liable to do so and (b) that it was and would remain financially able to meet that liability. He effectively acknowledges he understood the first point by saying that he assumed such a liability was imposed in the sale documentation the previous year. In that circumstance, and if he was genuinely concerned to ensure that LRH's position was secure, it is simply not credible that he would not have taken steps to satisfy himself that this was the case by at least looking at the document in question and if necessary taking advice on it. If he had done either it would have been apparent, in my judgment, that (at least) there were further questions to be asked because even though LCF was expressed to be obliged to pay the licence fee it was not a party to that document. 
144.	It was submitted on his behalf that Mr O'Neill cannot be criticised if he simply relied on lawyers to have prepared an effective document, but that simply raises the question, effective for what purpose? Neither Mr O'Neill nor Mr Trew gave any evidence that solicitors had been instructed in 2008 to ensure LCF was bound to meet the rent until the end of the lease, and in view of the fact that Mr Trew had a common interest in LCF (through OOH) and LRH (through CSGH) after the sale it may not have been thought necessary to do so. In the circumstances of a reorganisation in which that common interest would be broken, any prudent director would in my judgment check whether that documentation was sufficient for the new circumstances by looking at it and referring it to solicitors if necessary. Mr O'Neill, if genuinely interested in LRH's position and given his knowledge and experience, would certainly have done so. 
145.	I note in this context that Mr O'Neill was keenly aware of the need for contractual obligations to be binding on a company if it was to be liable and the fact that a company could not be made liable to a landlord indefinitely simply because it was a member of the tenant's group, or had occupied without taking an assignment, or had in the past paid the rent. That is clearly apparent from his sharp rebuttal (after the reorganisation but there is no reason to think Mr O'Neill's knowledge had changed) of an attempt by the landlord of one of the Resourcing properties to recover arrears of rent from that company. He told them bluntly that irrespective of who had occupied or paid the rent only LRH had ever been the tenant and only it was therefore liable under the lease. 
146.	In my judgment, Mr O'Neill would not have needed a lawyer to advise him that there would at least be reasons to doubt whether a document executed by OOH would be binding on LCF. If he had been genuinely concerned about LRH's interests he would have taken advice about the licence agreement and ensured a direct covenant was entered into. I do not doubt he was sufficiently astute to realise without legal advice that an obligation from OOH could be easily evaded or made worthless, as it soon was.
147.	As to LCF's ability to pay until the end of the lease, I do not believe that in fact Mr O'Neill regarded it as sufficient to accept Mr Trew's word for this without further investigation. Even if he did, that was not something a reasonable director would be prepared to accept, still less one with Mr O'Neill's professional and business experience, if genuinely having regard to the interests of LRH as a separate company. I reject Mr O'Neill's claim that he could not look further into LCF's position because he was not a director of it and did not have access to its accounts. He could and should have asked to be given any necessary accounting information, rather than accepting without question the word of a director whose interests were not solely aligned with those of the company (LRH) Mr O'Neill should have been protecting. The need to do so was enhanced because he was aware of LCF's lack of profitability and cash flow difficulties. 
148.	I consider it likely, as I have said above, that Mr O'Neill must have specifically considered the amount of the potential exposure and discussed it with Mr Thornton because of the note he made about a possible provision for over £1.7m in respect of it. Mr Thornton would not have explored the need for such a provision, or concluded that it was not necessary, without discussing it with his boss Mr O'Neill. The size of the risk would emphasise still further the need to be properly satisfied it would not eventuate.
149.	As indicated above, given Mr Trew's evidence I consider it likely that he told Mr O'Neill (and taking account of the evidence as a whole I find in any event that Mr O'Neill was aware) that when he said no provision need be made he was relying on the availability of support from CSG to LCF. In those circumstances, in my judgment any reasonable director acting in LRH's interests, and certainly Mr O'Neill if he were doing so, would have realised this could not be relied on to continue unless CSG gave a binding guarantee or equivalent obligation and would have taken steps to ensure one was in place, but Mr O'Neill did not do so. Further, Mr O'Neill would have instantly appreciated that this raised the question what terms that assistance was to be provided on, and in the long term would inevitably mean that LRH would become insolvent unless, by some means, LCF became able to discharge its arrears. I infer that he must have known that  Mr Trew was expecting that this funding would not in practice be repaid and would have to be written off, yet he took no steps to ensure CSG would be obliged to write it off.
