England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
(Mr Justice Rattee)

		Royal Courts of Justice Strand, London WC2
		7th May 1998

Lord Justice Mummery

Introduction

This is an appeal against the order of Rattee J dated 6 December 1996 granting leave, pursuant to Section 11(3)(d) of the Insolvency Act 1986, to four applicants (the respondents to this appeal) to commence proceedings by way of writ against Polly Peck International PLC (PPI), one of the appellants. The five other appellants are the administrators of PPI, which is massively insolvent and has been in administration under an order of the High Court since 25 October 1990.

Application for Leave

Section 11(3)(d) of the 1986 Act provides that, during the period for which an administration order is in force,

"(d) no other proceedings....... may be commenced.... against the company.....except with the consent of the administrators or the leave of the court and subject (where the court gives leave) to such terms as [the court may impose]."

The administrators of PPI refuse to consent to the commencement of proceedings based on a draft statement of claim setting out the applicants' proposed claims against PPI. They contend that the draft statement of claim fails to disclose a seriously arguable case justiciable in the English courts against any of the proposed defendants. It is common ground that leave should only be granted by the court if it is satisfied that the draft statement of claim discloses a seriously arguable case on the merits, as well as on jurisdiction.

The proposed claims arise out of alleged wrongful occupation of immovable property in Cyprus.The applicants assert that it is owned by them. They claim to be entitled to immediate possession of it. They claim that,to the knowledge of the proposed defendants, they were deprived of their property by armed force or threat of armed force, followed by expropriatory and discriminatory measures of the organs of an unrecognised state. The property is situated in that part of Northern Cyprus occupied by Turkey since an armed invasion in the summer of 1974.

PPI and the administrators argue that the proposed action is bound to fail on two grounds: first, the English courts have no jurisdiction to entertain the proposed action by virtue of the rule in British South Africa Company -v- The Companhia de Mocambique [1893] AC 602, as modified by section 30(1) of the Civil Jurisdiction and Judgments Act 1982 ; and, secondly, even if the English courts do have jurisdiction, the claims are misconceived and fail to disclose any seriously arguable case.

Factual Background

A. Cyprus

The Republic of Cyprus came into being as an independent sovereign State on 16 August 1960. Since then all States, with the sole exception of Turkey, have recognised that the Republic is the lawful sovereign of the whole of the island.

In the summer of 1974 Turkey invaded the island. By 16 August 1974 it had occupied a large area in the north amounting to just over one third of the whole island ( the occupied area). Many members of the Greek Cypriot community in the occupied area fled,in fear of armed force, from their homes and businesses to other parts of the island.

On about 13 February 1975 Turkey instigated an entity calling itself the "Turkish Federated State of Cyprus". It was not recognised by any state or international organisation.

On about 15 November 1983 the "Turkish Republic of Northern Cyprus" (TRNC) was declared by the Turkish Cypriot authorities, purporting to create an independent state in the occupied area. No state, apart from Turkey, and no international organisation has recognised TRNC. The United Kingdom has never recognised and does not recognise TRNC (or the Turkish Federated State of Cyprus) as a state in the occupied area or at all. The United Kingdom has never recognised any government in the occupied area other than the Government of the Republic of Cyprus.

B. The Land and Properties

Each of the applicants claims to be the owner of and to be entitled to immediate possession of land, buildings and other immovable property in the occupied area.

(1) The Constantia Hotel, Famagusta

The Marangos Hotels Company Limited (Marangos) is a company incorporated under the law of the Republic of Cyprus and is mainly owned and controlled by members of the Greek Cypriot community. Marangos claims that in 1974 it owned the Constantia Hotel (now called the Palm Beach Hotel) and the plot of land on which it stood. It still maintains that claim.

(2) Jasmine Court, Kyrenia

Pharos Estates Limited (Pharos) is incorporated under the law of the Republic of Cyprus and is mainly owned and controlled by members of the Greek Cypriot community. It claims that in 1974 it was the owner of a complex of apartments and other facilities called Jasmine Court (now called the Jasmine Court Hotel) in the Livadhia area, Kyrenia. It still maintains that claim.

(3) Packaging Plant, Kato Zhodia

Sedigep Limited (Sedigep) is a co-operative society with limited liability formed under the law of the Republic of Cyprus and is mainly owned and controlled by members of the Greek Cypriot community. It claims that in 1974 it was the owner of a fruit and vegetable packaging plant at Kato Zhodia on the west bank of the Potami river. It still maintains that claim.

(4) Warehouse 20, Famagusta

The Cyprus Ports Authority (CPA) is a state body of the Republic of Cyprus established in 1973 and operational since 1 January 1977 with responsibilities for administering all of the ports of the Republic of Cyprus. It took a transfer of the Port of Famagusta with effect from 1 August 1976. It claims that its predecessor, the Department of Ports, was in 1974 the owner of Warehouse 20 and the plot of land on which it stands in the port of Famagusta. Ownership was transferred to CPA on 1 August 1976 and CPA still maintains that claim.

C. Expropriation

It is not disputed on this appeal that, following the invasion of the occupied area, the four properties mentioned were expropriated. Under the purported legislation described in the judgment of Rattee J (Law 32 of 1975) immovable property belonging, inter alia, to Greek Cypriots was transferred into control and ownership of the Minister of Finance of the Turkish Federated State. Under a second purported law in 1985 (section 159) immovable property and land in TRNC, the owners of which were no longer present, was declared to be the immovable property of TRNC, who were to be entitled to lease it and make grants for long periods.

