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Neutral Citation Number: [2011] EWCA Civ 347
Case No: A3/2010/1776 & 1778 IN THE COURT OF APPEAL (CIVIL DIVISION) ON APPEAL FROM THE HIGH COURT OF JUSTICE CHANCERY DIVISION The Hon Mr Justice Lewison Claim No HC07C Royal Courts of Justice Strand, London, WC2A 2LL
Date: 29/03/ Before :
THE MASTER OF THE ROLLS
LORD JUSTICE RICHARDS and LORD JUSTICE HUGHES
**Between :**
Sinclair Investments (UK) Ltd Appellant
- and - (1) Versailles Trade Finance Limited (in administrative receivership) (2) Versailles Group Plc (in administrative receivership) (3) National Westminster Bank Plc (4) Anthony V Lomas (5) Robert Birchall (6) Royal bank of Scotland Plc
Respondents and Cross- appellants
Robert Miles QC and Richard Hill (instructed by Liam Hemmings, Sinclair Investments (UK) Ltd ) for the Appellant Matthew Collings QC (instructed by Denton Wilde Sapte LLP ) for the Respondents
Hearing dates : 14th, 15th^ and 16th^ February 2011
Approved Judgment
The Master of the Rolls:
- This is an appeal and a cross-appeal against a decision of Lewison J, who held that the appellant, Sinclair Investments (UK) Limited (“Sinclair”), was not entitled to assert a proprietary interest in the proceeds of sale of some shares in Versailles Group PLC (“VGP”), but was entitled to assert a proprietary interest in funds originally held by Versailles Trade Finance Limited (“VTFL”), albeit to a more limited extent than Sinclair had claimed.
- The proprietary claims arise out of the insolvency of the Versailles Group, whose business the Judge described as “little but a fraudulent scam” and “a classic Ponzi scheme”. The claims give rise to (i) an issue as to the circumstances in which a proprietary interest arises, (ii) an issue as to what constitutes sufficient notice to defeat a person’s claim that he is a purchaser for value without notice in good faith, and (iii) a number of other issues relating to tracing claims.
The background
The facts in outline
- I take the relevant facts largely from the judgment below at [2010] EWHC 1614 (Ch), paras 3-19, where Lewison J set out the background, which was more fully described by Rimer J in an earlier case, Sinclair Investment Holdings SA v Versailles Trade Finance Ltd [2007] EWHC 915 (Ch), paras 7-72.
- VGP’s principal shareholder was Mr Carl Cushnie (or, more accurately, a company which it is agreed is to be treated as his alter ego , and so I shall simplify matters by ignoring it). VTFL was VGP's wholly owned principal trading subsidiary, and, at least ostensibly, its business was a modified form of factoring. This business required money, and funds came from two principal sources, wealthy individuals, known as “traders”, and loans made by banks.
- The traders provided the money to a company, which was not part of the Versailles Group, called Trading Partners Ltd (“TPL”), which was controlled by Mr Cushnie and his associate Mr Clough, and of which they were both directors. From March 1996, TPL solicited funds from traders, who, having been promised high returns, supplied funds to TPL under a form of written agreement (“the traders’ agreement”).
- Clause 1 of the traders’ agreement provided that the funds would be used to “purchase goods of merchantable quality and goods which have been agreed for sale”. In so far as the trader’s funds were not so used, clause 2 stipulated that they would be “deposited by [TPL] in trust for [the trader] in a … bank account …”. Clause 5 required TPL to account to the trader “for the sale and purchase of all goods and the profit thereon on a quarterly basis”, and to “pay the net profit to [the traders] together with quarterly reports”. Clause 7 of the traders’ agreement provided for repayment “of the monies paid hereunder and accrued interest” on “not less than three months notice in writing” by the trader. It also stated that TPL purchased any goods as the trader’s agent.
- TPL and VTFL entered into a written management agreement (“the management agreement”) on 4 July 1996. Under this agreement, VTFL was appointed to “take
[effectively controlled by Mr Cushnie]. In broad terms, it worked as follows. VTFL had a Customer Service Division, which was a genuine trade generating funds. VTFL was financed by bank loans. It also received finance …. from March 1996, from TPL; [which was] financed by the traders. The money so received by VTFL was then revolved around the cross-firing companies. … [B]etween June 1993 and October 1999 hundreds of millions of pounds were transferred both ways between VTFL and various cross-firing companies. VTFL’s receipts were disguised in its cash books to make them appear as genuine sales to genuine customers, so falsely inflating its turnover.”
For many years the fraud was well concealed. Banks, investors, VTFL’s auditors and the financial press were all taken in.
- On 17 August 1999, Mr Cushie (through an alter ego company, whose existence I shall disregard as it is irrelevant for present purposes) bought a house in Kensington, London (“the Kensington property”), with the help of an advance from RBS of £9.975m, which was secured on the property.