150.	For  these reasons, in my judgment, if as he says he made no enquiry beyond asking Mr Trew whether a provision should be made, Mr O'Neill was in breach of his duty to LRH to exercise reasonable skill and care set out in Companies Act 2006 s 174, whether assessed on the basis of the knowledge skill and experience any director carrying out the functions of a finance director may be expected to have or that which he himself had.
151.	He was also in my judgment in breach of his duty to act in good faith to promote the success of the company. That specifically required him to seek to ensure the company was able to meet its liabilities,  and yet the steps he took in that direction were at best minimal. So lacking were they in any evidence of proper consideration of the risks LRH faced and what was needed to ensure they were met that in my judgment the only inference is that Mr O'Neill was not in truth genuinely concerned to protect LRH's interest at all, but had greater regard to the other competing interests (a) of CSGH and LCF, which were to be released to the control of Mr Trew with no or minimal responsibility for the liabilities of LRH having achieved the objective acknowledged by Mr Thacker of minimising the inter- company debt due to LRH, and (b) Aim Plus, in which he was personally interested, which would be able to benefit from the profits made by Resourcing and its sister company without these being passed through their former parent company and dissipated in meeting its liabilities. 
152.	I do not for a moment believe that if Mr O'Neill had been expecting to retain any economic interest in LRH he would have acted as he did in relation to it. The evidence shows, in my judgment, that (to put it no higher) he took the minimum measures he considered would justify that company being abandoned, burdened with liabilities that, barring a miracle, would be bound to result in its insolvency.
153.	Mr O'Neill was as I have said above under these duties in relation to the arrangements for the reorganisation notwithstanding that he intended to resign a few minutes before they were finally implemented during the completion meetings. He knew and intended that the steps he had put in place would be followed through without any meaningful further consideration by Mr Trew after his own resignation and so cannot either absolve himself of responsibility for the consequences of his own acts or be heard to say that he undertook them merely as preparatory steps and relying on Mr Trew's assuming responsibility for them at the operative part of the completion.
154.	I reject also the submission made that Mr O'Neill relied in any relevant respect on professional advice. He took no steps to obtain any such advice, whether from the solicitors, Vantis or KPMG on any aspect of the provision to be made or the documents he said he was relying on, and indeed seems to have shut down the discussions that were initiated between the solicitors and Vantis as to what approach should be taken to the provision.
155.	In relation to the assets remaining in the completion balance sheet, in my judgment Mr O'Neill was in breach of the same duties by including in it the directors loans of £150,000, for the reasons I have given above.
156.	Mr O'Neill was not however in breach of duty in accepting the inter-company obligation of CSGH as an asset having the stated value. On the evidence before me, that obligation was sufficiently documented such that it could have been enforced, and there is no evidence from which it can be concluded that CSGH was not, at the time, properly regarded as good for the money or that Mr O'Neill ought to have anticipated that it would cease to be so before payment could be sought.
157.	Further, in my judgment Mr O'Neill was in breach of the same duties in failing to make any provision for the liability under the lease of Unit 24. That was not covered by the licence arrangement to Aim Plus and he had no other arrangement in place for it to be met. I reject his explanation that it was either covered by the provision made or not necessary to make any provision because the premises were expected imminently to be sold as self-serving fabrications by him. 
158.	Mr O'Neill was not however in my judgment in breach insofar as he did not make any provision for liability on the three Resourcing properties licensed to Aim Plus in the reorganisation. I accept that the terms of the licence granted to Aim Plus included, at the date of the reorganisation, an enforceable provision that Aim Plus would pay or procure one of its subsidiaries to pay the lease liabilities for those three properties, which as then in force subsisted for the duration of the leases and irrespective of whether they were in fact assigned. It follows that even if I agreed with Mr Wilson that the obligation to seek an assignment was too weak, that would not entail a financial risk for LRH. The release of Aim Plus from that obligation happened after the reorganisation at a time when Mr O'Neill was not a director of LRH. In the absence of a pleaded case that this was a step that was prearranged at the time of the reorganisation, Mr O'Neill cannot be held to be responsible for the loss LRH suffered from that release.
