England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE CHANF 96/1128/3

Royal Courts of Justice

Strand, London WC2

Thursday, 19th November 1998

B e f o r e :

LORD JUSTICE NOURSE

LORD JUSTICE PILL and

LORD JUSTICE THORPE

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DUCKWARI PLC Appellant

-v-

(1) OFFERVENTURE LTD

(2) BRIAN STANLEY COOPER Respondents

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Handed Down Judgment

Smith Bernal Reporting Limited

180 Fleet Street London EC4A 2HD

Tel: 0171 421 4040 Fax: 0171 831 8838

(Official Shorthand Writers to the Court)

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MR D RICHARDS QC and MR K CRAIG (instructed by Messrs Clarks, Reading) appeared on behalf of the Appellant.

MR P HOSER (instructed by Messrs Wilson Myddelton, Potters Bar) appeared on behalf of the Respondents.

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J U D G M E N T (No 2)

(As Approved by the Court)

Crown Copyright

Thursday, 19th November 1998

Lord Justice Nourse:

In reserved judgments delivered on 8th May 1998 we allowed Duckwari's appeal against the decision of His Honour Judge Paul Baker QC [1997] Ch. 201 and discharged his declaration that the arrangement between Duckwari and Offerventure had resulted in no damage to Duckwari. We refused Mr Cooper and Offerventure leave to appeal to the House of Lords and on 16th July the Appeal Committee of the House also refused leave. Our decision is now reported at [1998] 3 WLR 913. All references to page numbers are to the pages in that report.

The effect of our decision was to hold that Mr Cooper and Offerventure were, in broad terms, jointly and severally liable to make good to Duckwari the loss caused to it by the depreciation in value of the property; see p. 923E. In discussion with counsel after judgment it became clear that the extent of the relief to be granted to Duckwari remained a matter of acute controversy and that further argument would be necessary. Argument was heard on 30th July, when judgment was again reserved.

The extent of the relief to be granted to Duckwari depends on the effect of section 322(3)(b) of the 1985 Act, which provides that Mr Cooper and Offerventure are jointly and severally liable:

"to indemnify [Duckwari] for any loss or damage resulting from the arrangement or transaction."

So, in order to be recoverable, the loss or damage must result from the "arrangement" or "transaction", each of which must be identified. For that purpose reference must be made to section 322(1).

In my earlier judgment I said, in regard to the wording of section 322(1)(p.918C):

"the effect of this court's earlier decision is that the 'arrangement' between Offerventure and Duckwari was that Duckwari should be at liberty to take over Offerventure's rights and liabilities under the contract. Duckwari was not obliged to complete, but if it decided to do so Offerventure was obliged to direct the vendor to convey the property to Duckwari and Duckwari to repay the amount of the deposit to Offerventure. Moreover, once Duckwari had completed, its purchase appears to be accurately described as a 'transaction entered into in pursuance' of the arrangement."

No difficulty has been caused by the identification of the arrangement. But the arguments advanced by counsel on 30th July have demonstrated that the identification of the transaction as the purchase was insufficiently precise. A distinction must be made between Duckwari's acquisition of the property and the means by which it was acquired.

The essence of the argument of Mr Richards QC, for Duckwari, is that the transaction entered into in pursuance of the arrangement was not simply Duckwari's acquisition of the property but included the means by which it was acquired, in particular the borrowing of £350,000 from the bank and the application of £155,923 from Duckwari's own resources (see p. 917B). He says, correctly on the evidence, that the acquisition and the borrowing were part and parcel of one transaction, in the sense that the acquisition could not have been achieved without the borrowing and the borrowing would not have been incurred but for the acquisition. Identifying the transaction in that way, Mr Richards claims that the "loss or damage resulting from" it included, up to 8th May 1998, actual compound interest paid or owing to the bank amounting to £676,686 and notional compound interest lost on the £155,923 amounting (at base rate less 0.5 per cent) to £183,632. On that footing, Duckwari's total claim is put at £1,216,753. I should add that the rate of interest charged by the bank was base rate plus 3 per cent with a minimum of 13 per cent. Since base rate has been 9 per cent or lower ever since September 1992 (it was 7 per cent or lower between November 1992 and November 1997), it is evident that the cost of the loan to Duckwari (if it is to be charged in full) will, for most of the time since November 1989, have been exorbitant.

The essence of the argument of Mr Hoser, for the respondents, is that, since the arrangement which contravened section 320(1) was that Duckwari should be at liberty to take over Offerventure's rights and liabilities under the contract, the only transaction falling within section 322 was Duckwari's acquisition of the property pursuant to the contract. That, and that alone, was the "substantial property transaction" involving a director within the marginal note to section 320. Neither Duckwari's borrowing from the bank nor the application of its own monies in part payment of the purchase price was part of the arrangement between Offerventure and Duckwari and neither was in contravention of section 320(1). A fortiori, neither could be or be part of a transaction entered into in pursuance of an arrangement for the purposes of section 322. On the footing that the transaction for those purposes was, as he contends, Duckwari's acquisition of the property, Mr Hoser accepts that the respondents are jointly and severally liable on the basis stated in my earlier judgment at p. 921A, ie to restore to Duckwari the difference between £505,923 and £177,970, plus interest on the amount for the time being outstanding. (We were told on 30th July that no rents or profits were received before completion of the sale.)

While I have found the question to be one of some difficulty, I have come to a clear conclusion that the argument of Mr Hoser is to be preferred to that of Mr Richards. Although it was at the heart of our earlier decision that the effect of section 322(3)(b) was to make the respondents liable as if they had been trustees, we also held that that basis of liability only arose because there had been a breach of section 320(1); see p. 920H. It necessarily follows that the loss or damage recoverable under section 322(3)(b) is limited to that resulting from the breach, in other words from the acquisition itself.

