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URL: http://www.bailii.org/ew/cases/EWCA/Civ/2000/16.html
Cite as: [2000] EWCA Civ 16
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Case No: CHANF 1998/1148/A3
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION (LLOYD J)
Royal Courts of Justice
Strand, London, WC2A 2LL
Thursday, 27th January 2000
LORD JUSTICE MORRITT
LORD JUSTICE MAY
and
MR JUSTICE WALL
THE ROYAL BANK OF SCOTLAND PLC |
Appellant | |
- and - |
||
WALLACE INTERNATIONAL LTD |
Respondent |
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040, Fax No: 0171 831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -
Mr Philip Heslop QC and Mr Christopher Harrison (instructed by Stephenson Harwood for the Appellant)
Mr Anthony Boswood QC, Mr Andrew Sutcliffe and Miss Gibaud (instructed by Lovell White Durrant for the Respondent)
Judgment
As Approved by the Court
Crown Copyright ©
Thursday, 27 January 2000
LORD JUSTICE MORRITT:
1. The claimant, Wallace International Ltd ("Wallace"), a company incorporated
in England, was a member of the Wallace Group. The Wallace Group carried on
business here and abroad in the design and sale of promotional games. It
enjoyed substantial banking facilities from Barclays Bank plc. By a debenture
dated 4th September 1987 Wallace granted to Barclays a fixed and floating
charge over all its assets to secure all monies due by Wallace. On 7th April
1988 Wallace and the other companies in the Wallace Group were acquired by
Prospective Group plc ("Prospective").
2. Prospective was the holding company for a group of about six companies.
The Prospective Group carried on business in promotion and market consultancy.
It enjoyed banking facilities from Midland Bank plc with which the companies in
the group had accounts. Following the acquisition of Wallace by Prospective on
22nd July 1988 Wallace opened an account with Midland. On 12th August 1988
Wallace entered into cross-guarantees with the other companies in the
Prospective Group in favour of Midland and granted to Midland a debenture
containing fixed and floating charges to secure its liability. Wallace's
account with Barclays and the debenture it had granted to Barclays
continued.
3. On 3rd July 1989 the second defendant, Doctus plc ("Doctus"), acquired the
shares in Prospective and thereby the companies in both the Prospective and the
Wallace Groups. Doctus carried on business as management consultants. It
banked with the first defendant, Royal Bank of Scotland plc ("RBS") in whose
favour it had on 10th December 1987 granted a debenture containing fixed and
floating charges to secure all monies due by Doctus to RBS.
4. Shortly after the acquisition of the shares in Prospective the senior
management of Doctus determined to obtain from RBS instead of Midland all the
banking facilities the Prospective group required and, in consequence, to
transfer from Midland to RBS the accounts of the companies in the Prospective,
but not the Wallace, group. In anticipation of the transfer, on 12th January
1990 Doctus, Prospective and six companies in the Prospective Group entered
into secured cross-guarantees of each others liabilities to RBS. The transfer
was carried out on 5th February 1990. It was effected by consolidating the
balances with Midland, procuring the payment of the net debtor balance of
£2,436,760 by RBS to Midland and deconsolidating that net figure by
debiting or crediting the individual amounts to comparable accounts with
RBS.
5. Shortly before the transfer was carried out it was discovered that one of
the most important components in the net amount to be repaid by RBS to Midland
was a credit balance due by Midland to Wallace in the sum of £2,727,760.
It had not been intended that the Wallace accounts should be transferred and
the senior management of Doctus negotiating the arrangements were unable or
unwilling to obtain the approval of the Board of Directors of Wallace to the
transfer of the credit balance on its account with Midland to a comparable
account with RBS. In the result the senior management of Doctus agreed with
RBS that the accounts with RBS comparable to the Wallace accounts with Midland
should be opened in the name of Doctus with designations apt to indicate the
Wallace accounts they represented. Thus on 5th February 1990 an account was
opened in the name Doctus PLC-WI ("The Doctus WI Account") and credited with
the sum of £2,727,760-97.