159.	Mr Trew, in my judgment, is guilty of breaches of the same duties and in similar respects. He is not able to say he relied on Mr O'Neill to prepare the terms of the reorganisation, since he was personally aware of the risks LRH was exposed to and also of the wholly inadequate nature of the enquiries Mr O'Neill made about the provision necessary for those risks, because insofar as such enquiries were made, they were made of himself. Indeed his culpability is greater, because on his own evidence when asked if a provision should be made against risk of LCF's non payment he said it should not, when he had direct knowledge of its poor financial position and need to rely on support from CSG but he failed to take any steps, which consideration of the position of LRH would have required him to do, to ensure that LRH could enforce that support. It was plainly not sufficient from LRH's perspective for him to rely on his own ability to procure that support, because (a) he could withdraw it at any time it suited him, as he did as soon as LRH had survived the 12 month period, and (b) it must be assumed he intended to provide it on the basis of loans, as he in fact did, so that the overall position of LRH was not improved. This may have had the effect of enabling LRH to survive for the 12 months covered by the solvency declaration, but did not assist its "success" as it would still be insolvent with no hope of meeting its liabilities to CSG at the end of that period.
160.	Mr Trew is further in breach of the same duties in that he proceeded with the steps planned to implement the reorganisation after Mr O'Neill resigned, including but not limited to making the solvency declaration that enabled it to proceed so that LRH was deprived of its assets that would otherwise have been available to meet the underprovided liabilities. 
161.	Performance of his duties to the company required Mr Trew to consider its position and its interests beyond the terms of the declaration itself, so that even if he could properly have been satisfied that the company could not be found unable to pay its debts at the date of the declaration and that it could meet its debts as they fell due for the following 12 months by obtaining loans from CSG that it would not be called on to pay in that period, he was required to consider (but did not) whether it was in the company's interest to be left at risk of being insolvent at the end of it.
162.	Mr Brewer is in breach of the same duties. He was appointed, as I have found (and as he eventually accepted) during the completion process but at a time when the restructuring transactions had not been concluded such that he could in principle have enquired about them and sought to satisfy himself that they were in the interests of the company he had now assumed a responsibility to serve. Instead he entirely abdicated his responsibility, simply signing whatever was put in front of him having made no enquiry about it or its effects on LRH before doing so, either before or after his appointment. The documents he signed include a statement attributed to the "Finance Director", which he accepted referred to himself, that he was of the view that after the payment of the dividend that removed the vast majority of its assets LRH would still be able to meet its liabilities. He made no enquiry whatever before signing up to that statement. Although he said he relied on the fact that the reorganisation had been devised by the solicitors and Vantis he made no enquiry as to what their roles were or on what basis they had been instructed, so he could not properly assume that they had given any advice to the effect that it was proper for him to make this statement or approve the reorganisation transactions, and indeed they had not. These duties on a director are inescapable, and it is no more an excuse for a director to say that he has just been appointed and not had the opportunity to familiarise himself with the company and its affairs than it is to say that he was a director in name only and the real management was left to others.
163.	I do not find there was a breach of the separate duty to avoid conflicts of interest. Each of the individual defendants was in a conflict of interest in that they had economic interests in the success of some or all of the companies that stood to gain if LRH went down bearing the lease liabilities itself, but no steps have been pleaded or argued by which they could have avoided that conflict. Their liability arises because, when faced with that conflict, they failed to have regard to the interests of LRH.
164.	I do however consider that the duty to give first consideration to the interests of creditors had arisen, because the structure of the reorganisation was such that the eventual insolvency of LRH was in practice inevitable, even if it could be made to survive for 12 months. Given my findings as to other breaches however, I do not think this adds anything to the case.