- On 9 November 1999, Mr Cushnie sold some 13.9 million shares in VGP (“the Shares”), representing about 5% of his total holding, for £28.69m. The proceeds of this sale were distributed to various parties in about February 2000. These payments included the following: £9.19m to the Versailles group, £1m to Mr Clough, £1.75m to traders, £2.25m loan repayment to NatWest, and £11.47m to RBS, of which £1.49m was an overdraft repayment and £9.98m was repayment of the loan secured on the Kensington property.
- On 5 May 1999, the DTI had begun an investigation into VGP's affairs under section 447 of the Companies Act 1985. On 30 November 1999, Baker Tilley were commissioned to provide a report under section 2.11 of the London Stock Exchange Yellow Book. On 8 December 1999, share dealing in VGP, whose market capitalisation was then £632m, was suspended. In early January 2000, the banks appointed PwC to investigate and review VGP’s affairs. On 18 January 2000 the SFO announced an investigation into the Versailles Group. On 14 January 2000 PwC produced an initial report; and on 20 January they reported that the position was far worse than they had realised. On the same day the banks appointed certain PwC partners, including Mr Lomas, as joint administrative receivers of VGP and VTFL (“the administrative receivers”). PwC produced their final report on 31 January. Some traders had been repaid in full before the collapse of VGP in January 2000, but the remainder had sums totalling approximately £22.6m invested. The banks were owed a total of £70.5m. In February 2000, NatWest received a payment of £2.25m from Mr Cushnie to pay off a loan he had raised to buy a villa near St Tropez.
- In July 2000, TPL was ordered to be wound up in the BVI, and, shortly thereafter, joint liquidators (“the liquidators”) were appointed; one of them was Mr Akers of Grant Thornton. He met Mr Greaves, who worked for the administrative receivers, on 18 August, and explained that the liquidators were “interested in a tracing process that leads to ultimate cash”, but that their “problem is that our money probably went into PwC’s black hole”. Further meetings took place between the administrative receivers and the liquidators, and their respective representatives over the next two years or more.
- From some time in 2000 the administrative receivers were in negotiation with Mr Cushnie, and in January 2001, they made a distribution to the banks from the moey they received from him. On 26 February 2001, they entered into a settlement agreement with Mr Cushnie. This purported to settle claims that VGP and VTFL had against him, namely (i) a claim by VGP for some £2.7 million for repayment of dividends paid on the false basis that VGP had distributable profits enabling the dividends to be paid; and (ii) a claim by VTFL for breach of his duties as a director. Neither dishonesty nor a proprietary claim was alleged in the settlement agreement. The administrative receivers entered into subsequent settlement agreements with Mr Cushnie in 2002 and 2005.
- Under the settlement agreement of 26 February 2001, VTFL and VGP acquired charges over the Kensington property, and, on 5 December 2001 receivers appointed under the Law of Property Act 1925 sold the property for £8.64m. The net proceeds of some £8.4m were paid to the administrative receivers, who, after the payment of tax, currently hold £5.2 million.
- Meanwhile monies were being distributed to the banks by the administrative receivers from VTFL’s funds. They were paid the following amounts on the following dates: £2.25m and £313,000 in February 2000, just under £4m in January 2001, £4,750, in September 2001, £500,000 in November 2001, £2,497,000 in August 2004, and £500,000 in January 2005.
- Mr Cushnie and Mr Clough were charged with criminal offences, all involving conspiracy to defraud. Mr Clough pleaded guilty to three counts, and Mr Cushnie was charged with two counts, to which he pleaded not guilty. After a four month trial before Jackson J, at which Mr Clough gave evidence and Mr Cushnie did not, the jury found Mr Cushnie guilty on one of the counts, namely that, between March 1992 and January 2000, he, together with Mr Clough and a Ms Jones, conspired to defraud the traders by dishonestly (a) representing that their moneys would be used for the purpose of trading transactions by or on behalf of TPL and (b) transferring those moneys between bank accounts held by TPL and bank accounts held by VTFL for the purposes of falsely inflating their turnover and assets.
- On 8 June 2004, Mr Cushnie and Mr Clough were each sentenced to a prison sentence of six years (reduced on appeal in Mr Clough’s case to five years). They were also disqualified from being directors of companies under the Company Directors Disqualification Act 1986 for 15 and 10 years respectively. On 29 June 2005, Jackson J made confiscation and compensation orders against Mr Cushnie under section 71 of the Criminal Justice Act 1988 and section 130 of the Powers of Criminal Courts (Sentencing) Act 2000.
- Sinclair was one of the traders who paid money to TPL, and, following its unsuccessful action before Rimer J, it took an assignment of all the claims of TPL and of the traders. Like the Judge, I shall treat Sinclair’s claims as being brought by TPL.