The applicants contend that their property, purportedly expropriated in this way, was, with knowledge of the wrongs committed against them and their property, illegally occupied and exploited without their authority by direct or indirect subsidiaries of PPI, or by persons acting for or at the direction of the administrators then serving. The properties were occupied under leases and contracts for leases entered into by Ministries of TRNC and the relevant PPI subsidiary. It is alleged that by this means PPI derived substantial financial advantages from the commission of illegal acts. This state of affairs continued until the sale of the shares in the subsidiaries for a substantial(but undisclosed) sum by PPI to Learned Limited on 24 March 1995. The proceeds are in the hands of the administrators, who have explained in their evidence their problems in the administration and have sought to justify the disposal of the shares on the best terms reasonably achievable by reference, inter alia, to the fact that they have never been able to exercise effective control over the conduct of the businesses of the subsidiaries or over the properties occupied by them in TRNC.

D. PPI

PPI, formerly called Polly Peck (Holdings) Limited, was incorporated in the United Kingdom. It was a holding company for a world wide group, including over 200 direct and indirect subsidiary companies. PPI is insolvent and subject to an administration order made in the Chancery Division of the High Court on 25 October 1990 under section 8 of the Insolvency Act 1986. All the individual appellants are accountants appointed by the Court at various times to act as administrators of PPI. Three of them are also Joint Scheme Supervisors of the Scheme of Arrangement made under Section 425 of the Companies Act 1985.

From about 7th July 1980, when he was appointed as Chief Executive, until the making of the administration order, Mr Asil Nadir, a Turkish Cypriot, controlled the affairs of PPI and the PPI group.

The subsidiaries and members of the PPI group relevant for the purposes of these proceedings are the following:-

(a) Red Peppers Limited, a company incorporated in England;

(b) PPI Holdings BV, a company incorporated in the Netherlands;

(c) Voyager Mediterranean Limited (a direct subsidiary) and Voyager Limited, two companies incorporated in the Isle of Man;

(d) Uni-Pac Packaging Industries Limited, Voyager Kibris Limited and Sunzest Trading Limited, three "companies" alleged to have been incorporated under "TRNC law";

(e) Spiel-Gerate GmbH (SG), an indirect subsidiary incorporated in Germany.

It is contended by the applicants that-

(1) all these companies were members of the PPI Group, being either direct or indirect subsidiaries of PPI;

(2) all of them should be treated as a single commercial unit with PPI as the ultimate parent company;

(3) all the companies and the arrangements between them and PPI constituted a facade, so as to justify lifting the corporate veil and treating acts of the subsidiaries as acts of PPI;

(4) PPI directed, controlled, aided and counselled their actions, involving the commission of torts to the applicants' properties in furtherance of the common design with the subsidiaries concerned and was therefore a joint tortfeasor.

E. The Causes of Action

The applicants plead the following causes of action:-

(1) The administrators of PPI caused and/or assisted PPI to sell all the shares in Voyager, SG and Uni-Pac on 24 March 1995 for an undisclosed, substantial consideration received by them to Learned Limited, a "company" incorporated under "TRNC law". Mr Asil Nadir has been a director of Learned since 27 March 1995. The sum received by the administrators (the Learned Consideration) represents the profits and proceeds of wrongdoing by PPI and subsidiary members of the PPI group, which has been unjustly enriched at the expense of the applicants. The Learned Consideration is therefore subject to a constructive trust for the benefit of the applicants as owners of and persons entitled to immediate possession of the properties leased by TRNC to the PPI subsidiaries. In the submissions this is referred to as a "remedial constructive trust."

(2) Alternatively, the administrators are under an obligation to the applicants to account for the Learned Consideration or are subject to an obligation to pay equitable compensation and/or damages to the applicants.

(3) The applicants are entitled to trace into the Learned Consideration received by the administrators the profits derived by the subsidiary companies of PPI from the illegal or wrongful occupation and exploitation of the properties.

F. The Relief Claimed

Relying on these causes of action,the applicants claim the following relief:-

(1) A trust or constructive trust for their benefit of the Learned Consideration held by the administrators of PPI;

(2) Alternatively, a declaration that the Learned Consideration was monies had and received by the administrators to the use of the applicants or that the administrators are under a duty to account to the applicants for the consideration.

(3) An account of the profits of the wrongful occupation and exploitation of the properties, alleged to be traceable into the Learned Consideration.

(4) A charge on the Learned Consideration or payment of equitable compensation and interest, together with all accounts inquiries and directions.

Although the relief sought is in part based on in personam claims against PPI and the administrators,the essential object of the proposed action is,as noted by Rattee J at p. 644c-d,to establish a"proprietary claim to the proceeds of the sale to Learned Limited."The applicants' skeleton argument mentions in paragraphs 28 and 29 the alleged liability of the administrators as accessories to breach of trust by PPI and its subsidiaries,giving rise to a constructive trust, and the personal claims for money had and received and for damages against PPI and the administrators. But,in view of the insolvency of PPI,Miss Dohmann naturally focused her written and oral submissions on the proprietary claim for a constructive trust of the Learned Consideration.If that claim is not seriously arguable,there is,in my view,no other claim against PPI or the administrators which would justify the grant of leave to commence the proposed action.The remainder of this judgment proceeds on that basis.

I would also add that no differences between the law of the Republic of Cyprus and English Law are at present relied upon.

Jurisdiction-The Law

As the decision of the judge was largely based on the question of jurisdiction, the main jurisdictional rules should first be identified.

The Mocambique Rule

The rule was stated in Dicey and Morris on the Conflict of Laws (9th Ed) Rule 79 as follows:-

" Subject to the exceptions hereinafter mentioned the court has no jurisdiction to entertain an action for

(1) the determination of the title to, or the right to possession of, any immovable situate out of England (foreign land); or

(2) the recovery of damages for trespass to such immovable."

The Civil Jurisdiction and Judgments Act 1982

Section 30 of the 1982 Act provides:-

" (1) The jurisdiction of any court in England and Wales or Northern Ireland to entertain proceedings for trespass to, or any other tort affecting, immovable property shall extend to cases in which the property is situated outside that part of the United Kingdom, unless the proceedings are principally concerned with a question of title to or the right to possession of that property."