Breach of duty after the reorganisation
165.	It is pleaded against Mr Trew (Particulars of Claim para 22.6, A/14) that he failed after the reorganisation to take an active role in the affairs of the company and in particular failed to take any remedial measures  to address the inadequacy of the provision for lease liabilities or to address the non payment of rent by LCF, and failed to take any steps to recover the directors' loan or the inter-company balance due from CSGH. Mr Trew's defence pleads that the directors' loan was repaid "on his departure from the company", but I have rejected that on the facts. He further pleads that he believed "most if not all of the CSGH debt was repaid while he was a director", but of course he has presented no evidence of his own to support that, nor has his counsel pointed to any other evidence to that effect. Indeed it appears that when money was required virtually immediately after the reorganisation instead of causing CSGH to pay the inter-company debt Mr Trew structured the funds he provided so that they were new loans from CSG. Mr Trew pleads he was under no duty to ensure that the whole of the CSGH debt was paid before he left in April 2010. Mr Wilson established in his cross examination that in reality Mr Trew had done little or nothing as a director of LRH after the reorganisation, but he has not set out either in his opening or closing submissions any argument as to what steps he could and should have taken in respect of any of the pleaded matters that would have avoided any losses to LRH. He has not submitted, for example, that the circumstances were such that the directors should have called in the entire balance due from CSGH so that LRH had control of its own funds.
166.	There was a dispute on the facts as to whether (as Mr Trew contended) Steelcase had been paid what was outstanding to them at the date of Mr Trew's own resignation. I am not satisfied that it had been, but to the extent Steelcase was paid it was by monies provided by CSG or Resourcing, so giving rise to equivalent liabilities to repay them and not improving LRH's financial position in circumstances in which the directors had an alternative that plainly would have been better from LRH's perspective, ie to call in the balance payable by CSGH. 
167.	In relation to the directors' loan, if it was ever recoverable, it is not said that it has ceased to be because of delay by Mr Trew. No doubt it is now the case that the CSGH balance is irrecoverable because that company is insolvent, but in the absence of a particularised case or submission as to what Mr Trew ought to have done to recover it while it might have been paid, I cannot find any breach of duty in that respect.
168.	Doing the best I can on the basis of the evidence and submissions, I find that Mr Trew was in breach of his duty of skill and care insofar as he caused or allowed LRH to incur further liabilities to CSG, Resourcing or the other related companies in meeting its own liabilities in the period after the reorganisation until his own resignation when he should have called in funds payable by CSGH. In doing so he incurred further liabilities unnecessarily and ran the risk, which has eventuated, that CSGH might ultimately fail to pay. He is liable for the amount of that additional debt accordingly. He is similarly liable to the extent it is shown by the documents that liabilities accrued due but were unpaid in that period, when they could and should have been met by the same means. If the amount cannot be agreed, I will hear further submissions. I do not however find a case made out that he should have called in the whole of the CSGH loan, in advance of needing it to meet current liabilities.
169.	Similar allegations are made against Mr Brewer (Particulars of Claim para 26) but again there is no submission as to what specifically Mr Brewer ought to have done. His defence is a bare denial. Surprisingly, there is no pleaded allegation against Mr Brewer in relation to the entry into the deed of variation, and Mr Wilson did not in his closing submissions advance any argument that his doing so fell within the generalised allegations referred to above. Accordingly, although I am in no doubt that Mr Brewer was grossly in breach of his duties to LRH in entering into that deed for a wholly inadequate consideration without apparently giving its terms or consequences a moment's thought, it does not appear to be a matter on which the claimants' case as presented entitles them to any remedy.
170.	Mr Brewer is however liable in the same manner as Mr Trew insofar as he could have called in debt from CSGH to meet current liabilities, but failed to do so with the result that liabilities were either not discharged or fresh debt was incurred. In his case, his liability continues after Mr Trew's resignation.
