COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(MR JUSTICE RIMER)
London, WC2A 2LL
B e f o r e :
LADY JUSTICE HALE
LORD JUSTICE CARNWATH
| GWEMBE VALLEY DEVELOPMENT COMPANY LIMITED and ANOR
|- and -
|THOMAS KOSHY and ORS
Smith Bernal Wordwave Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
MR HUGO PAGE QC (instructed by Landau Scanlan) for the Respondents/Defendants
Case No A3/2001/2661 on appeal from Mr Justice Harman
Case No A3/2002/0090 on appeal from Mr Justice Rimer
Case No A3/2002/0095 on appeal from Mr Justice Rimer
Case No A3/2002/0094 on appeal from Mr Justice Rimer
AS APPROVED BY THE COURT
CROWN COPYRIGHT ©
Crown Copyright ©
|Group of investors||10-14|
|Generating profits: the pipeline loan transactions||18-30|
|Bases of GVDC’s claims||31-32|
|Summary of outcome at trial||33|
|II. THE APPEALS|
|Permission to appeal||35-39|
|III. ACCOUNT OF PROFITS|
|Basis of liability||43|
|The no profit rule||44-46|
|GVDC’s Articles of Association||47-54|
|Implied modification of fiduciary duty||55-56|
|Sufficiency of disclosure||57|
|Disclosure under the Articles||58-63|
|Disclosure under the general law||64-68|
|Dishonest breach of fiduciary duty||69-70|
|IV. LIMITATION AND LACHES|
|Limitation and claims in equity: general||71-76|
|The 1980 Act||77-83|
|Recent Court of Appeal decisions||84-102|
|Two side issues||103-110|
|Fiduciary duties and limitation||111-112|
|The judgment below||113-116|
|The arguments in the Court of Appeal||117-121|
|The judge’s finding of dishonesty||122-128|
|The challenge to the finding of dishonesty||129-130|
|Conclusions on dishonesty||131-135|
|Scope of the account||136-138|
|Laches and acquiescence||139-141|
|V. EQUITABLE COMPENSATION|
|Mr Koshy’s submissions||153-158|
|VI. SUMMARY OF CONCLUSIONS||161|
Lord Justice Mummery:
This is the judgment of the Court to which all members of the court have contributed.
(1) Appeal No 0090
Mr Koshy appealed against the order directing him to account to GVDC for unauthorised profits. Rimer J found that, dishonestly and in breach of fiduciary duty, Mr Koshy had procured GVDC to enter into loan transactions with Lasco without making proper disclosure to the other directors of GVDC, or to its shareholders, of the existence and extent of his personal interest and that of his company, Lasco, in the transactions and the size of the profit which they would make out of them. His grounds of appeal are that there was no evidence to support Rimer J's finding of dishonesty; that the judge wrongly held that he was liable to account to GVDC; that he ought to have held that, in any event, the claim for an account of profits was statute-barred under the provisions of the Limitation Act 1980 (the 1980 Act); that the relevant limitation period for the account of profits was six years, which had expired well before the issue of the writ on 15 November 1996; and that Rimer J wrongly held that no limitation period was applicable to the claim for an account of profits.
(2) Appeal No 0095
GVDC appealed on the ground that Rimer J was wrong to limit the scope of the account of profits against Mr Koshy. The judge limited the account to the value of property, belonging in equity to GVDC, that Mr Koshy had received. He refused a more general account of profits. GVDC contended that the judge should have ordered an account of all the unauthorised profits made by Mr Koshy, in whatever form, as a result of his dishonest breaches of fiduciary duty. As for limitation considerations, a wider form of account should have been allowed under, or by analogy with, or irrespective of, subsection (a) or (b) of s 21(1) of the 1980 Act. Alternatively, Rimer J wrongly refused to award, or to direct an inquiry to assess the amount of, equitable compensation payable by Mr Koshy to GVDC for loss resulting from his dishonest breach of fiduciary duty. GVDC was entitled to be restored to the position that it was in prior to the loan transactions procured by Mr Koshy's dishonest breaches of fiduciary duty.