The claims in these proceedings
- TPL asserts two proprietary claims. The first is to the proceeds of sale (after payment of tax) of the Shares, which, it contends, Mr Cushnie held on constructive trust for TPL, and it says that the claim is good against the banks and against VTFL. This first
were distributed in satisfaction of his liabilities, TPL has no right to upset that distribution.
- It is common ground that if, contrary to Mr Collings’s submissions, TPL can establish a proprietary right to the proceeds of sale of the Shares, it is entitled in principle to trace those proceeds into the Kensington property. However, any proprietary right that TPL would otherwise have in the sale proceeds of the Shares would plainly be no more than an equitable right, and could therefore be defeated if the proceeds have passed to a bona fide purchaser without notice. Mr Collings said that the banks are entitled to rely on that defence, whereas, for TPL, Mr Miles contended that they are not.
- So far as TPL’s first claim is concerned, there are thus two questions. The first question is whether TPL has a proprietary interest in the proceeds of sale of the Shares. If it does, then the second question is whether the banks and VTFL are entitled to rely on the defence of bona fide purchaser for value without notice.
- TPL’s second proprietary claim is in relation to the monies which passed from it to VTFL and were mixed with VTFL's own monies. So far as this second claim is concerned it is therefore initially targeted against VTFL, on the basis that it had fiduciary duties to TPL in respect of the funds entrusted to it under the management agreement, and it thus seeks effectively to undermine the benefit to the banks of the payments referred to in para 20 above. Mr Miles contended that TPL is entitled to what remains of the mixed fund and that it is entitled to trace that fund into the hands of the banks. Mr Collings argued that there is no such proprietary right, primarily because of the inextricability of TPL’s funds and the funds of VTFL. There are also two further points in relation to this tracing claim.
- After considering the legal principles applicable to both these claims, I propose to consider three main issues. The first and second main issues relate to the first claim, the third main issue relates to the second claim. The first main issue is whether TPL has a proprietary interest in the proceeds of sale of the Shares. The second main issue is whether that claim can be traced into the monies paid to the banks as described in para 18 above. The third main issue is the extent to which TPL can trace into the monies paid as described in para 20 above a proprietary claim to the monies held in the name of VTFL, which raises a number of disparate questions relating to the right to trace.
The applicable legal principles
- TPL’s first proprietary claim is based on the proposition that, in his capacity as a director of TPL, Mr Cushnie misused the funds provided by traders, that this amounted to a breach of trust and that the proprietary interest which TPL had in the funds can be traced through to the proceeds of sale of the Shares. As for TPL’s second proprietary claim, it rests on the proposition that it is entitled to trace or follow its monies into an account held by VTFL in circumstances where those monies were mixed with monies owned by VTFL, all of which monies were involved in the cross- firing fraud.
- In that connection, Lewison J helpfully set out some “uncontroversial propositions” at [2010] EWHC 1614, paras 23 to 30, from which much of what is in the next few paragraphs is derived.
The duties of trustees and others in fiduciary positions
- Although company directors are not strictly speaking trustees, they are in a closely analogous position because of the fiduciary duties which they owe to the company: Bairstow v Queens Moat Houses plc [2001] 2 BCLC 531, 548. In particular they are treated as trustees as respects the assets of the company which come into their hands or under their control: per Nourse LJ in Re Duckwari plc (No 2) [1999] Ch 253, 262. Similarly, a person entrusted with another person’s money for a specific purpose has fiduciary duties to the other person in respect of the use to which those monies are put.
- The distinguishing obligation of a fiduciary is the obligation of loyalty, which has several features: (i) a fiduciary must act in good faith; (ii) he must not make an unauthorised profit out of his trust; (iii) he must not place himself in a position where his duty and his interest may conflict; (iv) he may not act for his own benefit or the benefit of a third person without the informed consent of his principal: per Millett LJ in Bristol and West Building Society v Mothew [1998] Ch 1, 18.
- In accordance with feature (i), it is a breach of fiduciary duty for directors of a company to exercise their powers of management and control otherwise than in good faith and in a way which they believe is in the best interests of the company: Item Software (UK) Ltd v Fassihi [2005] ICR 450. In accordance with features (ii) and (iii), if a director of a company makes an unauthorised profit by the use of his position as a director, he is liable to account for that profit to the company, whether or not he acted in good faith: Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, 144.
Proprietary claims
- Whether a proprietary interest exists or not is a matter of property law, and is not a matter of discretion: see Foskett v McKeown [2001] 1 AC 102, 109 per Lord Browne- Wilkinson, It follows that the courts of England and Wales do not recognise a remedial constructive trust as opposed to an institutional constructive trust.