Judgment of Rattee J

The judge reached the following conclusions:-

(1) The Mocambique Rule

The Court has no jurisdiction to entertain the action by virtue of the Mocambique Rule, as re-stated and applied in the context of a claim to land in Northern Cyprus in Hesperides Hotels Limited -v- Aegean Turkish Holidays Limited [1979] AC 508. The applicants' claim is based on alleged legal ownership of their properties in the occupied area. The judge rejected the argument that this case falls within an exception to the rule as a claim for an equitable interest by way of constructive trust in the proceeds of sale of shares in the subsidiaries by PPI to Learned.

(2) Section 30(1) of the 1982 Act

The Court has jurisdiction to entertain the proposed proceedings under section 30(1). The judge accepted the administrators' submission that, as the question of jurisdiction was a pure point of law on which he heard full argument, he should decide it rather than confining himself to a view on whether the jurisdiction point was arguable. He concluded that the proposed proceedings were not

" principally concerned with a question the title to, or the right to possession of immovable property situated outside the United Kingdom."

He stated that the word " principally " meant "for the most part " or " chiefly" and added (page 642 C-F)

" I do not consider that the applicants' action would be principally concerned with the question of the applicants' title to, or right to possession of the applicants' properties. Of course, as in any action for trespass to land, it would be a sine qua non of success that the plaintiffs proved their right to possession at the dates of the alleged trespass, but that right is far from the only substantial question raised by the proposed statement of claim. In particular it raises the questions: (a) whether PPI itself committed any acts which could be characterised as trespass by it on the applicants' properties or any of them; (b) whether by some process referred to as " piercing the corporate veil " PPI can be held responsible for acts of trespass by its direct or indirect subsidiaries; (c) whether, even if question (a) or (b) is answered in the affirmative, the applicants have any rights in specie in the proceeds of the sale by PPI of shares of its subsidiaries to Learned Limited, as opposed to a right in personam entitling them to participate in the Scheme of Arrangement relating to PPI.

Such questions cannot, in my judgment, be said to be merely incidental to the question of the applicants' right to possession of the applicants' properties. Of course they will not arise unless the latter question is decided in the applicants' favour, but they are substantial questions going to the applicants' right to the relief sought in the action. They are not minor or incidental questions. Given that the relevant proceedings, if allowed to be brought, will concern such questions quite as much as the question of the applicants' right to possession of the properties concerned, in my judgment those proceedings would be concerned, but not principally concerned, with such right to possession. I consider that the purpose of section 30(1) of the 1982 Act is to preserve the Mocambique Rule only in cases where the real issue in the proceedings is the question of title to, or the right to possession of, foreign land and all other questions are merely incidental thereto. Such is not this case.

Accordingly, in my judgment the court would have jurisdiction to entertain the proposed action by virtue of Section 30(1) of the 1982 Act."

(3) Seriously Arguable Case

The judge concluded that, although the draft statement of claim faces "formidable obstacles", it does disclose a seriously arguable claim against PPI. The judge agreed with the administrators that the sale by PPI of its interests in its subsidiaries had not caused loss to the applicants or resulted in PPI acquiring any property belonging to the applicants; that if, before the sale, the applicants had good causes of action for trespass against the subsidiaries, those causes of action were unaffected by the sale; that if the amount of the proceeds of sale had been increased by the fact that subsidiaries had benefitted from the alleged trespasses , then PPI had obtained the benefit of that increase, not from the applicants but from Learned Limited, which had paid the sale price without discounting for the outstanding liabilities of these subsidiaries to the applicants; that the applicants had no seriously arguable case for the existence of a constructive trust based on PPI being an alleged " dishonest accessory to a breach of trust committed by the subsidiaries", as there was no evidence of any fiduciary relationship between the allegedly trespassing subsidiaries and the applicants and therefore no basis on which the trespasses could be said to have been in breach of trust; that there was, therefore, no seriously arguable case for the existence of any "institutional constructive trust" affecting any part of the proceeds of the sale by PPI to Learned Limited. The judge concluded, however, that the statement of claim does disclose a seriously arguable case against PPI based on the following allegations:-

" (a) that the applicants remained at all material times entitled to possession of the applicants' properties, (b) that PPI knew that its subsidiaries were exploiting those properties, to which it knew the applicants claimed title and the right to possession, (c) that PPI actively encouraged such exploitation, (d) that it has benefitted from the exploitation and should be bound to disgorge such profit, and (e) that the Court should accordingly impose a remedial constructive trust on so much of the proceeds of sale by PPI to Learned Limited as represents such profit." (p.648h-649a).

On the claim for the imposition of a"remedial constructive trust" the judge expressed no opinion as to the prospect of success, save to say that it seemed " right in the interests of justice the applicant should have leave to make it." The judge relied on a passage cited from the judgment from the Court of Appeal in Metall Und Rohstoff AG -v- Donaldson Lufkin & Jenrette Inc [1990] 1 QB 391 at 479. Although the judge concluded that the claim for a "remedial constructive trust" over part of the proceeds of sale in the hands of PPI was seriously arguable, he expressed doubts about the submission of the applicant's counsel that it was just to impose such a trust. He said at page 648e

" In my judgment it is by no means clear that the court would so consider it, particularly where, as here, the relevant defendant (PPI) is insolvent, so that a remedial constructive trust in favour of one claimant against it will prima facie prejudice other persons with unsecured causes of action against it."

It is a question which, in his view, he could not properly determine on the application for leave. The judge concluded that it was not appropriate for him to reach any conclusion on the prospects or even arguability of claims in the proceedings, other than the " remedial constructive trust" claim. If the proceedings were issued including those other claims, it was open for any defendant to take interlocutory steps by way of application to strike out parts of the pleading. (p.649b-c).