6. Thereafter Doctus credited Wallace with interest on the sums standing to the
credit of the Doctus WI Account and RBS took such credit balance into account
in calculating the extent of the use of the loan facility available to Doctus.
On 20th June 1991 RBS consolidated the accounts in the name of Doctus thereby
setting off the credit balance on the Doctus WI Account, then £2,718,547,
against the larger debit balances on the other accounts for which Doctus was
liable as principal debtor or guarantor.
6. Both Wallace and Barclays contended that RBS was not entitled so to do.
Doctus was put into administrative receivership by RBS on 29th July 1991;
Wallace was put into such receivership by Barclays on 2nd August 1991. The
writ in the action was issued on 2nd February 1996 whereby Wallace claimed
declarations that Doctus held the monies standing to the credit of the Doctus
WI Account on trust for Wallace and that RBS knew that such monies belonged
beneficially to Wallace and were therefore not available for set off against
the liability of Doctus to RBS.
7. At the conclusion of the six day trial Lloyd J gave judgment in favour of
Wallace on 17th July 1998. After a further hearing dealing with questions
concerning the form of order to which Wallace was entitled, on 24th July 1998,
Lloyd J made the declarations sought by Wallace and ordered RBS to pay Wallace
the amount of the credit balance at the time of consolidation (£2,718,547)
with interest thereon from that time until the date of his order at 1% above
base rate for the time being compounded quarterly (£2,072,421) and
thereafter at the judgment rate until payment.
8. This is the appeal of RBS from that order. RBS contends that the judge was
wrong: (1) to conclude that the relevant events occurring on and before 5th
February 1990 gave rise to a trust whereunder Doctus held the credit balance on
the Doctus WI Account in trust for Wallace; (2) to conclude, if there was any
such trust, that the equitable interest of Wallace had priority over and was
therefore not subject to the rights of set-off enjoyed by RBS against Doctus as
the holder of the relevant account; (3) to conclude, if there was such a trust
whereunder the equitable interest of Wallace had priority over the contractual
rights of RBS against Doctus as the account-holder, that RBS had notice of it;
(4) to reject the contention of RBS that the conduct of Wallace between 6th
February 1990 and 20th June 1991 gave rise to acquiescence or an estoppel
sufficient to preclude Wallace from relying on the absence of any right in RBS
to justify the combination of the Doctus WI account with the other accounts of
Doctus at RBS; (5) to order the payment of interest on any sum for which RBS
might be liable to Wallace either at a rate in excess of base rate or on a
compound basis. The first three issues depend on events occurring on or before
5th February 1990 which I must now describe in greater detail.
9. Wallace was incorporated in England in 1983. It adopted new articles of
association on 27th April 1988 in the form of Table A to Companies Act 1985
with immaterial amendments. Thus the business of Wallace was to be managed by
the directors of Wallace by whom the powers of Wallace were exercisable. From
the time that the Wallace Group was taken over by the Prospective Group in
April 1988 down to 1st March 1990, some three weeks after the opening of the
Doctus WI account, the directors of Wallace were Messrs Beattie, Clark,
Sanders, Shaffer and Wallace. Only Wallace was also a director of Doctus.
10. The directors of Doctus in the period from the takeover of the Prospective
and Wallace Groups in July 1989 down to 1st March 1990 who played any part in
the relevant events were Messrs Blake and Fearnley. Mr Blake was the chairman.
Mr Fearnley was the finance director who took the principal role in discussions
on strategic matters of banking. Relevant employees of Doctus were Mr Hughes,
the group finance controller, and Mr Bolton, the company secretary. Mr Bolton
described the relationship between Doctus and the directors of Wallace as
"difficult". He said that Wallace operated separately from the rest of the
group and that its management was spirited in defending its independence to
such an extent that it did not co-operate in the investigation into Wallace
which Doctus initiated towards the end of 1989.