- Foskett [2001] 1 AC 102, 127-130 also establishes that, where a person has such a proprietary interest, he may enforce it by (a) following the asset unless and until the asset passes into the hands of a bona fide purchaser for value without notice, and also (b) tracing the value of his proprietary interest into identifiable substitutes for the original asset, unless the substitute has been provided by a bona fide purchaser for value without notice.
- As Lord Millett explained in Foskett [2001] 1 AC 102, 127, “[f]ollowing is the process of following the same asset as it moves from hand to hand” whereas “[t]racing is the process of identifying a new asset as the substitute for the old.” He went on to explain that, at least in principle, “[w]here one asset is exchanged for another, a claimant can elect whether to follow the original … or to trace the value”. In individual cases, for a variety of different reasons (sometimes practical sometimes
DB Thakerar & Co [1999] 1 All ER 400, 408, in a passage in which he identified two classes, the first of which he described as follows:
“A constructive trust arises by operation of law whenever the circumstances are such that it would be unconscionable for the owner of property … to assert his own beneficial interest in the property and deny the beneficial interest of another. In th[is] class of case, … the constructive trustee really is a trustee. … In these cases the plaintiff does not impugn the transaction by which the defendant obtained control of the property. He alleges that the circumstances in which the defendant obtained control make it unconscionable for him thereafter to assert a beneficial interest in the property.
The second class of case is different. It arises when the defendant is implicated in a fraud. Equity has always given relief against fraud by making any person sufficiently implicated in the fraud accountable in equity. In such a case he is traditionally though I think unfortunately described as a constructive trustee and said to be ‘liable to account as constructive trustee’. Such a person is not in fact a trustee at all, even though he may be liable to account as if he were. He never assumes the position of a trustee, and if he receives the trust property at all it is adversely to the plaintiff by an unlawful transaction which is impugned by the plaintiff. In such a case the expressions ‘constructive trust’ and ‘constructive trustee’ are misleading, for there is no trust and usually no possibility of a proprietary remedy; they are ‘nothing more than a formula for equitable relief’: Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555 at 1582 per Ungoed-Thomas J.”
- In Dubai Aluminium Co Ltd v Salaam [2003] 2 AC 366, 404 Lord Millett returned to the point, saying that, in the second class of case which he had identified, “the expressions ‘constructive trust’ and ‘constructive trustee’ create a trap”, that they are “nothing more than a formula for equitable relief”, and that “we should now discard the words ‘accountable as constructive trustee’ in this context and substitute the words ‘accountable in equity’.”
Equitable compensation
- As this suggested reformulation implies, the traditional way in which a non- proprietary claim is assessed in equity is through the medium of an equitable account, which in turn leads to equitable compensation. The right to an account is dependent on the existence of a fiduciary relationship, so that it can be sought, for instance, by a principal against his agent, or even by a claimant in a passing off claim.
- The right to equitable compensation through an equitable account will often produce the same answer, in terms of the ultimate value to the claimant, as a proprietary interest, but it has the disadvantage of being a personal claim, so it would rank pari passu with the defaulting fiduciary’s other unsecured creditors’ claims, in the event of his bankruptcy. Mr Miles argued that it also has the disadvantage of preventing the claimant from benefitting fully from a following or tracing claim. Thus, if the defaulting fiduciary invests the money he has misappropriated, and for which he
would be liable to account, in an asset which appreciates, a claimant with a proprietary claim can trace into that asset and recover its full value because he can effectively claim to own the asset beneficially, whereas, if he is limited to a personal claim, he cannot.
- Some support for that contention may be found in observations in Target [1996] AC 421, where Lord Browne-Wilkinson said:
“Equitable compensation for breach of trust is designed to achieve exactly what the word compensation suggests: to make good a loss in fact suffered by the beneficiaries and which, using hindsight and common sense, can be seen to have been caused by the breach.”
However, although it is subject to limiting principles, equitable compensation is a more flexible concept than common law damages. Kirby J in the High Court of Australia put it this way in Maguire v Makaronis (1997) 188 CLR 449, 496: “[Equitable] remedies will be fashioned according to the exigencies of the particular case so as to do what is ‘practically just’ as between the parties. The fiduciary must not be ‘robbed’; nor must the beneficiary be unjustly enriched.”
First main issue: TPL’s proprietary claim to the sale proceeds of the Shares
Introductory
- In a nutshell, the issue between the parties is whether, as it contends, TPL has a proprietary interest in the proceeds of sale of the Shares, or whether, as the defendants argue, TPL has a right to an equitable account to the proceeds of sale. The difference is vital, because, if TPL is correct, it was the beneficial owner of those proceeds, and its beneficial ownership would override, subject to the question of notice, the payments made to the banks in so far as they were made out of the proceeds of sale. On the other hand, if the defendants’ case is right, Mr Cushnie’s duty is to account to TPL for the proceeds of sale, which is a personal remedy, which would not override the payments already made to the banks.