Group of investors
Generating profits: the pipeline loan transactions
Bases of GVDC's Claims
Summary of outcome at trial
II. THE APPEALS
Permission to appeal
III ACCOUNT OF PROFITS
Basis of liability
(1) Under the "no profit rule" i.e. the rule of equity that a company director may not make an unauthorised (secret) profit from his fiduciary position (see paragraphs 249 and 291-294 of the judgment). The rule stems from the general principle that a director, like the trustee of a trust, must avoid conflicts of duty and interest when discharging the fiduciary duties undertaken by him in the management of property beneficially belonging to the company (GVDC in this case) and in pursuing his personal interests. Liability to account could arise under this rule, even if Mr Koshy did not commit any breach of fiduciary duty, dishonest or otherwise, or misapply any of GVDC's assets, or cause GVDC any loss.
(2) Dishonest breaches of fiduciary duty i.e. dishonestly using his position as managing director of GVDC to procure, in his own interests rather than in the interests of the company, GVDC to enter into the pipeline loan transactions, while deliberately not disclosing to the other directors and to the shareholders of GVDC his controlling interest in Lasco and the scale of Lasco's, and his, intended profit from the transactions (see paragraphs 268-269 and 272-273 and the supplemental judgments of 12 December 2001), The judge found that the non-disclosure was deliberate, that it was part of Mr Koshy's dishonest scheme to benefit himself and that it involved the misapplication of GVDC's assets.
The no profit rule
"….the inflexible rule that, except under the authority of a provision in the articles of association, no director shall obtain for himself a profit by means of a transaction in which he is concerned on behalf of the company unless all the material facts are disclosed to the shareholders and by resolution a general meeting approves of his doing so or all the shareholders acquiesce. An undisclosed profit which a director so derives from the execution of his fiduciary duties belongs in equity to the company. It is no answer to the application of the rule that the profit is of a kind which the company itself could not have obtained, or that no loss is caused to the company by the gain of the director. It is a principle resting upon the impossibility of allowing the conflict of duty and interest which is involved in the pursuit of private advantage in the course of dealing in a fiduciary capacity with the affairs of the company. If, when it is his duty to safeguard and further the interests of the company, he uses the occasion as a means of profit to himself, he raises an opposition between the duty he has undertaken and his own self interest, beyond which it is neither wise nor practicable for the law to look for a criterion of liability. The consequences of such a conflict are not discoverable. Both justice and policy are against their investigation."
"The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well intentioned, cannot escape the risk of being called upon to account."
(1) Article 89 exemption
It was submitted that (a) Mr Koshy was expressly exempted by Article 89 of the Articles of Association of GVDC from the strict duty to account to the company for the profits made from the pipeline loan transactions, even if he had made no disclosure to the board of his personal interest in the transactions or of his profits; and that (b) the disclosure in fact made by him was sufficient for that purpose and under the general law.
(2) Implied modification of the rule
It was submitted that the "no profit rule" was, in the particular circumstances of this case, impliedly abrogated in relation to GVDC.
GVDC's Articles of Association
"(A) A director who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the Company shall declare the nature of his interest at a meeting of the Directors."
" (B) Subject to disclosure under the provisions of paragraph (A) of this Article, a Director shall be entitled to vote in respect of any contract or arrangement in which he is interested and he shall be taken into account in ascertaining whether a quorum is present."
"(A) A director may hold any other office or place or profit under the Company (other than Auditor) in conjunction with his office of Director for such period and on such terms (as to remuneration and otherwise) as the Directors may determine and no Director or intending Director shall be disqualified by his office from contracting with the Company either with regard to his tenure of any such other office or place of profit or otherwise nor shall any such contract or any contract or arrangement entered into by or on behalf of the Company in which any Director is in any way interested be liable to be avoided, nor shall any Director so contracting or being so interested be liable to account to the Company for any profit realised by any such contract or arrangement by reason of such Director holding that office or of the fiduciary relation thereby established."
Implied modification of fiduciary duty
Sufficiency of disclosure
Disclosure under the Articles
Disclosure under the general law
Dishonest breach of fiduciary duty
IV. LIMITATION AND LACHES
Limitation and claims in equity: general
"A claim for breach of trust is a claim in equity, and the application of the law of limitation to claims in equity is extremely complex. Limitation at common law is simply a question of statute: the claim is either caught by the relevant limitation period or it is not. Equity, by contrast, has both a judge-made system of limitation rules, known as "laches", and a statutorily-based set of rules. And to make the matter worse, these statutory rules apply either directly, i.e. where express provision is made in the statute for their application to an equitable claim, or "by analogy", i.e. where no express mention of the equitable claim appears but is treated by the courts as analogous to one barred by the statute at common law."
"(i) Is this an action to which there is an express statutory time limit on the bringing of claims?
(ii) If not, is this an action to which a court will apply a statutory time limit by analogy?