11. From August 1989 Mr Fearnley took steps to rationalise the banking
arrangements for the Doctus Group. This involved negotiations with RBS for the
grant of the requisite facilities and for the individual companies to open
accounts with RBS. The individuals in RBS with whom he dealt were Messrs
Atkinson, Barnes, England and Kirkland all of whom were employed in various
capacities in the branch of RBS at St Ann Street, Manchester.
12. It is clear from the negotiations which took place between Mr Fearnley on
behalf of Doctus and the representatives of RBS between August 1989 and January
1990 that Wallace was not included in the proposed arrangements though the
security to be obtained might include a guarantee from the Wallace Group parent
or holding company. On 22nd December 1989 the Directors of Doctus were
informed by RBS that their request for increased and restructured facilities
had been granted. On 28th December RBS sent to Mr Fearnley the documentation
required to give effect to his agreement that the companies in the Prospective
Group should give debentures and cross-guarantees to RBS so that they might
form part of the banking arrangements of the Doctus group. No documents were
sent then or thereafter relating to a cross-guarantee, debenture or account
opening forms to be given or completed by Wallace. This was not an oversight
for the internal communications between RBS personnel show that they were well
aware that Wallace's assets were charged to Barclays and that the way to obtain
some security over them, in addition to a parent company guarantee, was by way
of some "pari passu arrangement" with Barclays. The need for such an
arrangement was emphasised by the Senior Assistant Advances Manager in his
letter to Mr Atkinson, the senior manager at the St Ann Street Branch, dated
31st January 1990.
13. What then happened is, together with some of his findings, clearly
described by Lloyd J in his judgment [transcript pp.17-23] as follows
"On Wednesday, 31st January 1990, Mr. Hughes started the final preparations for
the transfer, which was expected to take place on 1st February. He obtained by
phone from Midland Bank the up-to-date balances on all the accounts to be
transferred, the overall net amount due to Midland and the account to which the
net amount was to be paid. Mr. Hughes noted this down and it was confirmed by
Midland in a letter the next day. He then telephoned Mr. Kirkland at RBS, who
by then was his regular contact for everyday dealings.
Mr. Kirkland became a Senior Assistant Manager in the branch on 4th December
1989, with responsibility for accounts which included those of the Doctus
Group. By 31st January he was at an early stage of his involvement with these
accounts. He gave evidence before me. His recall of the events of this time
is very limited. He said he would have read back into the relevant file during
January 1990. He did have regular contact with Mr. Hughes and some contact
also with Mr. Bolton and Mr. Fearnley but had not met any of them by the end of
January. Mr. Hughes says that he told Mr. Kirkland on the phone the details of
the accounts and the balances and says that they discussed the fact that the
position at Midland was to be mirrored at RBS with the same accounts and
matching balances. Mr. Kirkland told Mr. Hughes of a number of points which
were still outstanding on the security documents, which had to be dealt with
before the transfer had taken place. Mr. Kirkland does not recollect this, but
I accept Mr. Hughes' evidence as to this conversation.
Mr. Hughes then dictated a letter to RBS to confirm the instruction given to
him by telephone to transfer £2,436,760.56 to Prospective Group plc's
account at Midland of a given number and to debit or credit ten named accounts
at RBS with specified amounts. These were to include WI with a £2.7
million-odd credit; Wallace Companies Inc with a debit of some £29,000;
and WI Contingent Liabilities with a debit of £14,000. This letter was
for signature by Mr. Fearnley and Mr. Bolton.
Mr. Bolton was not in the office on 31st January, and Mr. Hughes was not going
to be there on 1st February, so Mr. Hughes wrote a note to Mr. Bolton to brief
him on the position. He listed the points on the security documentation that
were still outstanding and told Mr. Bolton what to expect. The security
document points were confirmed to RBS in a letter on 1st February as well.
On 1st February, Mr. Bolton received the letter from Midland confirming the
balances, checked them against the letter Mr. Hughes had dictated and which
their shared secretary had typed, found that letter to be correct, and he and
Mr. Fearnley signed and sent off the letter to RBS. Mr. Bolton also dealt, as
far as he could, with the outstanding security points. These, in fact, delayed
completion until 5th February.