The proprietary claim to the proceeds of sale of the Shares: the arguments
- TPL’s proprietary claim relies on the fact that Mr Cushnie was able to sell the Shares in VGP for a substantial sum because he dishonestly misused funds in respect of which he owed TPL fiduciary duties, in order to inflate the apparent turnover and profits of VGP’s wholly owned trading subsidiary, thereby increasing (or, in truth, creating) VGP’s market value.
- The proprietary claim is thus neither to the funds in respect of which Mr Cushnie owed the relevant fiduciary duties to TPL, nor to any asset, or proceeds of any asset, purchased with those funds; nor is the claim to the proceeds of any right or opportunity which belonged to TPL. Further, Mr Cushnie did not acquire the Shares with funds beneficially owned by TPL, or with money derived from those funds; indeed, he did not even acquire those shares as an indirect consequence of his misuse of those funds.
e.g. as the principal's agent, in order to induce him to place a contract for the principal with the bribe payer. Not only did Mr Cushnie not acquire the Shares with, or as a result of, his breach of duty as director of TPL, but the profit which he made on the Shares was as a shareholder in VTFL (indirectly through VGP) not as a director of TPL. Having pointed out that distinction, I can well see that, for practical, as well as principled, reasons, the proceeds of sale of the Shares, as an unauthorised secret profit, should be treated for present purposes in the same way as a bribe.
The proprietary claim to the proceeds of sale of the Shares: the cases up to 1993
- In the famous, if rather unsatisfactorily reported, decision of King LC in Keech v Sandford (1726) Sel Cas t King 61, the only issue which appears to have been argued was whether, as the landlord had refused to renew a lease held on trust, the normal rule, that a trustee, who renews a lease held on trust, holds the renewed lease on trust, applied. If the normal rule applied, as was held to be the case, there does not seem to have been any dispute as to the consequences: the judgment is short and unreasoned, and there is no report of the argument. Both parties may have been happy for the lease to be treated as held on trust, if the claim succeeded in principle as it did.
- Quite apart from this, it is possible to regard Keech Sel Cas t King 61 as an example of a trustee acquiring an asset through seizing for his own benefit an opportunity which was effectively owned by the trust. As explained by Hicks, in The Remedial Principle in Keech v Sandford reconsidered (2010) 69 Camb LJ 285, 295 to 298, the opportunity to renew a tenancy, although not strictly a legal right, was effectively recognised as such by the courts in the 18 th^ century. Thus, King LC himself in Addis v Clement (1728) 2 P Wms 456, 459 referred to a church lease as being “always renewable” and therefore possible to regard as “a perpetual estate”. Viewed in this way, Keech Sel Cas t King 61 can be said to be an orthodox, if rather strict, application of the principle that where a trustee takes advantage of an opportunity, which is really owned by the beneficiary, he holds the consequent proceeds for the beneficiary (as in In re Cape Breton Company (1885) 29 Ch D 795).
- Next, there is a first instance decision of Stuart V-C, Sugden v Crossland (1856) 2 Sm & G 192, whose reasoning proceeded on the basis that there was no “distinction between a profit which a trustee takes out of a trust and a profit such as a bribe which a trustee receives from a third party”, to quote Lord Templeman in Attorney-General for Hong Kong v Reid [1994] 1 AC 324. However, Sugden 2 Sm & G 192 was a first instance decision, and the same result would have obtained on the basis of equitable accounting, which does not appear to have been raised as an argument, and there was no question of the defendant being insolvent.
- The next case in time is a decision of the House of Lords, Tyrrell v Bank of London (1862) 10 HL Cas 26. There was disagreement between Mr Miles and Mr Collings as to whether the reasoning of Lord Westbury LC and Lord Cranworth is inconsistent with the notion that a bribe received by an agent would be beneficially owned by his principal. However, there is no doubt that part of the reasoning of Lord Chelmsford, at 10 HL Cas 26, 59-60, is inconsistent with that notion, as he discussed and specifically rejected the contention that a solicitor, who receives a bribe to induce his client to purchase land, holds the bribe on trust for his client.
- The view of all three members of the committee in Tyrrell (1862) 10 HL Cas 26 was that a solicitor, who bought a piece of land (which he knew that his client was interested in acquiring), (i) held that part of the land which his client then purchased on trust for his client (so that his client beneficially owned the profit which the solicitor made on that part), but (ii) did not hold the remainder of the land on trust for his client. In Reid [1994] 1 AC 324, 333, Lord Templeman seems to have thought that his conclusion that a bribe accepted by an agent was beneficially owned by his principal was inconsistent only with Lord Chelmsford’s view. I find it hard to see how it is not also inconsistent with the view of all three members of the committee in Tyrrell v 10 HL Cas 26 on point (ii).