As an alternative to his main argument, Mr Richards further argued that, even if the basis of liability accepted by Mr Hoser is correct, it would be wrong, in a case where a trustee had borrowed in order to acquire an unauthorised investment, to limit his liability to the amount of the loss incurred on its realisation; he ought also to be liable for the expenses of the borrowing. Mr Richards added, correctly, that at the time that Knott v. Cottee (1852) 16 Beav. 777 was decided it was unknown for trustees of wills or settlements to have power to borrow money. Nowadays such powers are a commonplace. Mr Richards suggested that if the point were to come up for decision now, the trustee would certainly be held liable for the expenses of the borrowing.

While there may be force in Mr Richards' alternative argument so far as it relates to trustees of a private trust, here it encounters the same objection as his main argument, which is that the loss or damage recoverable under section 322(3)(b) is limited to that resulting from the acquisition itself. Subject to one outstanding point, I am of the opinion that the basis of liability accepted by Mr Hoser is correct.

Before dealing with that point, I would make a general comment. It appears that Duckwari's claim in respect of interest and notional interest partakes more of a claim for damages at common law than one for equitable compensation. About that two points may be made. First, although section 322(4) provides that subsection (3) is without prejudice to any liability imposed otherwise than by that subsection, it has been established by our earlier decision that the correct basis of recovery under subsection (3) is an equitable one. Secondly, that basis is in one crucial respect more favourable to the company than a common law basis. In equity the liability is strict. If the unauthorised investment depreciates in value, the trustee is automatically liable for the amount of the loss incurred on its realisation. No question of foreseeability or remoteness, in particular foreseeability of the depreciation in value of the investment, arises, as it would at common law.

The outstanding point is this. Duckwari claims to recover the costs of holding the property, more accurately the costs of holding and realising it. They consisted of £1,000 in respect of rates, £1,836 in respect of insurance premiums and £22,144 in respect of the costs of pursuing an appeal against the refusal of planning permission, which was ultimately granted in March 1995. In general, I would not expect such costs to be recoverable, although the rates and insurance premiums could no doubt have been set off against the rents and profits of the property, had there been any. However, each case must be judged on its own facts. Since Judge Paul Baker QC found the value of the property between 1993 and May 1996 to have been no more than £90,000 and since it was sold in May 1997 for £177,970 net of expenses (see p. 917E), it is natural to assume, despite Mr Hoser's submissions to the contrary, that the obtaining of planning permission in March 1995 substantially contributed to the £177,970 obtained in May 1997. On that ground I would allow the planning costs in this case; so too the rates and insurance premiums, which may be taken to have been properly incurred in preserving the property and thus in achieving the best price possible on its realisation. Subject to any verification of the figures which may be necessary, I would therefore add the amount of the holding costs to the sum recoverable by Duckwari.

There remains the question of interest. Mr Hoser's formal position is that we should follow the established practice, dating from before the time of Knott v. Cottee , which was to charge the trustee with simple interest at 4 per cent unless there was misconduct. More realistically, he accepts that in recent years the court has regularly departed from that rate. His alternative submission is that Duckwari should be held to the notional interest rate (base rate less 0.5 per cent, simple not compound) which it has claimed in respect of the £155,923 applied in part payment of the purchase price. I will say at once that no case has been made out for compound interest.

On the other side, Mr Richards has relied on the judgment of Forbes J in Tate & Lyle Food and Distribution Ltd v. GLC [1982] 1 WLR 149, 154, for the proposition that interest should be payable at a commercial rate, ie at the rate Duckwari would have had to pay in order to borrow the money, and that in the case of a small concern such as Duckwari the rate should be taken to be as high as base rate plus 3 per cent. My impression is that Forbes J's suggestion that the rate should vary according to the size and prestige of the concern which is taken to have borrowed the money has not won general acceptance. The practice of the Commercial Court is to award interest at base rate plus 1 per cent.

In Bartlett v. Barclays Bank Trust Co Ltd (No 2) [1980] Ch. 515, 547, Brightman J was of the opinion that a proper rate of interest to be awarded, in the absence of special circumstances, to compensate beneficiaries and trust funds for non-receipt from a trustee of money that ought to have been received was that allowed from time to time on the Short Term Investment Account, a rate which may be taken to be not more favourable than base rate less 0.5 per cent. However, such a rate is not appropriate where the entity which is out of pocket is not a private trust but a commercial concern. In such a case interest ought to be awarded at a commercial rate. A precedent is at hand in the shape of Belmont Finance Corporation Ltd v. Williams Furniture Ltd (No 2) [1980] 1 All ER 393, 419, to which reference was made in my earlier judgment (p. 920G). There simple interest was awarded on the sum recoverable by the company in constructive trust at base rate plus 1 per cent. I propose that we should award it at the same rate here.

In summary, I would enter judgment for Duckwari in the sum of £352,933, being the gross acquisition costs of £505,923 plus the holding costs of £24,980 less the net proceeds of sale of £177,970, together with simple interest at base rate plus 1 per cent on £505,923 from completion of the purchase on 9th November 1989 until completion of the sale on 23rd May 1997 and on £327,953 from 24th May 1997 until judgment on 8th May 1998. Duckwari is also entitled to interest at the like rate on the holding costs, in each case as from the date of expenditure until 8th May 1998. It is to be hoped that the aggregate sum for which judgment should be entered can be agreed between the parties.

Lord Justice Pill:

I agree.

Lord Justice Thorpe:

I also agree.

Order: judgment entered as at 8th May 1998 for £751,655, with interest to run at the judgment rate from that date; no order as to costs from 8th May 1998 onwards.