On 2nd February, Mr. Hughes returned to the office and found that the transfer
had not taken place because of the problems on the documentation.
At this point, as I find, there was a discussion within Doctus between Mr.
Fearnley and Mr. Hughes about the proposed Wallace accounts. Accounts had
already been opened by RBS for all, or virtually all, of the relevant companies
whose accounts were to be transferred, supported by appropriate board
resolutions and bank mandates, so that in those cases it was simply a question
of entering the debit or credit balance on the account, but WI had not signed a
mandate, so that RBS could not open an account for that company, nor indeed for
Wallace Companies Inc.
It is not clear to whom this point first occurred. Mr. Kirkland says he
mentioned it probably to Mr. Hughes on receiving the 31st January letter. That
is possible. However, I cannot accept his evidence that he was told the
preferred solution in the same telephone call. It may be that he rang on 1st
February and spoke perhaps to Mr. Fearnley, or on 2nd February, in which case
he would have spoken to Mr. Hughes, and raised the point. It seems to me that
that is quite likely. Alternatively, it may have occurred to someone in Doctus
on 1st or 2nd February. At all events, Mr. Hughes and Mr. Fearnley had a
discussion about the point.
Mr. Fearnley said that he did not wish to go to WI's board to get a mandate,
since this would alert the directors of WI to the existence of this credit
balance and they might be expected to be difficult about letting it be
transferred to RBS. Mr. Blake, the Chairman of Doctus, was also consulted
about this and agreed with that position. Accordingly, the decision that was
reached was to ask RBS instead to open three matching accounts, but not in the
name of Doctus, relying on the Doctus mandate, and with a special designation
in the title of each: "Doctus plc WI account", "Doctus plc W account", and
Doctus plc WI account Cont Obs".
I find that these discussion took place between Mr. Hughes and Mr. Fearnley on
Friday, 2nd February 1990, that they obtained the approval of Mr. Blake to the
decision, and that they communicated the decision to Mr. Bolton on that day.
I find that on Monday, 5th February Mr. Hughes telephoned Mr. Kirkland to
explain the new proposal. Mr. Kirkland annotated his copy of the 31st January
letter and asked for the new instructions to be confirmed. I will come back to
the detail of what was said in that conversation.
On the same day, Mr. Hughes dictated a new letter to confirm the instruction as
asked, which he and Mr. Bolton signed and sent. I must read the whole of this
letter:
"Dear Sirs,
Further to our letter of 31st January 1990 requesting that you take over a
number of accounts from the Midland Bank plc, we do not wish to open accounts
with new mandates for the following accounts:
1. Wallace International
2. Wallace Inc.
3. Wallace International Contingent Obligations.
Would you please open Doctus plc accounts, using the existing Doctus plc
mandate, for the above-mentioned accounts being transferred from Midland, but
using the following titles respectively:
1. Doctus plc WI.
2. Doctus plc W.
3. Doctus PLC-WI Cont Obs.
Yours faithfully."
Mr. Kirkland accepted and acted on this instruction and the transaction was
completed on that day. What happened was that RBS made a CHAPS transfer of
£2,436,760.56 to Midland to the credit of the Prospective Group plc
account at that bank, which was then overdrawn by £5,868,642.73. Midland
then combined all the relevant accounts, transferring debits from two accounts
and credits from three others, including the WI £2.7 million. Together
with charges and an adjustment of interest, this left the Prospective Group
Midland account in credit to the tune of some £51,000. In turn, RBS
debited Prospective Group's new business current account with itself the
matching sum of £5.8 million odd and credited the Doctus plc WI account
with £2,727,760.97, that being account number 12242195, and of course, RS
opened credits or debits on all the other accounts in accordance with the
instructions given.