(iii) If not, is this an action nevertheless barred by the doctrine of laches?"
"….none of the three questions can be answered without a knowledge of the history of the subject…"
The 1980 Act
"An action for an account shall not be brought after the expiration of any time limit under this Act which is applicable to the claim which is the basis of the duty to account."
The next step, therefore, is to identify the claim which was "the basis of" the duty to account in this case, and to determine what time limit (if any) was applicable to it.
"(1) No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action-
(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or
(b) to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee, or previously received by the trustee and converted to his use.
(2) [omitted as immaterial]
(3) Subject to the preceding provisions of this section, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a limitation period is prescribed by any other provision of this Act, shall not be brought after the expiration of six years from the date on which the right of action accrued."
By section 38(1) (applying Trustee Act 1925 s 68) the words "trust" and "trustee" are defined as extending to "implied and constructive trust."
"32 (1) Subject to [subsections (3) and (4A)] below, where in the case of any action for which a period of limitation is prescribed by this Act, either—
(a) The action is based upon the fraud of the defendant, or
(b) any fact relevant to the plaintiff's right of action has been deliberately concealed from him by the defendant, …
the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.
References in this subsection to the defendant include references to the defendant's agent and to any person through whom the defendant claims and his agent."
" (1) The following time limits under this Act, that is to say-
(a) the time limit under section 2 for actions founded on tort;
(b) the time limit under section 5 for actions founded on simple contract;
[(c )- (f) are omitted as immaterial]
shall not apply to any claim for specific performance of a contract or for an injunction or for other equitable relief, except in so far as any such time limit may be applied by the court by analogy in like manner as the corresponding time limit under any enactment repealed by the Limitation Act 1939 was applied before 1st July 1940.
(2) Nothing in this Act shall affect any equitable jurisdiction to refuse relief on the ground of acquiescence or otherwise."
"For where the remedy in Equity is correspondent to the remedy at Law, and the latter is subject to a limit in point of time by the statute of limitations a Court of Equity acts by analogy to the statute, and imposes on the remedy it affords the same limitation…. But if any proceedings in Equity be included within the words of the statute, there a Court of Equity, like a Court of Law, acts in obedience to the statute."
Recent Court of Appeal decisions
"The expression 'fiduciary duty' is properly confined to those duties which are peculiar to fiduciaries and the breach of which attracts legal consequences differing from those consequent upon the breach of other duties. Unless the expression is so limited it is lacking in practical utility. In this sense it is obvious that not every breach of duty by a fiduciary is a breach of fiduciary duty…." ( p 16)
He distinguished duties, such as the duty of care, which, though owed by fiduciaries, are no different in principle than equivalent duties in common law. He continued:
"This leaves those duties which are special to fiduciaries and which attract those remedies which are peculiar to the equitable jurisdiction and are primarily restitutionary or restorative rather than compensatory. A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations…." (p 18A-C).
"The first covers those cases already mentioned, where the defendant, though not expressly appointed as trustee, has assumed the duties of a trustee by a lawful transaction which was independent of and preceded the breach of trust and is not impeached by the plaintiff. The second covers those cases where the trust obligation arises as a direct consequence of the unlawful transaction which is impeached by the plaintiff."
"His possession of the property is coloured from the first by the trust and confidence by means of which he obtained it, and his subsequent appropriation of the property to his own use is a breach of that trust…the circumstances in which he obtained control make it unconscionable for him thereafter to assert a beneficial interest in the property." ( p.409 b-d).
"those whose fiduciary obligations preceded the acts complained of and those whose liability in equity was occasioned by the acts of which complaint was made."(p. 414h-j)"
"The expressions 'trust property' and 'retained by the trustee' properly apply, not to a case where a person having taken possession of the property on his own behalf is liable to be declared a trustee by the Court; but rather to a case where he originally took possession upon trust or on behalf of others. In other words they refer to cases where a trust arose before the occurrence of the transaction."
(see also the fuller analysis by Chadwick LJ in Harrison referred to below at paras 101 and following.)
"...it was there laid down that there is a distinction between a trust which arises before the occurrence of the transaction impeached and cases which arises only by reason of that transaction."