- Although it is a decision of the House of Lords, Tyrrell 10 HL Cas 26 was not cited below, and it was not in the forefront of Mr Collings’s argument before us, although he did rely on it. Its lack of prominence may be attributable to the rather uninformative headnote coupled with the density of the judgments. Whatever the reason, it does not seem to have been referred to in many of the subsequent relevant cases, or in many of the articles which discuss the cases on bribes in this field (referred to in para 81 below).
- In Re Caerphilly Colliery Company (Pearson’s case) LR 5 Ch D 336 the promoters of a company agreed to sell a colliery to the company for a substantial profit, and the price was payable partly in cash and partly in shares in the purchasing company. Some of the shares were given to Pearson, a director of the company, who was instrumental in ensuring that the contract was completed. Sir George Jessel MR said at LR 5 Ch D 336, 340, that:
“[Pearson] cannot in the fiduciary position he occupied, retain for himself any benefit or advantage that he obtained under such circumstances. He must be deemed to have obtained it under circumstances which made him liable, at the option of the cestuis que trust , to account either for the value at the time of the present he was receiving, or to account for the thing itself and its proceeds if it had increased in value.”
James LJ (in a judgment which I suspect betrays the court’s view of the underlying merits of the case) and Baggallay JA agreed – see at LR 5 Ch D 336, 342.
- In that case, again, there appears to have been no issue as to whether the claim against Pearson was based on a proprietary interest or a duty to account in equity, and, as there was no suggestion that Pearson was in danger of bankruptcy, it is not clear that either party had an interest in raising that issue. I also note that Tyrrell 10 HL Cas 26 does not appear to have been cited. Further, as pointed out by Lewison J at [2010] EWHC 1614, para 36, given that the shares had been issued as part of the payment by the company for the acquisition of the colliery, Pearson’s case LR 5 Ch D 336 “was a case in which the property that was subject to the trust had originally been the beneficiary’s property”.
- In Metropolitan Bank v. Heiron (1880) 5 Ex D 319, a director of a company who had received a bribe was being sued by the company, and he successfully ran a limitation defence on the ground that the company could not treat the bribe “as the money of the
[1892] 1 Ch 322, 338. He said that “[i]n one sense” the commission “may be said to be the company’s money”, but only “in the sense that the company are entitled to get it.” He then said that “in the event of the [director’s] bankruptcy, [the company could not] withdraw the money from his assets instead of ranking as creditors against his estate.”
- These observations in Archer’s case [1892] 1 Ch 322 can fairly be said to highlight the need for caution when citing cases such as Sugden 2 Sm & G 192 and Pearson’s case LR 5 Ch D 336 to support the proposition that the claimant has a proprietary interest in the commission or bribe received by the fiduciary. This point is further bolstered by the fact that Bowen LJ was “of the same opinion” as Lindley LJ – at [1892] 1 Ch 322, 339, and Fry LJ (who considered Pearson’s case LR 5 Ch D 336 in a little detail at [1892] 1 Ch 322, 343) not only was “of the same opinion”, but “express[ed] his entire concurrence with everything that ha[d] been said by” Lindley and Bowen LJJ – [1892] 1 Ch 322, 342, 344.
- The approach in Heiron 5 Ex D 319 and Lister LR 45 Ch D 1 was followed by the Court of Appeal in the civil case of Powell & Thomas v Evans Jones & Co [1905] 1 KB 11, and in the criminal case, Attorney-General’s Reference (No 1 of 1985) [1986] 1 QB 491. Further, Lister 45 Ch D 1 was referred to without any suggestion that it was wrong by Lord Wright in Regal (Hastings) Ltd v Gulliver [1942] 2 AC 134.
- The well known case of Boardman v Phipps [1967] 2 AC 46 was relied on by TPL. On analysis, it takes matters no further. The precise nature of the remedy was not at issue in the Court of Appeal or the House of Lords, as the argument centred on the question of liability – see [1965] Ch 992, 1007G and [1967] 2 AC 46, 61F. Lewison J’s analysis of Boardman [1967] 2 AC 46 at [2010] EWHC 1614 (Ch), paras 41- suggests that it is unclear whether the remedy granted at first instance was proprietary or personal, and I agree with his view that “it seems … to be clear that the question was never argued, and apparently did not matter”.