It is clear from Mr. Hughes' evidence as to the discussions at this time, and
from the later dealings between Doctus and WI, that this account was regarded
as holding money belonging to WI. Doctus was to control it only as a matter of
expediency, in the interests of its better management of that particular part
of the group and its financial affairs. I accept WI's contention that this
balance was so regarded and in terms of legal analysis that the debt from RBS
in respect of the credit balance on that account was from the outset held by
RBS on behalf of, and therefore in trust for, WI."
14. The judge then considered and rejected various arguments of counsel for RBS
and concluded on this point that
"...Mr. Hughes was clear in his own mind that the balance to be credited to
this account to match the WI Midland account would be held entirely on behalf
of WI. I do not consider that Mr. Hughes regarded it as a fund which could be
used at will by Doctus for its own or the group's benefit. It was WI's money
and was to be accounted for on that basis. Mr. Hughes did not address the
legal analysis of that, but it is clear it was a trust assumed by Doctus plc
from the moment of the account for the benefit of WI."
RBS accepts the judge's findings as to what happened but disputes the validity
of his conclusion that a trust of the credit balance in the Doctus WI account
was thereby constituted.
15. The judge's finding of a trust depended on the evidence of Mr Hughes regarding the discussions between him, Mr Fearnley and, later, Mr Blake. RBS challenges this conclusion. First, it was suggested that the judge was wrong to have relied on the evidence of Hughes, particularly in the absence of any corroborative evidence from Mr Fearnley. Second, it was submitted that the evidence of Mr Hughes did not support the inference of a trust drawn by the judge.
16. I reject the submission that the judge was wrong to have relied on Mr
Hughes' evidence. The judge described Mr Hughes "as honest, reliable and
accurate" whose evidence he found to be "entirely plausible and coherent". It
would need a very clear case indeed to warrant this court disregarding this
finding. The grounds on which it was suggested that we should do so were also
considered by the judge in the sections of his judgment dealing with whether
RBS had notice of the trust and with the subsequent events. In each case he
rejected them. I would do the same and for the same reasons.
17. The only ground which it is convenient to deal with at this stage is the
failure of Wallace to call Mr Fearnley as a witness. It is not disputed that
Mr Fearnley was available to give evidence and that his evidence as to the
conversations with Mr Hughes to which the judge referred would have been
material. It is suggested that in those circumstances the court should infer
that Mr Fearnley's evidence would not have supported Wallace's case. This was
one of the grounds advanced before the judge why he should reject the evidence
of Mr Hughes. Lloyd J referred to the point but, notwithstanding, reached the
conclusion as to the reliability of the evidence of Mr Hughes to which I have
already referred. RBS complains that the judge gave no reason for rejecting
the point. I do not see why he should. The issue was one of credibility.
The judge reached a clear conclusion and, in doing so, rejected the point.
18. In his cross-examination Mr Hughes referred to Mr Fearnley's responsibility
with strategic questions of the group finance as opposed to day to day contact
and his, Mr Hughes' own, role to provide information to the banks and to make
sure that the subsidiaries complied with their business plans. Thus, Mr Hughes
considered that in group financial matters he and Mr Fearnley spoke on behalf
of all the companies in the group. He described the need to "mirror exactly"
the group company accounts with Midland with accounts at RBS. He agreed that
there was some urgency to complete the transfer of the accounts. With regard
to the rights and obligations of Wallace and Doctus in relation to the
£2.7 million credit balance the following exchange occurred:
Q. But at the time you came up with this solution to a problem that had for
some reason occurred to you either on the Friday or the Monday, you and Mr.
Fearnley were concentrating, as I understand it, on the question of controlling
this fund?
A. Yes, we were.
Q. Or more accurately keeping it out of the control of the Wallace
directors?
A. Yes, that is correct.
Q. You never addressed your mind to a question of whether it was going to be
held on trust by Doctus for Wallace, did you?
A. No.
Q. The word "trust" was not used between you and Mr. Fearnley, was it?
A. I do not recall it being used at all.
Q. The terms on which Wallace was to have access or not to have access were not
specifically defined between yourself, were they?