Issues on the appeal

A. Seriously Arguable Case

The making of an administration order, as with the case of a winding up order, triggers a prohibition on proceedings being commenced or continued against the company. While the administrators seek to achieve the statutory purpose for which they are appointed, a moratorium is imposed on the enforcement of proprietary and other rights against the company. The administrators are officers of the court. They are expected to make their decisions responsibly. The court may give directions to them on the conduct of the administration. The court may grant leave for the commencement of proceedings against the company under Section 11 (3)(d) of the 1986 Act, provided that the application for leave discloses that the jurisdiction of the court to entertain the claim has been sufficiently established in respect of a seriously arguable case: See Re Atlantic Computer Systems PLC [1992] Ch 505 at 528 and Seaconcar Far East Limited -v- Bank Iran [1994] 1AC 438 at 456.

In some cases it is more logical and convenient to deal with the question of jurisdiction first, as Rattee J did in this case. However, it is more convenient on this appeal to consider first whether there is a seriously arguable claim. On its face the claim is novel: the applicants seek an order from an English court retrospectively imposing on the assets of an insolvent company in administration in England a "remedial constructive trust" giving them a proprietary interest in those assets. By decree of the court the Learned Consideration would cease to be an asset absolutely and beneficially owned by PPI. The imposed constructive trust would operate to exclude that asset from pari passu distribution by the administrators among the unsecured creditors of PPI in accordance with the legislative scheme prescribed in the 1986 Act. That surprising result would follow from acceptance of the applicants' submission, explained in the judgment of Rattee J, that, even in the absence of a pre-existing fiduciary relationship, the proceeds of sale of shares in subsidiary companies of PPI should be impressed by the English court with a trust to meet the applicants' claim (invoking the user principle : see Ministry of Defence v Ashman [1993] 30 EGLR 144) for restitution for unjust enrichment by the wrongful occupation and exploitation of properties in Northern Cyprus confiscated from the applicants by discriminatory and expropriatory "laws" made by the Government of a state not recognised by the Government of the United Kingdom.

In my judgment, the question whether this claim is seriously arguable should be answered at the outset for two practical reasons: first, if there is no serious issue to be tried under English law, a decision on the question of jurisdiction is unnecessary; secondly, it is difficult to see how the jurisdictional point can, in any event, be decided without first determining the nature of the claim advanced by the applicants.

B. The Remedial Constructive Trust

The conclusion of the judge (at page 648f-g) was that

"..... The question whether the court should impose a remedial constructive trust is not one which I can properly determine on this application, but.... it may well be a seriously arguable question in the circumstances which emerge at the trial of the applicants' claim".

I agree with the judge that,for the reasons given by him,there is no seriously arguable claim for an institutional constructive trust. After detailed argument from both parties on the question of a "remedial constructive trust," I also conclude that the claim of the applicants that the court should retrospectively confer a proprietary interest on them in respect of the assets of the insolvent PPI is not seriously arguable in English law.

I start with the few English cases on the topic, beginning at the highest level. In Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 at 714 G to 715 A Lord Browne-Wilkinson recognised that there is a critical distinction between an institutional constructive trust and a remedial constructive trust:-

" Under an institutional constructive trust the trust arises by operation of law as from the date of the circumstances which give rise to it: the function of the court is merely to declare that such trust has arisen in the past. The consequences that flow from such trust having arisen (including the potentially unfair consequences to third parties who in the interim have received the trust property) are also determined by rules of law, not under a discretion. A remedial constructive trust, as I understand it, is different. It is a judicial remedy giving rise to an enforceable equitable obligation: the extent to which it operates retrospectively to the prejudice of third parties lies in the discretion of the court".

In an earlier passage at page 714 F-G Lord Browne-Wilkinson said that, whereas the New York Law of constructive trusts had for a long time been influenced by the concept of a remedial constructive trust " English law has for the most part only recognised an institutional constructive trust : See Metall Und Rohstoff (Supra) at 478 to 480.

In the latter case the Court of Appeal, after quoting from Snell's Principles of Equity (28th Edition) 1982 at page 193 and Goff & Jones on the Law of Restitution (3rd Edition) 1986 at page 78 said:-

" While we have had the benefit of very full argument on almost all other aspects of the law involved in this case, we have neither heard nor invited comprehensive argument as to the circumstances in which the court will be prepared to impose a constructive trust de novo as a foundation for the grant of an equitable remedy by way of account or otherwise. Nevertheless we are satisfied that there is a good arguable case that such circumstances may arise and, for want of a better description, will refer to a constructive trust of this character as a remedial constructive trust."

In the Westdeutsche case at p.716G-H Lord Browne-Wilkinson concluded:

"Although the resulting trust is an unsuitable basis for developing proprietary restitutionary remedies,the remedial constructive trust,if introduced into English law, may provide a more satisfactory road forward. The court by way of remedy might impose a constructive trust on a defendant who knowingly retains property of which the plaintiff has been unjustly deprived. Since the remedy can be tailored to the circumstances of the particular case, innocent third parties would not be prejudiced and restitutionary defences, such as change of position,are capable of being given effect. However, whether English law should follow the United States and Canada by adopting the remedial constructive trust will have to be decided in some future case when the point is directly in issue."

Later cases do not, in my view, take the matter of remedial constructive trusts any further than the statements quoted above. The other cases cited were; Re Goldcorp Exchange Ltd [1995] 1AC 74 at 104 where Lord Mustill, in his opinion in the Privy Council, referred to

" An ill-defined remedial restitutionary right created by the court after the event, superior to the security created by the charge".

He commented

"Although remedial restitutionary rights may prove in the future to be a valuable instrument of justice, they cannot in their Lordships opinion be brought to bear in the present case."