"The law on this subject has been settled for more than a hundred years. An action for an account brought by a principal against his agent is barred by the statutes of limitation unless the agent is more than a mere agent but is a trustee of the money which he received… A claim for an account in equity, absent any trust, has no equitable element; it is based on legal, not equitable rights… Where the agent's liability to account was contractual equity acted in obedience to the statute… Where, as in Knox v Gye, there was no contractual relationship between the parties, so that the liability was exclusively equitable, the court acted by analogy with the statute. Its power to do so is implicitly preserved by s 36 of the 1980 Act…"
"… Millett LJ explained how the statute of limitations would be applied by analogy so as to bar a proprietary claim against a "constructive trustee" (improperly so called as he would say) alleged to be such by virtue of his conduct where no pre-existing fiduciary relationship existed; whereas it would not be applied in relation to a proprietary claim against a constructive trustee (properly so called as he would say) where the constructive trusteeship flowed from a pre-existing fiduciary or trust relationship." (Waller LJ's emphasis)
In Waller LJ's view:
"…it is fundamentally to misunderstand the judgment of Millett LJ to suggest that he would have approved the view that a claim for damages brought against a fiduciary, even alleging a dishonest breach of that duty, would be free from limitation altogether."
"…(i) that a company incorporated under the Companies Acts is not trustee of its own property; it is both legal and beneficial owner of that property; (ii) that the property of a company so incorporated cannot lawfully be disposed of other than in accordance with the provisions of its memorandum and articles of association; (iii) that the powers to dispose of the company's property, conferred upon the directors by the articles of association, must be exercised by the directors for the purposes, and in the interests of, the company; and (iv) that, in that sense, the directors owe fiduciary duties to the company in relation to those powers and a breach of those duties is treated as a breach of trust."
"26.It follows from the principle that directors who dispose of the company's property in breach of their fiduciary duties are treated as having committed a breach of trust that a person who receives the property with knowledge of breach of duty is treated as holding it upon trust for the company. He is said to be a constructive trustee of the property….
27. It follows, also, from the principle that directors who dispose of the company's property in breach of their fiduciary duties are treated as having committed a breach of trust that a director who is himself the recipient of the property holds it upon a trust for the company…"
"… The possession of an express trustee was treated by the Courts as the possession of his cestuis que trustent, and accordingly time did not run in his favour against them. This disability applied, not only to a trustee named as such in the instrument of trust, but to a person who, though not so named, had assumed the position of a trustee for others or had taken possession or control of the property on their behalf… These persons, though not originally trustees, had taken upon themselves the custody and administration of property on behalf of others; and though sometimes referred to as constructive trustees, they were, in fact, actual trustees, though not so named. It followed that their possession also was treated as the possession of the persons for whom they acted, and they, like express trustees, were disabled from taking advantage of the time bar. But the position in this respect of a constructive trustee in the usual sense of the words – that is to say, of a person who, though he had taken possession in his own right, was liable to be declared a trustee in a Court of equity – was widely different, and it had long been settled that time ran in his favour from the moment of his so taking possession." (our emphasis).
"The relevance of Taylor v Davies in the present context is that the Privy Council rejected the submission that the defendant fell within the first category of constructive trustee – see  AC 636, 650. He was treated as within the second category of constructive trustee. It is clear that, if he had fallen within the first category of constructive trustee, he would not have been able to take advantage of a limitation defence. The reason why he was not within the first category is that he did not have power to dispose of the company's property; that power lay in the assignee, subject to the supervision of the inspectors." (para 37)
Thus, the defendant in that case, although in a pre-existing fiduciary relationship with the company, was not himself the custodian of its property. This did not help Mr Harrison, who, as a director, had been directly responsible for the terms of its sale.
Two side issues
"A possible line of escape from the anomaly would be to treat agents, solicitors and the rest as constructive trustees for this purpose, so that all would be subject to the six years period: but I should be reluctant to resort to such artificiality unless driven to it." (para 249B)
Fiduciary duties and limitation – summary
The judgment below
"The case with which Chadwick L.J. was dealing is not exactly analogous to this case. There the defendant director transferred the company's property to himself, whereas here Mr Koshy paid GVDC's money to Lasco. But the claim here in question is a claim against Mr Koshy for an account of the profits he made as a result of the transaction; and in so far as profits did flow into his hands as a result, I cannot see how they can have been received by him other than as a type 1 trustee."(para 295)
Accordingly, the claim fell within section 21(1)(b). Mr Koshy was "liable to account for all profits he has received as a result of the GVDC/Lasco agreements."(paragraph 297).
"(1) An account be taken of all profits received by [him] which both:
(a) Were received out of the provision to GVDC by Lasco of the pipeline loan of K56.4 million; and
(b) Represented or were derived from trust property beneficially owned by GVDC or the proceeds of such trust property converted to his use."