- While both Heiron 5 Ex D 319 and Lister 45 Ch D 1 were followed and applied in at least three subsequent decisions of this court, they were disapproved by the Privy Council in Reid [1994] 1 AC 324. In that case, a public prosecutor employed by the Hong Kong administration had received bribes for not pursuing accused persons. Lord Templeman, who gave the opinion of the Board, said this:
“When a bribe is offered and accepted in money or in kind, the money or property constituting the bribe belongs in law to the recipient. Money paid to the false fiduciary belongs to him. The legal estate in freehold property conveyed to the false fiduciary by way of bribe vests in him. Equity, however, which acts in personam , insists that it is unconscionable for a fiduciary to obtain and retain a benefit in breach of duty. The provider of a bribe cannot recover it because he committed a criminal offence when he paid the bribe. The false fiduciary who received the bribe in breach of duty must pay and account for the bribe to the person to whom that duty was owed. In the present case, as soon as the first respondent received a bribe in breach of the duties he owed to the Government of Hong Kong, he became a debtor in equity to the Crown for the amount of that bribe. So much is admitted. But if the bribe consists of property which
increases in value or if a cash bribe is invested advantageously, the false fiduciary will receive a benefit from his breach of duty unless he is accountable not only for the original amount or value of the bribe but also for the increased value of the property representing the bribe.”
The proprietary claim to the proceeds of sale of the Shares: principle and precedent
- Lewison J followed the approach of the Court of Appeal in Heiron 5 Ex D 319 and Lister 45 Ch D 1, and accordingly held that TPL had no proprietary interest in the proceeds of sale of the Shares. For TPL, Mr Miles contends that this was wrong and that we should follow the decision of the Privy Council in Reid [1994] 1 AC 324.
- I would reject that contention. We should not follow the Privy Council decision in Reid [1994] 1 AC 324 in preference to decisions of this court, unless there are domestic authorities which show that the decisions of this court were per incuriam , or at least of doubtful reliability. Save where there are powerful reasons to the contrary, the Court of Appeal should follow its own previous decisions, and in this instance there are five such previous decisions. It is true that there is a powerful subsequent decision of the Privy Council which goes the other way, but that of itself is not enough to justify departing from the earlier decisions of this court: see Re Spectrum Plus Ltd (in liquidation) [2004] EWCA Civ 670, [2004] Ch 37, para 56 per Lord Phillips of Worth Matravers MR and [2005] UKHL 41, [2005] 2 AC 680, para 153 per Lord Walker of Gestingthorpe.
- I do not suggest that it would always be wrong for this court to refuse to follow a decision of the Privy Council in preference to one of its own previous decisions, but it the general rule is that we follow our previous decisions, leaving it to the Supreme Court to overrule those decisions if it is appropriate to do so. Two recent cases where this court preferred to follow a decision of the Privy Council rather than an earlier domestic decision which would normally be regarded as binding (in each case a decision of the House of Lords) are R v James (Leslie) [2006] EWCA Crim 14, [2006] 1 All ER 759 and Abou-Rahmah v Abacha [2006] EWCA Civ 1492, [2007] 1 Lloyd’s Rep 115. In each case, the decision was justified, based as it was on the proposition that it was a foregone conclusion that, if the case had gone to the House of Lords, they would have followed the Privy Council decision.
- In the present instance, Mr Miles invited us to take the view that it was a foregone conclusion that the Supreme Court would follow the Privy Council in Reid [1994] 1 AC 324 rather than the Court of Appeal in Heiron 5 Ex D 319 and Lister 45 Ch D 1, and therefore to follow the Privy Council approach rather than that of this court.
- Although it is possible that the Supreme Court would follow Reid [1994] 1 AC 324 rather than Heiron 5 Ex D 319 and Lister 45 Ch D 1, I am far from satisfied that they would do so. In any event it does not seem to me right to follow Reid [1994] 1 AC
- First, there are five decisions of this court ( Heiron 5 Ex D 319 Lister 45 Ch D 1, Archer’s case [1892] 1 Ch 322, Powell [1905] 1 KB 11, and, A-G’s Reference [1986]
Lawyer 3. (While it may be seeking to undermine some of the arguments which support Reid [1994] 1 AC 324, Hicks in (2010) 69 Camb LJ 285, is, I think, ultimately neutral).
- As for the text books, the majority appear to accept Reid [1994] 1 AC 324 as correct – see e.g Goff and Jones in The Law of Restitution (sixth edition, para 33-025) Underhill & Hayton on The Law Relating to Trusts and Trustees (18th^ edition, paras 27.29-30), Lewin on Trusts (18 th^ edition , p. 589) and Snell (31st^ edition paras 7-141- 2). However, on the whole, these books do not devote much analysis to the point at issue, whereas the most recent edition of Bowstead & Reynolds (19th^ edition, paras 6- 040 to 6-043) gives the topic close consideration and the editor clearly has significant doubts about the soundness of Reid [1994] 1 AC 324.
- Sixthly, it seems to me that Lord Templeman may have given insufficient weight to the potentially unfair consequences to the interests of other creditors, if his conclusion was right. His dismissal of their concerns on the basis that they should be in no better position than the defaulting fiduciary at [1994] 1 AC 324, 331F-H stands in rather stark contrast with what was said in Lister 45 Ch D 1, 15, and in Archer’s case [1892] 1 Ch 322, 338, as well as, more recently, in Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 716E. In that case, Lord Browne-Wilkinson disapproved extending the reach of resulting trust as it could produce “most unjust results”, namely “conferring on the plaintiff a right to recover property from, or at the expense of [for example] the lender whose debt is secured by a floating charge and all other parties who have purchased an equitable interest only …”.