In El Ajou -v- Dollar Land Holdings PLC [1993] 3AER 717 at 733 to 734 Millett J , having referred to the requirement of a fiduciary relationship in order to establish a right to trace in equity, made it clear that reliance was being placed not " on some new model remedial constructive trust, but old fashioned institutional resulting trust." Miss Dohmann QC, for the applicants, cited from the opinion of Lord Nicholls in Royal Brunei Airlines v Tan [1995] 2AC 378 a passage dealing with the liability of a dishonest accessory to a breach of trust, in particular the comment of Lord Nicholls at 389 E

" If a person knowingly appropriates another's property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour......... honest people do not knowingly take others' property."

Miss Dohmann QC contended that the subsidiary companies of PPI in Northern Cyprus fall within that damning description.

Finally, an earlier case cited in later decisions of the English Courts (and in the Canadian Supreme Court) is Chase Manhattan Bank NA -v- Israel - British Bank (London) Ltd [1981] Ch 105. The interest of the case for present purposes lies in the passage at page 120 of the judgment of Mr Justice Goulding who rejected the contention that in an insolvency situation the rights of a person claiming a constructive trust had been excluded by the imposition of a statutory trust under the Companies Act. Mr Justice Goulding held that where the claim rested on a " persistent equitable proprietary interest " the assets affected did not, at the commencement of the insolvent winding up, belong beneficially to the company and therefore never formed part of the property subject to the statutory trust arising on a winding up.

That analysis is essential to the applicants' case. They wish to claim priority over the interests of the unsecured creditors of the insolvent PPI by establishing a proprietary interest in assets which would exclude those assets from pari passu distribution to the unsecured creditors. Naturally, they prefer not to stand with their personal claim in the long (and ultimately unrewarding) wait in the queue at the check-out for the unsecured creditors of PPI. The applicants wish to apply the analysis of Mr Justice Goulding in the case of a " persistent equitable proprietary interest " to the case of an equitable proprietary interest arising from the ex post facto imposition by the court, in the exercise of its discretion, of a remedial constructive trust.

In my judgment, not even the Supreme Court of Canada, which has pioneered the remedial constructive trust, has gone that far in imposing such a trust.

C. The Canadian Cases

The three decisions of the Supreme Court of Canada cited in argument were Pettkus -v- Becker [1980] 2 SCR 834: LAC Minerals Ltd -v- International Corona Resources Ltd [1989] 61 DLR 14 and Korkontzilas -v- Soulos [1997] 146 DLR 217. The court was also provided with a copy of a comprehensive article by Mr David M Paciocco entitled "The Remedial Constructive Trust: a Principled Basis for Priorities over Creditors."

Although all this material is of great interest, none of it focuses on the precise issue confronting the court in this case: whether it is seriously arguable that the court, at the trial of the applicants' case, will impose retrospectively a remedial constructive trust over specific assets of the insolvent PPI in the hands of the administrators, so as to exclude the unsecured creditors of PPI from any participation in those assets.

As none of the cases directly deal with the " insolvency problem", little would be gained from extensive citation of that material. The following points may be noted:

(1) It is recognised in the most recent of the cases, Korkontzilas, at page 228 that the remedial constructive trust as a remedy for unjust enrichment is a new development not yet " formally" recognised by English Law.

(2) The remedial constructive trust does not require any pre- existing fiduciary relationship between the parties nor is it confined to an "institutional " function recognising an existing property right. A remedial constructive trust may be ordered even though there is no pre-existing right of property. As La Forest J said in the LAC case at page 50:-

" The imposition of a constructive trust can both recognise and create a right of property."

He explained on page 51, having declared himself against a discretionary remedy imposed whenever the court thinks it just to impose a trust,that

" The issue of the appropriate remedy only arises once a valid restitutionary claim has been made out. The constructive trust awards a right in property, but that right can only arise once a right to relief has been established. In the vast majority of cases a constructive trust will not be the appropriate remedy."

He added

" A constructive trust should only be awarded if there is reason to grant to the plaintiff the additional right that flows from recognition of a right of property. Among the most important of those will be that it is appropriate that the plaintiff receive the priority accorded to the holder of a right of property in a bankruptcy."

(3) In the Korkontzilas case, the only reference made by McLachlin J to the effect of awarding a remedial constructive trust on the interests of third parties was at page 227 C-D where she said

" Finally, it is informed by the absence of an indication that constructive trust would have an unfair or unjust effect on the defendant or third parties, matters which equity has always taken into account. Equitable remedies are flexible; their award is based on what is just in all the circumstances of the case."

On page 230 she identified the four conditions which generally have to be satisfied for the imposition of a constructive trust as a remedy for unjust enrichment and, on the fourth of those conditions, said

" There must be no factors which would render imposition of a constructive trust unjust in all the circumstances of the case; eg the interest of intervening creditors must be protected."

(4) In his article, Mr Paciocco makes it clear that his understanding of the remedial constructive trust is that it is proprietary in the sense that it gives " the successful plaintiff rights in the specific property which are good not only against the defendant but also against most others, including and most especially, the general creditors of the defendant." He explains clearly the difference between an institutional constructive trust, in which pre-determined legal consequences automatically apply to certain facts when they are found, and a remedial constructive trust which is discretionary and selected by the court as a remedy to give effect to a legal right which the court finds has been established. He deals with the problem of the effect of a remedial constructive trust on creditors who have acted in good faith without notice of the trust and comments at page 321 that

"Where a constructive trustee is insolvent, a declaration of a constructive trust turns the unpaid general creditors of the constructive trustee into the real losers."