The arguments in the Court of Appeal
i) GVDC's causes of action against Mr Koshy were not, and did not need to be, based on either knowing receipt of trust property or on dishonest assistance in a breach of fiduciary duty, being claims usually made against third parties, and claims of the kind recently considered by the House of Lords in Twinsectra v. Yardley  2 AC 114. The claim against Mr Koshy concerned the personal liability of the fiduciary himself for breach of duty, not the third party liability of a recipient or of an accessory to a breach of trust by a trustee or to a breach of fiduciary duty by a director.
ii) Mr Koshy's personal liability to account to GVDC 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 GVDC as a result of the misapplication of GVDC's assets, whether in the form of payments made by GVDC directly to him, or in the form of payments made, via Lasco, indirectly to him. GVDC's causes of action against Mr Koshy were based on the equitable disabilities or the fiduciary duties to which he was subject as a director of GVDC. As such, he was under a personal liability in equity to account to GVDC for unauthorised profits: either because he was disabled in equity from making an unauthorised personal profit out of the position occupied by him and/or because he acted in dishonest breach of fiduciary duty by deliberately and secretly doing so. The profits made by him are treated as taken for and of behalf of GVDC, as the person to whom he owed the duty to account. As between him and GVDC, equity prevents Mr Koshy from asserting, in answer to the claim for an account, that he is entitled to retain the profits (if any) made by him for his own benefit.
iii) Conversely, his fiduciary position as director of GVDC, and the liability which results, are quite separate from any responsibility borne by Lasco as manager of the project, or Mr Koshy as its agent. Mr Thompson presented a number of elaborate arguments, designed to establish that Mr Koshy's failings invalidated the whole of the Lasco arrangements, with the result that no money passed under them; or, alternatively, that, regardless of the non-disclosure, all payments made by Lasco from GVDC funds were misapplications for which Mr Koshy was liable. We hope that we will be forgiven for not dealing with these points in detail. In our view, they confuse and misrepresent the facts. Lasco had a valid role as manager of the project, under the Management Agreement (para 129). The GVDC current account (para 187) seems to have been a perfectly normal part of that arrangement. Mr Koshy's role as agent for Lasco was well known to the GVDC Board (para 266), and his responsibilities in that regard were distinct from those as director of GVDC. The judge made no finding that any payments made by GVDC to Lasco, or any payments made by Lasco out of the current account, were improperly made. The only thing wrong with them was Mr Koshy's failure, in his separate capacity as director of GVDC, to make full disclosure to that Board of the nature and extent of his own financial interest.
(We have not overlooked Mr Thompson's reference to certain answers of Mr Koshy in cross-examination (Day 22 pp 47ff) to base his claim that the money in the account was misapplied by Mr Koshy, quite apart from the non-disclosure issue. However, these were inconclusive, and we are not surprised that they merited no more than a passing reference in paragraph 29 of GVDC's lengthy closing submissions to the judge.)
The judge's finding of dishonesty
"I regret to have to say that I approach the fact finding exercise on the basis that I am satisfied that Mr Koshy has shown himself to be a dishonest man…."
Having, summarised the particular points, he said:
"…. in the light of what I have said about Mr Koshy, I regard DEG's task in discharging the burden of proof of fraud as easier than it might otherwise have been. Put shortly, I have seen and heard enough of Mr Koshy to conclude that it is by no means inherently improbable that he might have been moved to commit the frauds which DEG allege against him. However, having said that, I have not approached the evidence on the crucial issues on the basis that, simply because Mr Koshy may have lied on some occasions, he must be presumed also to have lied on all relevant occasions. That is usually an unsafe basis on which to approach the evidence in any case and I have not done so in this one. In assessing the evidence, I have not ignored what I have learnt about Mr Koshy; but I have borne in mind that the burden of proof still remains on DEG and that the allegations they make against him are serious ones." (para 26)
"GVDC submitted that Mr Koshy breached his fiduciary duties in spades. I agree. His scheme was simple. First, almost from the outset, he had a prospective beneficial interest in Lasco, an interest which would in due course give him control of it. He was also a director of Lasco. There is some evidence that certain of the GVDC board may have known that he had some sort of interest in Lasco, but the evidence on this is unclear. The formal picture, at least until September 1987, was that Lasco was wholly owned by Lasco USA, a company controlled, if not wholly owned, by Lummus. Down to September 1997, Mr Koshy appears to have kept his prospective beneficial interest in Lasco a secret. He lied to DEG about it. There is no evidence that he ever made a formal disclosure of his interest in Lasco to GVDC. And even after September 1987 he lied to IFC about it, signing an investment agreement with IFC which described Lasco as a wholly owned subsidiary of Lasco USA. Having said this, however, I also find that the GVDC board was aware that, for some not very obvious reasons, Mr Koshy acted for Lasco virtually from the start. The oddity about this is because his interest at that stage was ostensibly as an HZL employee, whereas Lasco was a Lummus company. But no-one appears to have regarded his activities for Lasco as requiring any explanation."