171.	In relation to that, it was Mr Brewer's case that he had resigned as a director and responsibility had been transferred to a Mr Grundy who had taken over as director. However there is no evidence that Mr Grundy was ever appointed as a director, and Mr Wilson established in cross examination that even after the date Mr Grundy was supposedly appointed all matters requiring a decision continued to be referred to and dealt with by Mr Brewer. I find therefore that he remained a director in fact until the liquidation, so that his responsibility in this respect continued until that date. 
Was the solvency statement invalid and if so what are the consequences?
172.	In his skeleton argument Mr Wilson submitted that I should conclude that Mr Trew had not in fact formed the opinion expressed in the solvency statement, and accordingly it was wholly ineffective, with the result that the distribution made on the basis of it was void. He accepted that on the basis of Sequana it was not open to him to argue at first instance that the absence of reasonable belief in the truth of that statement is sufficient to achieve this result. But he said Mr Trew had given no witness evidence conforming that he had formed that opinion, and I could infer from the other evidence that he had not done so.
173.	Mr Wilson amplified this in his closing submissions, arguing that it was apparent from his evidence in cross examination that Mr Trew had asked himself the wrong question, ie not whether LRH could be found unable to pay  or discharge its debts at the date of the declaration (or would be able to pay or discharge them as they fell due in the following 12 months) but whether CSG or CSGH could do so. In consequence, he had not in fact held the required opinion in relation to LRH. 
174.	Ms Stonefrost submits that it is not part of the pleaded case that the declaration was invalid. There is she says no pleaded allegation of fact that Mr Trew had not in fact formed the stated opinion, only (at most) that he did not have reasonable grounds to do so.
175.	The pleaded case against Mr Trew (Particulars of Claim para 22) is an allegation of breach of duty, inter alia in signing the solvency statement "without taking into account all of the company's liabilities (including contingent and prospective liabilities) as required by [section] 643 of the Companies Act 2006". Para 27 pleads that in consequence "The solvency statement could not properly and should not have been signed" and "the dividend should not have been distributed and was unlawful". By para 3.4 of the Reply it is pleaded that by reason of his inadequate assessment "Mr Trew lacked reasonable grounds for forming the opinion required by the solvency statement".
176.	I accept Ms Stonefrost's point, insofar as a case was sought to be made that Mr Trew had not subjectively formed the opinion stated in the declaration he signed.  A pleaded allegation of absence of actual belief in the opinion expressed would be a necessary element in such a case. No such allegation of fact having been made, it is not open to me (even if I find that it would have been made out if pleaded) to hold the declaration invalid on that account.
177.	However, it seems to me that the pleading is sufficient to make the case put in closing, on the basis that Mr Trew did not take account of LRH's potential lease liabilities because he impermissibly assumed they would be discharged, in part at least, by CSG when it was under no obligation to do so. I do not consider any unfairness to Mr Trew results; he was sufficiently aware from the pleaded case that he had to justify the consideration he had given to LRH's liabilities, and it is as a result of his own evidence as to the way he went about it that Mr Wilson is able to make his closing submissions.
178.	In dealing with that case, firstly, I accept Mr Trew's evidence that he considered that LRH's liabilities to landlords and other external creditors could be met, both at the date of the declaration and over the next 12 months. However in doing so he relied solely on the assumption that whatever funds were required in relation to the Poyle properties would be provided by CSG (or CSGH), not LCF (or OOH). I accept that he intended to provide those funds and genuinely believed he would be able to do so sufficiently to see LRH through that 12 month period.
179.	Any support that CSG might have provided was not however something LRH was entitled to. It had no right to compel CSG to provide it, even by way of loan, and was entirely dependant on Mr Trew's continued willingness to make CSG do so. Mr Trew could have changed his mind about that at any time. As Mr Wilson submits, it is highly questionable to say the least whether Mr Trew could be acting in the interests of CSG in making it provide such support, since CSG had no interest itself in LRH (or LCF, which was not at the date of the declaration even a member of the same group) and as its director Mr Trew knew was unlikely to be repaid.