He discusses in his article the problems arising for general creditors by the imposition of a remedial constructive trust and comments at page 349 that the courts in the United States do not use the remedial constructive trust where the defendant is insolvent: the reasoning is that the purpose of the remedial constructive trust is to prevent the defendant and not his creditors from being unjustly enriched. The article does not deal specifically with the problem that faces an English court where a plaintiff seeks to have a remedial constructive trust imposed on the beneficial assets of an insolvent company in administration or liquidation.

PPI's Insolvency

In my judgment, the intervening insolvency of PPI means that under English law there is no seriously arguable case for granting the applicants a remedial constructive trust on the basis of the allegations in the draft statement of claim. PPI is a massively insolvent company subject to an administration order. The administrators are bound to distribute the assets of PPI among the creditors on the basis of insolvency. Parliament has,in such an eventuality, sanctioned a scheme for pari passu distribution of assets designed to achieve a fair distribution of the insolvent company's property among the unsecured creditors. This scheme, now contained in the Insolvency Act of 1986, was described by Sir Donald Nicholls Vice-Chancellor in Re: Paramount Airways Ltd [1993] Ch 223 at 230 E, as

"a coherent, modernised and expanded code."

The provisions of that code apply both to the case of an insolvent company which has gone into formal liquidation and to one in respect of which an administration order has been made. The essential characteristic of the statutory scheme is that the liquidator or administrator is bound to deal with the assets of the company as directed by statute for the benefit of all creditors who come in to prove a valid claim. There is a statutory obligation on the administrators of PPI to treat the general creditors in a particular way. A question may arise as to whether a particular asset was or was not the beneficial property of the company at the date of the commencement of the winding up (or administration). If it is established in a dispute that it is not an asset of the company then it never becomes subject of the statutory insolvency scheme: See Chase Manhattan (Supra). If, on the other hand, the asset is the absolute beneficial property of the company there is no general power in the liquidator, the administrators or the court to amend or modify the statutory scheme so as to transfer that asset or to declare it to be held for the benefit of another person. To do that would be to give a preference to another person who enjoys no preference under the statutory scheme.

In brief, the position is that there is no prospect of the court in this case granting a remedial constructive trust to the applicants in respect of the proceeds of sale of the shares held by PPI in its subsidiaries, since the effect of the statutory scheme applicable on an insolvency is to shut out a remedy which would,if available, have the effect of conferring a priority not accorded by the provisions of the statutory insolvency scheme. In her eloquent address Miss Dohmann submitted that "the law moves." That is true. But it cannot be legitimately moved by judicial decision down a road signed "No Entry" by Parliament. The insolvency road is blocked off to remedial constructive trusts,at least when judge-driven in a vehicle of discretion.

For those reasons alone I would refuse leave to the applicants to commence these proceedings. To a trust lawyer and, even more so to an insolvency lawyer, the prospect of a court imposing such a trust is inconceivable and, in my judgment, even the most enthusiastic student of the law of restitution would be forced to recognise that the scheme imposed by statute for a fair distribution of the assets of an insolvent company precludes the application of the equitable principles manifested in the remedial constructive trust developed by such courts as the Supreme Court of Canada.

Jurisdiction

With only one qualification, I am in complete agreement with the judgment of Rattee J on jurisdiction. The qualification is in the judge's treatment of the question arising under section 30(1) of the 1982 Act as a pure point of law on which it was appropriate for him to reach a final decision rather than a decision that the jurisdiction point was arguable.The question of jurisdiction under Section 30(1) is one on which it is not necessary to reach a final decision ahead of the trial.

I shall deal briefly with the four points on jurisdiction.

(1) The Mocambique Rule

(2) Exceptions to the Mocambique Rule

(3) Section 30 (1) of the 1982 Act

(4) Section 2 of the 1982 Act and Article 2 of the Brussels Convention (as amended)

(1) The Mocambique Rule

I agree with Rattee J that this case falls within the Mocambique Rule, as re-stated and applied to a claim relating to land in the Turkish Republic of Northern Cyprus in Hesperides Hotels Limited -v- Aegean Turkish Holidays Ltd [1979] AC 508. It was held in the Hesperides that the rule cannot be avoided by framing the action as one of a conspiracy within the jurisdiction to commit trespass to foreign land. Rattee J accepted the submissions of PPI that the applicants' title to the properties is in dispute and that there is a real question to be answered as to whether the court should treat the applicants as having a right to possession of the properties as against the alleged trespassing subsidiary companies of PPI. I agree with Rattee J that the decisions in Mocambique and the Hesperides on jurisdiction at common law are applicable to this case.

(2) Exceptions to Mocambique

I also agree with Rattee J that this case does not fall within the exception to the rule in Mocambique relied on by Miss Dohmann. She relied on the exceptions in Rule 116 (3)(a) and (b) of Dicey & Morris on Conflict of Laws(12th Ed), namely that "the action is based on a contract or equity between parties" and that " the question has to be decided for the purposes of the administration of an estate or trust and the property consists of movables or immovables in England as well as immovables outside England." Reliance was also based on the fact that the respondents, as administrators of PPI, are officers of the court and should not be permitted to rely upon a technicality where to do so would be dishonourable or shabby; Ex parte James (1874) L R 9 Ch App 609. In my judgment, these exceptions do not apply: the applicants' claim for relief by way of constructive trust is not founded on a contractual or equitable right. It is founded on the legal ownership of properties in Northern Cyprus. The claim to a constructive trust imposed on the assets in the hands of the administrators is the remedy which the applicants assert is appropriate to the infringement of that right of ownership or possession; but the claim is not itself based on a contractual or equitable right.