"At no point in any of that did Mr Koshy volunteer either his interest in Lasco or explain the massive profit which those transactions would give Lasco and - whether via Haze or otherwise - would also give him. At no point did he suggest that, because of his interest in the transactions, he should take no part in the decision as to whether GVDC should recognise the various liabilities to Lasco. At no point did he suggest that, in order to ensure that GVDC's interests were properly respected, the terms of the proposed GVDC/Lasco agreements should be the subject of negotiation between someone on behalf of GVDC who was independent of Lasco, and someone on behalf of Lasco who was independent of GVDC."
"…. the evidence did not satisfy me that, had GVDC known the full picture and engaged in an arm's length negotiation with Lasco, the outcome would necessarily have been materially different from what in fact happened, although of course it is possible it might have been. The heart of GVDC's complaint is as to the K45m top-up received in December 1986. I have found that it arrived as something of a surprise, but I also find that it was much needed, and was regarded as very welcome by the GVDC board. The suggestion now made, nearly 15 years later, that GVDC might have been moved to pay it all back to Lasco and attempt to do likewise itself in the pipeline market is one I regard as improbable. I was also not convinced that GVDC could and would have been able to buy the kwacha from Lasco less than it did. First, there is no evidence that US$5.8m was not a fair nominal value figure, or therefore that GVDC was repaying any more for the kwacha than would any other commercial concern in Zambia (in fact, by May 1987, the nominal value of K45.6m was rather more than US$4.3m). Secondly, I see no reason in principle why GVDC should expect to be able to buy kwacha from Lasco more cheaply than it could from anyone else. The mere fact that Mr Koshy had an interest in Lasco did not mean that Lasco was obliged to give GVDC a bargain. Companies do not ordinarily assess the value of their supplies by reference to the amount of their suppliers' profits. They pay for a particular item what they regard it as being worth. The K56.4m Lasco provided was, I find, worth US$5.8m." (para 271)
"272… In my view, it is clear that Mr Koshy concealed from GVDC matters which it was obviously in its interests to know before committing itself to the Lasco agreements. A full knowledge of the facts would have enabled it to consider whether or not it did in fact wish to deal with Lasco on such terms; whether it might be able to negotiate better terms; or whether it might be in its interests instead to raise money itself on the pipeline. I find that the reason Mr Koshy concealed the information from GVDC is because he was concerned that its revelation might spoil his plans. How he would have responded had he ever been asked the direct question of what Lasco's cost of the kwacha has been, I do not know. I do not exclude the possibility that he would have given an untruthful answer. I find that his decision to conceal the information from GVDC was not because he genuinely regarded it as simply of no interest. It was a deliberate, and dishonest, decision arrived at by reason of the fact that he was preferring Lasco's interests to GVDC's. I find that he was dishonest in the sense that he was pursuing a particular course of action in his own interests, either knowing that it was contrary to the interests of GVDC, or recklessly indifferent as to whether it was (see Armitage v. Nurse and Others  Ch 241, at 251, per Millett L.J.)."
"Bearing in mind that, as I find, the other directors knew that Lasco was making an undisclosed profit of uncertain dimensions, it may be that they too were also at fault in not making proper inquiry about the Lasco transactions. But they are not being sued, whereas Mr Koshy is; and that feature provides no answer to the claim against him. He was the man who was primarily responsible for raising finance for GVDC. He acted as its finance director, and was the driving force behind the GVDC/Lasco agreements. His own breach of duty led directly to the making of the agreements…." (para 273)
The challenge to the finding of dishonesty
i) The first was that Mr Koshy had kept his prospective beneficial interest in Lasco secret down to September 1987. The finding was attacked principally on the basis that it was undermined by contradictory contemporaneous documentary evidence in the form of the Grindlay's memorandum. The memorandum was authorised by Mr Koshy. It was intended to be shown to prospective investors, such as DEG. It showed that Mr Koshy told GVDC's bankers about his interest in Lasco. Apart from Dr Polzer, none of the other directors had given evidence that Mr Koshy had concealed from them his interest in Lasco and there was no evidence that he had. They were aware that he acted for Lasco, and there was evidence that some at least were aware of his personal interest in it. As for Dr Polzer, he could not escape from the fact that he was informed of Mr Koshy's interest in the Grindlay's memorandum.