- Seventhly, there are some relevant domestic decisions subsequent to Reid [1994] 1 AC 324. In Daraydan Holdings Ltd v Solland International Ltd [2005] Ch. 119, para 86, Lawrence Collins J (after referring at [2005] Ch 119, para 81 to some other post- Reid [1994] AC 324 first instance decisions which seemed to have gone in different ways) preferred to follow Reid [1994] 1 AC 324, but (i) that was before the guidance given in Spectrum Plus [2004] Ch 37, [2005] 2 AC 680, referred to in para 73 above, (ii) as Lawrence Collins J pointed out at [2005] Ch. 119, paras 87-88, on the facts of that case, the decision was not inconsistent with the reasoning in Lister 45 Ch D 1, and (iii) it was a first instance judgment, and neither Tyrrell 10 HL Cas 26 nor Archer’s case [1892] 1 Ch 322 was cited to him.
- Perhaps of more direct relevance for present purposes are two recent decisions, both of this court, where the reasoning in Lister 45 Ch D 1 was followed, namely Gwembe Valley Development Co Ltd v Koshy (No 3) [2004] 1 BCLC 131 and Halton International Inc v Guernroy [2006] EWCA Civ 801.
- In Gwembe [2004] 1 BCLC 131, a director had made secret profits in breach of his fiduciary duty to the company. As in Heiron 5 Ex D 319 and Paragon [1999] 1 All ER 400, the issue was whether the director was entitled to rely on a defence of limitation. The Court of Appeal applied the two-fold categorisation expounded by Millett LJ in Paragon [1999] 1 All ER 400, 409, and held that he fell within the second class, as the director’s “personal liability to account to [the company] for profits made by him from his fiduciary position as a director is not dependent on establishing that he has received any money or other property belonging to [the company] as a result of the misapplication of [its] assets” - [2004] 1 BCLC 131, para
- In the following paragraph, the court distinguished an earlier decision, JJ
Harrison (Properties) Ltd v Harrison [2002] 1 BCLC 162, where a proprietary claim was upheld, on the ground that, in the earlier case, the director had transferred to himself assets which were the property of the company.
- In Halton [2006] EWCA Civ 801, para 18, Carnwath LJ said that “[t]he difference between [ Harrison [2002] 1 BCLC 162 and Gwembe [2004] 1 BCLC 131], in short, was that while in the former the director had a pre-existing ‘trustee-like responsibility’ in relation to the particular property which was the subject of the action, in the latter he did not.” It is interesting to note that Carnwath LJ said this at [2006] EWCA Civ 801, para 25:
“ Keech v Sandford might arguably be brought within [Millett LJ’s] class 1 [in Paragon [1999] 1 All ER 400, 409], but, if so, only because of the special nature of the property involved. As was explained in Biss v Biss [1903] 2 Ch 40, 56 … , the renewal is treated as ‘an accretion to or graft upon the original term arising out of the goodwill or quasi-tenant right annexed thereto’. It provides no analogy for a similar link between the voting rights and the new shares in the present case.”
Conclusion on the proprietary claim to the proceeds of sale of the Shares
- In my view, Lewison J was right to reject TPL’s proprietary claim to the proceeds of sale of the Shares. It is true that the decisions in Reid [1994] 1 AC 324, Sugden 2 Sm & G 192 and (at least arguably) Pearson’s case LR 5 Ch D 336 go the other way. However, there is a consistent line of reasoned decisions of this court (two of which were decided within the last ten years) stretching back into the late 19th^ century, and one decision of the House of Lords 150 years ago, which appear to establish that a beneficiary of a fiduciary’s duties cannot claim a proprietary interest, but is entitled to an equitable account, in respect of any money or asset acquired by a fiduciary in breach of his duties to the beneficiary, unless the asset or money is or has been beneficially the property of the beneficiary or the trustee acquired the asset or money by taking advantage of an opportunity or right which was properly that of the beneficiary.
- For the reasons I have given, previous decisions of this court establish that a claimant cannot claim proprietary ownership of an asset purchased by the defaulting fiduciary with funds which, although they could not have been obtained if he had not enjoyed his fiduciary status, were not beneficially owned by the claimant or derived from opportunities beneficially owned by the claimant. However, those cases also establish that, in such a case, a claimant does have a personal claim in equity to the funds. There is no case which appears to support the notion that such a personal claim entitles the claimant to claim the value of the asset (if it is greater than the amount of the funds together with interest), and there are judicial indications which tend to militate against that notion.