(3) Section 30 (1) of the 1982 Act

In my judgment, the contention that these proceedings are not "principally concerned with a question of a title to, or the right to possession of, " property situated outside the United Kingdom is seriously arguable. I would not therefore disagree with the judge's conclusion that the court has jurisdiction to entertain the proposed action under that section. As the judge pointed out (page 642 c) the word "principally " is used in its ordinary sense " for the most part " or " chiefly ". Whether something is principally concerned with a specified topic is a matter of judgment, one of fact and degree. The approach taken by Rattee J in holding that the proceedings raise substantial questions which are not principally concerned with a question of title to or the right to possession of the property in Cyprus is consistent with the approach taken in the application of that expression in Article 19 of the Brussels Convention in recent patent cases: see Fort Dodge Animal Health Ltd -v- Akzo Nohl [1998] FSR 222 and Coin Controls Ltd -v- Sizo International (UK) Ltd [1997] 3 AER 45 at 60F. I am satisfied by the arguments of Miss Dohmann that it is seriously arguable that these proceedings are not principally concerned with the question of title to or right to possession of the property. There would, of course, be arguments on that issue arising from her contentions that the laws enacted by the government of the Turkish Republic of Northern Cyprus have not effectively divested her clients of the ownership or right to possession of their properties. She contends, first, that these laws should not be recognised by the English courts because of their expropriatory and discriminatory nature: Oppenheimer -v-Cattermole [1976] AC 249 at 278 B-C and Williams and Humbert Ltd -v- W & H Trade Marks (Jersey) Ltd [1986] AC 368 at 379 where Nourse J said

" English law will not recognise foreign confiscatory laws which, by reason of their being discriminatory on grounds of race, religion or the like, constitute so grave an infringement of human rights that they ought not to be recognised as laws at all."

Further, Miss Dohmann argues, basing herself on passages in the judgments of the House of Lords in Carl Zeiss Stiftung -v- Rayner & Keeler Ltd [1967] AC 853, that the legislative acts of the Turkish Republic of Northern Cyprus are acts of a government of an unrecognised state and that, having regard to the considerations of public policy already mentioned, those acts purporting to give title to the land to the subsidiaries of PPI are unlawful and of no effect. There would,as pointed out by Rattee J, be other issues in the case which are substantial and cannot be said to be merely incidental to the questions of title and right to possession. Among those questions would be the important one of piercing the corporate veil of companies within the PPI group, so as to hold PPI responsible for the acts of trespass committed by its subsidiary companies.The claim to a constructive trust rests in part on this argument. On that issue we were referred to Adams v Cape Industries PLC [1990] Ch 433 and Re PPI PLC [1996]2 All ER 433 for a statement of the circumstances in which a court treats a corporate personality as a facade and a group of companies as a single economic unit. Issues would also arise on the remedial constructive trust claim(if,contrary to my view,it were maintainable by the applicants) as to whether the applicants have any rights of a proprietary nature in the proceeds of sale by PPI of the shares in the subsidiary companies. Rattee J held that these are " not minor or incidental questions. Given that the relevant proceedings, if allowed to be brought, will concern such questions quite as much as the question of the applicants' right to possession of the properties concerned, in my judgment, those proceedings would be concerned, but not principally concerned, with such right to possession. I consider that the purpose of Section 30(1) of the 1982 Act is to preserve the Mocambique Rule only in cases where the real issue in the proceedings is the question of title to, or the right to possession of, foreign land, and all other questions are merely incidental thereto. Such is not this case." (p. 642 g-h)

I agree.

(4) Article 2 of the Brussels Convention

Miss Dohmann's final point was based on the mandatory language of Article 2 conferring jurisdiction in a case where the proposed defendants are domiciled in the United Kingdom, a contracting state to the Brussels Convention. The judge did not decide this point because he held that Section 30(1) did not operate to exclude jurisdiction. For the same reason I do not think that it is necessary to reach a final decision on this point. I would point out that,in any event, at this level of decision this question has already been decided without reference to the European Court of Justice. In Re: Harrods (Buenos Aires) Ltd [1992] Ch 72 the Court of Appeal decided that the provisions of Article 2 only apply as between contracting states, not between a contracting and a non-contracting state. The object of the Convention is not impaired by refusing jurisdiction as against the court of non-contracting state. Article 2 has to be interpreted to reflect the purpose and scheme of the Convention as a whole. In that context, it only regulates jurisdictional questions as between contracting states. TRNC is not a contracting state.I would, therefore, reject the contention that jurisdiction could be founded on Article 2.

Conclusion

For all these reasons, I would allow this appeal and refuse leave to the applicants to commence the proposed action:it does not raise any serious question to be tried on the claim for an institutional or a remedial constructive trust affecting assets of PPI in the hands of the respondent administrators and it does not contain any other claim which would justify the grant of leave.

Lord Justice Potter: I agree.

Lord Justice Nourse: I also agree that this appeal must be allowed for the reasons given by Lord Justice Mummery. I add some observations of my own on the applicants' claim that it is seriously arguable that, if they were to succeed at trial, the court would impose a remedial constructive trust on the proceeds of the sale of the shares in PPI's subsidiaries.

The formidable and continuing problems of terminology which afflict the consideration of many questions on constructive trusts make it desirable to start with definition. In referring to a remedial constructive trust, I mean an order of the court granting, by way of remedy, a proprietary right to someone who, beforehand, had no proprietary right.

The essential allegations the applicants seek leave to make were summarised by Mr Justice Rattee towards the end of his judgment [1997] 2 BCLC 648H:

"(a) that the applicants remained at all material times entitled to possession of the applicants' properties, (b) that PPI knew that its subsidiaries were exploiting those properties, to which it knew the applicants claimed title and the right to possession, (c) that PPI actively encouraged such exploitation, (d) that it has benefitted from that exploitation and should be bound to disgorge such profit, and (e) that the court should accordingly impose a remedial constructive trust on so much of the proceeds of the sale by PPI to Learned Ltd as represents such profit".