ii) The second was that, in early 1986, Mr Koshy had lied DEG about his stake in Lasco. This was a reference to the evidence of Mr Helmut Klingler, a member of DEG's staff, about what was said to him in early 1986. In detailed submissions Mr Page sought to demonstrate that the finding was not supported by the evidence and that it should be reversed by this court. Mr Klingler's involvement in the project was brief, and he was superseded by Mr Polzer in June 1986. He had visited Zambia in January 1986. He met Mr Koshy, who took him to see the proposed site of the project. An internal memorandum on the project was prepared by Mr Klingler on 29 January 1986. It stated that Lummus was proposing to invest $US 3m. Rimer J found that the figure, which is incorrect, was supplied to Mr Klingler by Mr Koshy, though the document does not say that it was, and that Mr Koshy knew. Relying on the memorandum Mr Klingler gave oral evidence at the trial that the incorrect figure came from Mr Koshy. The judge accepted Mr Klingler's evidence on that point. He concluded that, by his misrepresentation, Mr Koshy was pretending to DEG that its main partner was Lummus and that Lasco was its subsidiary vehicle. It was submitted that the judge should not have trusted, to the extent he did, the recollection of Mr Klingler of what had been said to him informally by Mr Koshy 15 years previously, particularly in view of his very limited involvement in the project.
iii) The third was that there was "no evidence that he made formal disclosure to GVDC". This, if correct, showed no more than a breach of the duty of disclosure; it did not show that it was dishonest.
iv) The fourth was that Mr Koshy had lied to IFC about his interest in Lasco. The finding was based on an incorrect recital in the IFC Investment Agreement that Lasco was indirectly a wholly owned subsidiary of Lummus. Mr Page submitted that the more likely explanation was not that Mr Koshy was dishonest, but that he had not noticed the error when he signed the agreement and that there was no evidence that IFC was misled. There was evidence that in January 1987 Mr Milton of IFC knew that the finance for Lasco's shareholding in GVDC had been provided by Mr Koshy and he told Dr Polzer so.
Conclusions on dishonesty
"… connotes at the minimum an intention on the part of the trustee to pursue a particular course of action, either knowing that it is contrary to the interests of the company or being recklessly indifferent whether it is contrary to their interests or not."
"It is the duty of a trustee to manage the trust property and deal with it in the interests of the beneficiaries. If he acts in a way which he does not honestly believe is in the interests of the beneficiaries then he is acting dishonestly." (p 251D-F)
"which requires that before there can be a finding of dishonesty it must be established that the defendant's conduct was dishonest by the ordinary standards of reasonable and honest people and that he himself realised that by those standards his conduct was dishonest." (paras 27, 38)
Lord Hutton's speech was also relied on by Mr Thompson as confirming that:
"It is only in exceptional circumstances that an appellate court should reverse a finding by a trial judge on a question of fact (and particularly on the state of mind of a party) when the judge has had the advantage of seeing the party giving evidence in the witness box." ( para 43)
Mr Page noted that this was a case where the trial judge had rejected the allegation of dishonesty. By contrast a finding of dishonesty should be more readily susceptible to review, because of the strong evidence required to establish such a case. He also reminded us of the authorities which emphasise the danger, in cases alleging fraud after a substantial lapse of time, of over-reliance on the unaided recollections of witnesses (see e.g. The Ocean Frost  1 Ll R 1, 57).
" The principle is well settled that where there has been no misdirection on an issue of fact by the trial judge the presumption is that his conclusion on issues of fact is correct. The Court of Appeal will only reverse the trial judge on an issue of fact when it is convinced that his view is wrong. In such a case, if the Court of Appeal is left in doubt as to the correctness of the conclusion, it will not disturb it."
Scope of the account
Laches and acquiescence
V. EQUITABLE COMPENSATION
"When a party, holding a fiduciary relationship, commits a breach of his duty by non-disclosure of material facts, which his constituent is entitled to know in connection with the transaction, he cannot be heard to maintain that disclosure would not have altered the decision to proceed with the transaction, because the constituent's action would be solely determined by some other factor, such as the valuation by another party of the property proposed to be mortgaged. Once the Court has determined that the non-disclosed facts were material, speculation as to what course the constituent, on disclosure would have taken is not relevant."