A. Only that the Wallace directors would not be signatories to the bank account
in which those funds were held, so that to make absolutely sure that they could
not use those funds without permission of Doctus PLC.
Q. I follow that, but the circumstances in which you would or would not agree
to let Wallace have the funds were not precisely determined between yourself
and Mr. Fearnley, were they?
A. Oh, not at all.
Q. How long this arrangement was going to last was not precisely determined
between yourself and Mr. Fearnley, was it?
A. No.
Q. There was no written record of what you say were the new arrangements and
why they would come about made by you or Mr. Fearnley, so far as you are aware,
was there?
A. Not so far as I am aware, no.
Q. You have not seen them?
A. I have never seen one.
Q. You do not recall making a record yourself?
A. I certainly did not make a record myself.
Q. You are certain you did not?
A. I am certain that I did not.
Q. Why not, it was an important matter?
A. It did not seem to be necessary at the time. The important thing was to get
the --- (a) I had to check with the bank that they were happy with this; (b)
to get the documentation drawn up and the letter of instruction done, and then
to get on with the transfer. It did not seem important from me to make a file
note about it.
Q. I suppose you could look at this another way. There was really an enforced
inter-company loan here between Doctus taking over the control of the fund,
really on the footing that it become obliged to Wallace for 2.7 million; you
could look at it that way?
A. We did not treat it as an inter-company loan.
Q. I follow that, but you could look at it that way (inaudible).
A. You could look at it in any number of ways.
Q. Because you did not address your mind ---
A. The way we looked at it was that it was Wallace Funds, though we instructed
Wallace that they had a bank account at Royal Bank of Scotland with those funds
in them and we instructed them to reflect them in their accounts as such.
Q. But beyond that, you did not give any thought to an appropriate legal
analysis of what you were trying to do.
A. No.
Later Mr Hughes repeated that if Wallace wished to use the money in the Doctus
WI Account then it would be necessary for the Wallace directors to satisfy the
Doctus board as to the validity of such use.
19. It is submitted by RBS that this evidence is more consistent with an
intercompany loan from Wallace to Doctus than with the trust as found by Lloyd
J. RBS pointed out that the court is reluctant to introduce trusts into
commercial transactions. Reliance was placed on Henry v Hammond [1913] 2 KB 515, 521, Re: Wait [1927] 1 Ch. 606, 639-640, and Re:
Goldcorp [1995] 1 AC 74, 90-91.
20. I would reject these submissions. As the evidence of Mr Hughes made
clear, Doctus regarded the credit balance in the Doctus WI Account as the money
of Wallace and as the mirror of its rights to the money formerly in its account
with Midland. Doctus did not regard the right of Wallace to be that of the
creditor on an intercompany loan account for if that had been the intention it
would have been unnecessary to open a new Doctus account at all or to give it
the designation of Doctus WI Account. The opening and crediting of such an
account was recognition of the need to keep that money separate from the funds
beneficially owned by Doctus. Cf Henry v Hammond [ibid] The judge
specifically did "not accept that that the evidence justifies the submission
that [Wallace] gave Doctus authority to deal with its property, such as the
bank account, as its agent". Thus Doctus was obliged to keep the funds
separate in the Doctus WI Account for it had no right or power to disburse
them. The fact that Messrs Hughes and Fearnley did not use the word "trust"
or carry out an analysis of the rights of Wallace is immaterial. Likewise the
fact that Doctus might seek to dissuade or prevent the directors of Wallace
exercising the rights of an absolute beneficial owner cannot prevent those
rights arising. Accordingly I would reject the first ground of appeal
summarised in paragraph 8 above.
21. The second ground may be illustrated by a simple example. If A has two
accounts with the Bank one of which is in credit and the other is overdrawn, in
the absence of some stipulation to the contrary, the bank is entitled to
combine them so that the debit balance on the latter is set off against the
credit balance in the former. If before combination A settles the credit
balance on trust for another he does not thereby exclude the right of the bank
for it arose before and so has priority over the right of the beneficiary. By
contrast, if A, being overdrawn at his bank, becomes the trustee of a credit
balance at the same bank the bank is not entitled to combine the two accounts
for the interest of the beneficiary in the latter preceded and so took priority
over any right of combination the bank might otherwise have. Doctus claims
that the Doctus WI account comes within the former rather than the latter
example.