Whatever other rights the applicants may have or may have had against the subsidiaries or PPI itself, it is plain that they have no proprietary right to any part of the proceeds of the sale of the shares in the subsidiaries. They could only get one by the imposition of a remedial constructive trust in their favour. So this case raises fairly and squarely the question whether the remedial constructive trust is part of English law.

Although, in passages that Lord Justice Mummery has read, this court (Slade, Stocker and Bingham LJJ) in Metall und Rohstoff, Lord Mustill in Re Goldcorp Exchange Ltd and Lord Browne-Wilkinson in Westdeutsche Landesbank have accepted the possibility that the remedial constructive trust may become part of English law, such observations, being both obiter and tentative, can only be of limited assistance when the question has to be decided, as it does here. There being no earlier decision, we must turn to principle. In doing so, we must recognise that the remedial constructive trust gives the court a discretion to vary proprietary rights. You cannot grant a proprietary right to A, who has not had one beforehand, without taking some proprietary right away from B. No English court has ever had the power to do that, except with the authority of Parliament; cf. Chapman -v- Chapman [1954] AC 429. But it is said that, although that may be the law today, it may not be the law tomorrow. If the Supreme Court of Canada can develop the law so as to permit the court to vary proprietary rights without legislative authority, why cannot the House of Lords do likewise? At least, it is said, there must be a real prospect that they will, and so the applicants ought to be allowed to bring their action.

I agree with Lord Justice Mummery that where, as here, there would be not simply a variation of proprietary rights but a variation of the manner in which the administrators are directed to deal with PPI's assets by the Insolvency Act 1986 it is not seriously arguable, even at the highest level, that a remedial constructive trust would be imposed. For myself, I would go further and hold that it would not be seriously arguable even if PPI was solvent. It is not that you need an Act of Parliament to prohibit a variation of proprietary rights. You need one to permit it; see the Variation of Trusts Act 1958 and the Matrimonial Causes Act 1973.

Partly because we were only referred to three of the Canadian decisions and partly because it appears that in none of them has the Supreme Court had to grapple with the insolvency of the party on whose assets the remedial constructive trust is to be imposed, this is not an appropriate occasion for a comparative inquiry into the jurisprudence of our two countries. Three points ought nevertheless to be made.

First, in Canada the remedial constructive trust, whose origin was in the dissenting judgment of Laskin J (as he then was) in Murdoch -v- Murdoch (1973) 41 DLR (3d) 367 (see also Rathwell -v- Rathwell (1978) 83 DLR (3d) 289), was developed through Pettkus -v- Becker (1980) 117 DLR (3d) 257 and Sorochan -v- Sorochan (1986) 29 DLR (4th) 1 as a remedy in property disputes between married and unmarried couples. Both Murdoch -v- Murdoch and, as I understand it, Rathwell -v- Rathwell were actually decided on the principles of Gissing -v- Gissing [1971] AC 886 and, subject to a rather surprising difference of opinion in the Supreme Court as to the findings of the trial judge, Pettkus -v- Becker could have been so decided and was so decided by the minority. Sorochan -v- Sorochan, on the other hand, could not have been decided according to those principles. In that case the Supreme Court had to rely for its decision on the remedial constructive trust. Although there must have been later family property cases which could have been decided on Gissing -v- Gissing principles, I believe that the remedial constructive trust has now become the accepted and perhaps the exclusive remedy in such cases.

Secondly, in Canada the application of the remedial constructive trust has not only been extended beyond family property cases (we were referred to LAC Minerals Ltd -v- International Corona Resources Ltd (1989) 61 DLR (4th) 14 and Korkontzilas -v- Soulous (1997) 146 DLR (4th) 214); in the other areas to which it has been extended there are also cases which could have been decided in exactly the same way according to principles well known to English law. For example, I would think that English notions of breach of confidential obligation and fiduciary duty were well up to leading to the same result as in LAC Minerals Ltd -v- International Corona Resources Ltd.

Thirdly, it is evident that some of the early Canadian decisions in family property cases were influenced by Lord Denning MR's constructive trust of a new model; cf. Cooke -v- Head [1972] 1 WLR 518, Hussey -v- Palmer [1972] 1 WLR 1286 and Eves -v- Eves [1975] 1 WLR 1338. However, in the 1980s this court, in particular in Burns -v- Burns [1984] Ch. 311 and Grant -v- Edwards [1986] Ch 638, held that Lord Denning's approach was at variance with the principles stated in Gissing -v- Gissing. That is not to say that English law has remained static in this area. In Grant -v- Edwards the court was able to achieve the same beneficial result as in Eves -v- Eves, although by adopting the approach, not of Lord Denning, but of Brightman J and Browne LJ. Since then the possibility of further developments through applying the principles of proprietary estoppel has been signalled by the House of Lords in Lloyds Bank PLC -v- Rosset [1991] 1 AC 107.

It is appropriate that we on this side of the Atlantic should remind ourselves of some observations of Lord Simonds LC in Chapman -v- Chapman which were well known at the time but may have been forgotten. In holding that the court had no inherent jurisdiction to vary the beneficial interests of infants and unborn persons in settled property, he said at [1954] AC 444:

"It may well be that the result is not logical, and it may be asked why, if the jurisdiction of the court extends to this thing, it did not extend to that also. But, my Lords, that question is as vain in the sphere of jurisdiction as it is in the sphere of substantive law. We are as little justified in saying that a court has a certain jurisdiction, merely because we think it ought to have it, as we should be in declaring that the substantive law is something different from what it has always been declared to be, merely because we think it ought it to be so. It is even possible that we are not wiser than our ancestors. It is for the legislature, which does not rest under that disability, to determine whether there should be a change in the law and what that change should be."

Order: appeal allowed with costs here and below, with a certificate for three counsel; applicants refused leave to commence the proceedings mentioned in paragraph 1 of their notice of application dated 8.2.96; leave to appeal to the House of Lords refused. [Not part of approved judgment]