"….there is no sufficient evidence showing that GVDC has suffered any loss. The fact remains that Lasco did provide GVDC with K56.4m and I find that its nominal value-or worth-was US$5.8m. If the evidence had satisfied me that, had Mr Koshy laid all his cards on the table, the course of events would have been different, then that would be one thing. However, it did not. I find myself quite unable to conclude that, had it known the full facts, GVDC would in fact have dealt with the matter any differently. The evidence did not satisfy me that there was any good reason why it should not pay the market rate for its kwacha. It needed the money. Although now Dr Polzer and (as an afterthought) Mr de Winter both express shock at the thought of profit going to Lasco rather than to the project, I find that both knew perfectly well (as did other board members) that this was precisely what was happening and none of them at the time thought it appropriate even to inquire what the profit was."
Mr Koshy's submissions
VI. SUMMARY OF CONCLUSIONS
(1) Mr Koshy was under a duty to account to GVDC for the unauthorised profits made by him out of the pipeline loan transactions entered into by GVDC with Lasco.
(2) Mr Koshy acted in breach of his fiduciary duties, as a director of GVDC, in deliberately and dishonestly concealing from the directors and shareholders of GVDC the nature and extent of the profit made by him from the pipeline loan transactions between GVDC and Lasco.
(3) Mr Koshy is not entitled to rely on the provisions in the Articles of Association of GVDC excusing a director from liability for breach of the rule against self-dealing by not disclosing his interest in the pipeline loan transactions, as he did not make the disclosure to the board of GVDC required by the Articles.
(4) Mr Koshy is not entitled to rely on the general law to excuse him from liability for breach of the rule against self-dealing by not disclosing his interest in the pipeline loan transactions, as he did not make full disclosure of the nature and extent of his interest to the directors and shareholders of GVDC.
(5) The judge's findings that Mr Koshy did not make the required disclosure were justified on the evidence and on his own findings of fact.
(6) The judge's findings of fact that Mr Koshy deliberately and dishonestly concealed the nature and extent of the profits made by him out of the pipeline loan transactions were justified by the evidence.
(7) The questions whether the GVDC /Lasco Loan Agreement was voidable or void, and, if voidable, whether it was avoided by the service of the Amended Statement of Claim and whether the payments of money made to Lasco under the Loan Agreement were valid and passed to Lasco the property in the sums paid do not affect the liability of Mr Koshy to account for profits made by dishonest breach of fiduciary duty.
(8) The sum of $2.075m transferred to Lasco in 1987-8 was held by Lasco on a constructive trust for GVDC in accordance with the order made by Harman J on 20 March 1998.
(9) The action by GVDC for an account of profits against Mr Koshy is an action for, or is treated for limitation purposes as analogous to an action for, "fraud or fraudulent breach of trust" within s 21(1)(a) of the 1980 Act.
(10) The action for an account of profits against Mr Koshy was not an action, nor is it treated for limitation purposes as analogous to an action, "to recover from the trustee trust property…in the possession of the trustee" within s 21(1)(b) of the 1980 Act.
(11) No limitation period applies to the claim by GVDC against Mr Koshy for an account of the profits made by him from the pipeline loan transactions.
(12) Acting on the analogy of the statutory provision in s 21(1) (a) the court of equity before I July 1940 would hold that there was no limitation period applicable to the cause of action against Mr Koshy.
(13) It is unnecessary to decide whether, if a limitation period did apply, the running of time would be postponed under s 32 of the 1980 Act.
(14) The claim for an account of profits is not barred by laches or acquiescence.
(15) The judge was wrong to confine the scope of the account of profits in the manner he did. A general account of profits should have been ordered.
(16) The judge was entitled to find that GVDC had not established that it had suffered any loss as a result of a breach of fiduciary duty by Mr Koshy.
(17) The judge was entitled to find that it had not been established that GVDC
would not have entered into the pipeline loan transactions, absent any breach of fiduciary duty on the part of Mr Koshy.
(18) The judge was entitled to refuse to make an order for the payment of equitable compensation or to order an inquiry to assess such compensation
(19) If loss had been established as a result of the dishonest breach of fiduciary duty by Mr Koshy, the claim for equitable compensation would not have been statute barred under the 1980 Act.