180.	Mr Wilson submits that the prospect of payments being made to which LRH was not entitled may not be taken into account in forming an opinion whether it is able to pay its debts. So much has been decided in BNY Corporate Trustee Services Ltd v Eurosail [2010] EWHC 2005 (Ch) (where the question fell to be decided by the court on the basis of the compulsory winding up test in Insolvency Act 1986 s 123) and in Byblos Bank v Al Khudairy [1987] BCLC 232 on a similar question arising under the predecessor provision in the Companies Act 1985.
181.	Those were cases in which the assessment fell to be made by the court. Mr Wilson submits that the same applies when the opinion is to be formed by a director, relying on Re In a Flap Envelope Co Ltd [2004] 1 BCLC 64 in which Mr Jonathan Crow QC held in relation to the financial assistance whitewash procedure in s 155 Companies Act 1985, which is drafted in very similar though not quite identical terms to Companies Act 2006 s 643 (at para 33):
“In order for a declaration to comply with s 155(6), the directors must have made sufficient inquiries into the financial affairs of the company to satisfy themselves that the statement required by s 156(2) can be honestly made – namely, that as regards the company's initial situation immediately following the date on which the assistance is proposed to be given there will be no ground on which it could be found to be unable to pay its debts, and (if it is not intended to commence the winding up of the company within 12 months) that the company will be able to pay its debts as they fall due during the year immediately following that date. No such inquiries were made in this case.”
and that in consequence the declaration made was ineffective.
182.	There may be some tension between this and Rose J's conclusion in Sequana that it is not necessary for the directors to have reasonable grounds for their opinion, provided they have honestly and genuinely formed that opinion. That required, she said, that they must have applied the right test, being the holistic and realistic assessment of all the circumstances that I have referred to above, rather than being required to adopt a worst case set of assumptions as to potential liabilities. I note that in reaching that view she was influenced by the submission that the consequences of unravelling a distribution, possibly many years after the event, were serious and that Parliament must have intended to achieve a measure of certainty, at the possible risk of inadequate consideration by directors (see para 318-320). It is I think difficult to see how certainty can be achieved if the validity of a declaration may be attacked on the basis of insufficient investigation, even if the inadequacy of investigation must be such as to lead to the conclusion the directors have not acted honestly, rather than simply that they have not achieved reasonable grounds for their opinion. No doubt there is a qualitative distinction, but it may not be an easy one to draw in a particular case.
183.	However, I do not consider that in formulating the test as she did, or referring to "provision in a non technical sense" Rose J intended to depart from the authorities regarding taking into account contingent assets which might be voluntarily contributed but to which the company has no present entitlement, not least because the authority she cited for the test as she formulated it was BNY v Eurosail itself. What she was focussing on was the extent to which liabilities should be taken into account despite uncertainties over their amount and/or occurrence, not the assets (present or future) that the company might properly take into account as being available to meet them.
184.	In these circumstances, it seems to me, the pleaded case that Mr Trew had not taken into account LRH's contingent and prospective liabilities is made out because (a) he did not in fact make any enquiry or give any consideration as to what LRH was liable for in relation to the Poyle properties, how much was outstanding or what might be expected to be received from the normal source (LCF) or the only party contractually liable (OOH), and (b) insofar as he assumed that whatever was outstanding or might fall due would be covered by CSG (or CSGH) he applied the wrong test because their resources were not assets to which LRH was entitled. The result is that he did not properly hold either of the opinions he expressed in the solvency statement.
185.	Mr Jory submitted that whatever might be the position on the test under the Insolvency Act, it was substantially different under s 643 because that referred to paying "or otherwise discharging" debts, and existing debts might be discharged by incurring new debt to pay them. I do not accept this submission; the words added seem to me to be directed at discharge other than by payment (eg by setoff) and not to payment by incurring further debt, which remains "payment". In any event, if it is not correct to take account of the prospect of uncommitted third party funds being made available, it cannot matter whether they are to be used to "pay" or "otherwise discharge" existing debt. 
186.	For these reasons, I find that the solvency statement was invalid, and the dividend declared and capital reduction made on the basis of it unlawful. The consequences are that the directors responsible are in breach of duty and liable to the company for the full amount of the assets unlawfully paid away, so potentially up to the amount of the dividend itself (£21m odd). That is not, in principle, contested by counsel for Mr O'Neill or Mr Trew.
187.	Mr Jory submitted however that loss could not be calculated in the absence of a figure for the provision it is said the directors ought to have made, referring to Re Marini Ltd [2003] EWCA 334, but in that case the directors were able to show by reference to properly drawn accounts that they could have lawfully distributed a lower amount. There are no such accounts before me, and no other evidence from the directors from which it could be established that irrespective of the invalid solvency statement they could have distributed any smaller amount than they in fact did, and so there is no basis on which to limit their liability for the distribution that was in fact made.
188.	Ms Stonefrost made various submissions about relief from liability for Mr O'Neill, if he were found liable, which I deal with below.
189.	Mr Trew is plainly a director responsible for this dividend, as the only director in office throughout the entire period in which the reorganisation was planned and implemented as well as being the person who actually made the invalid declaration it depended on.
190.	In my judgment, Mr O'Neill is also to be held responsible. He of course resigned before the solvency statement and the distribution that relied on it were made, but the reality is that they were the implementation of the plans that he had put in place while acting as a director. As I held above, he intended this result and realistically knew that there was no genuine prospect that it would not eventuate after his resignation. Further, I am satisfied he knew that the basis on which Mr Trew was taking the view that LRH was and would continue to be able to pay or discharge its debts was because he was relying on supporting it from CSG. Mr O'Neill therefore knew the essence of the basis on which the solvency statement was being improperly made and must be regarded as responsible for the fact it was so made. Mr O'Neill is therefore in principle equally liable.
191.	So too in my judgment is Mr Brewer. He took part in the resolutions to implement the capital reduction and dividend, and lent his name to the statement attributed to him as Finance Director in the minutes. He did all this without making any enquiry at all about the propriety of these measures or what if any steps had been taken to justify them. He was, in the true sense, reckless as to whether they were proper, and is responsible for the consequences of the fact they were not.
192.	I should say that each director was also in breach of duty in that in entering into these transactions they exposed the company to the inevitability that it would not be able to repay any support in fact provided by CSG (or any of the other companies) even if they considered it would not be demanded until after the 12 months. Their duty to protect the interests of the company was not limited to what may have fallen due for payment in that period, even if the terms of the solvency statement did not extend further. The consequences of this breach in part overlap with the others I have found. But the fact of this breach means that, even if I am wrong about the validity of the solvency statement, the directors should not have proceeded with the reorganisation anyway, because it made the eventual insolvent winding up of the company inevitable even if they expected to postpone it until after the 12 month period.
Quantum and relief
193.	On the basis the solvency statement is found to be invalid, Mr Wilson seeks an order for repayment of the unlawful dividend, but limited by concession to the amount of the deficit in the liquidation. If the dividend was lawful but in breach of duty, he submits the loss caused is effectively the same- the company has been deprived of the assets to discharge its liabilities and exposed to insolvent liquidation at the petition of Hilti. 
194.	I will hear further submissions on quantum after the judgment is handed down, but in general and in case the matter goes further, it seems to me the consequences of the breaches I have found may require to be analysed separately.
195.	Insofar as those breaches relate to consideration of the reorganisation documentation before completion, and specifically the amount of the provision to be made and the values to be attributed to assets in the completion balance sheet, the appropriate quantification depends on what the directors should have done, had they acted properly in the interests of LRH. Accordingly:
i)	They should have provided for its exposure in relation to the Poyle properties, without regard to possible voluntary contributions from CSG or other companies. Given that reasonable enquiry would have shown (even if they did not already know) that LCF had ceased to make payment and there was no evidence it would be able to resume doing so, and in any event it was not contractually liable to do so and that OOH could not be relied on for any substantial amount at all, the provision would be at least the remaining liability under that lease, as Mr Thornton calculated when he was considering the point. Arguably it should have included the exposure for Units 14 and 17 under the cross default provision.
ii)	No credit is to be given against that for the amounts subsequently paid by CSG, because these merely led to incurring equivalent debts to CSG.
iii)	The directors' loan should not have been accepted as an asset. I would be prepared to order however that insofar as any amount is actually received by the liquidators in payment of this loan, net of any costs of recovery, credit is given against the sums payable by the directors. 
iv)	I have found there were no breaches, at this point, in relation to provision that might have been made for the Resourcing Properties (other than Unit 24) or accepting the CSGH balance as an asset.
v)	Provision should have been made for the outstanding liability for Unit 24. Certain payments were later made by Resourcing, for which credit should be given provided they do not lead to claims in the liquidation by Resourcing. Ms Stonefrost submitted that Unit 24 was not part of the claim because Mr Richardson said in cross examination he thought it related to Unit 3.1, but the pleaded allegations extend to Unit 24 and I do not take Mr Richardson's error to have been an abandonment of any claim in relation to it.
vi)	I reject the argument that the liquidators have failed to mitigate these losses by not pursuing OOH or LCF. It would be futile to do so. The same applies in respect of the directors' loans; in the absence of documentation to substantiate the existence of these loans and an effective assignment of them to LRH, the liquidators cannot be said to have acted unreasonably in not pursuing payment. If any amount is in fact paid, credit should be given as indicated above, to avoid double recovery.
vii)	An argument was raised about failure to pursue the CSGH debt after the liquidators were appointed. I have found there is no evidence it was not recoverable at the date of the reorganisation so that the liquidators have not shown loss by accepting it as an asset, but the issue on mitigation in respect of other losses is different. It is for the directors to show that it was recoverable when the liquidators were appointed and that they acted unreasonably in not taking steps to recover it. General submissions were made as to how it was surprising that the liquidators had not pursued this debt on appointment, but that is not enough to show that if they had done so it would have been paid.
196.	The position seems to me to be different in relation to the payment of the unlawful dividend, for which the liability of the responsible directors is in principle the whole amount of the distribution that should not have been made, not just the additional provision they should have made if they had considered it properly. I accept there might be discretionary relief if the directors establish that they were entitled irrespective of the invalid capital reduction to distribute some smaller amount, but they have not shown that is the case.
197.	If I am found to be wrong on the invalidity point and the breach of duty is limited to failure to consider properly the assets and liabilities before making the solvency statement and failure to take account of unpayable liabilities surviving the 12 month period, the loss from those breaches is as set out above. 
198.	Ms Stonefrost and Mr Jory submitted that their clients should be relieved from liability under s 1157 on the basis they had acted honestly and reasonably, and submissions were made that as there was no pleaded allegation of dishonesty, supported by the detailed particulars that should be given of a serious allegation, they must be found to have acted honestly. I reject those submissions; it is for a defendant director seeking relief to show that he acted honestly and reasonably (the requirements are cumulative) and not for the claimant to plead and prove dishonesty against him where that is not a constituent of the cause of action.
199.	In the present circumstances, I am not satisfied that any of the defendant directors acted honestly or reasonably. I have emphasised at various points that there is no pleaded case against them that the reorganisation was devised with the deliberate intention of extracting the valuable assets from the group and leaving LRH with its onerous liabilities in such a position that it would inevitably fail, but taking the evidence as a whole and looking at the events surrounding the reorganisation that I have described, it seems to me there must be a very strong suspicion that it was set up with exactly that intention. I do not have to make such a finding, and do not do so, but in those circumstances I decline to find that the directors have shown that they acted honestly. 
200.	Further, in paying so little attention as they did to evaluating the exposure LRH was under and providing for it properly, they were not acting reasonably in performance of their duties to it, and indeed in my judgment as I have said above they had effectively subordinated its interests entirely to those of the other companies from which they hoped in future to benefit. For these reasons, I decline to grant relief under s 1157, or indeed on any other discretionary ground, save to the extent of the credit in respect of the directors' loans I have indicated.
201.	I will list a short hearing for this judgment to be handed down. There need be no attendance on that occasion. I anticipate it will be necessary to have a further hearing to deal with matters arising; the parties should seek to agree a time estimate and provide my clerk with a joint list of available dates so that it can be listed.