22. This contention was rejected by the judge quite shortly on the ground that
he could not see how the source of the chose in action, or the precise manner
by which it arose, could affect the legal issue as to the rights and
obligations arising from RBS's knowledge as to its status as a trust account.
In this court the submission was developed further by reference to the fact
that it was the money of RBS which went into the Doctus WI account. But this
does not overcome the objection that if RBS had the requisite notice, which is
the third ground of appeal, then it had it before the Doctus WI account was
opened and credited with a sum equal to that standing to the credit of
Wallace's account at Midland. There never could have been a time at which
Doctus was beneficially entitled to the money and therefore able to confer the
rights on which RBS relies when, on that assumption, RBS did not have the
requisite notice. Furthermore RBS, if it had the requisite knowledge, also
knew that it had not stipulated for and would not get any security over the
assets of Wallace. This is plain from the recognition of the officers of RBS
that they should enter into a pari passu arrangement with Barclays apparent
from two letters dated 2nd February 1990 from Mr Fearnley to Mr McMahon and Mr
Atkinson, both senior officers of RBS. Accordingly I would dismiss the second
ground of appeal also.
23. The third ground of appeal, as summarised in paragraph 8 above, is whether
RBS had notice of the trust as found by the judge. This depended on the nature
and effect of the conversations Mr Hughes had had with Mr Kirkland between 31st
January and 5th February 1990 referred to in the section from the judge's
judgment I have quoted in paragraph 13 above.
24. The judge started with a consideration of their respective witness
statements. He quoted paragraph 20 of the witness statement of Mr Hughes where
he said
"On 5th February 1990 I telephoned Mr. Kirkland to tell him of my letter and
the revised instruction. I told him that Doctus's officers were to be the
signatories of Wallace's accounts, as Prospective's officers had been at
Midland, so that Doctus retained control of the funds. I also told him that
Doctus needed to retain control in order to be able to deal with Wallace's
cashflow. I believe that the revised description of the accounts set out in
the letter of 5 February 1990 still made it clear that the monies were still
owned by Wallace. I do not believe that Mr. Kirkland and I discussed the
question of whether Doctus had a mandate from Wallace's board. He appeared to
accept my explanation that Doctus needed to retain control of these monies,
even though they belonged to Wallace."
He contrasted that statement with paragraph 11 of the witness statement of Mr
Kirkland where he said
"I cannot remember whether I was told what the initials WI and W stood for. It
now seems pretty obvious that I must have thought the initials WI stood for
Wallace International. I must have been satisfied that this account was
covered by the security arrangements which RBS was putting in place but I
cannot now recall how I satisfied myself of this. It may have been by asking
Malcolm Hughes or whoever it was I spoke to at Doctus. I cannot recall what
explanation was given to me as to what the accounts represented but I must have
been satisfied that the credit balance of £2.7 million on the Doctus plc
WI account could be set off against the debit balances on the other accounts
within the Doctus group at RBS to produce a net debit balance conforming with
the group borrowing arrangements."
25. Both witnesses gave oral evidence and were cross-examined. The judge
observed that Mr Hughes' recollection was clearer than that of Mr Kirkland who
was confused. The judge noted that in his oral evidence Mr Hughes
"..said that he definitely gave the information to Mr. Kirkland about the
Wallace bank accounts and is sure that Mr. Kirkland did not raise any question
with him on 31st January. He confirmed his account of the 5th February
conversation and in particular confirmed that he had told Mr. Kirkland that the
money would be Wallace funds and explained why it was to be outside WI's
control. He said that he could not remember the words used, but that:
"It would have been clear from the conversation that we were talking about
Wallace funds"
He did not suggest he used the word "trust" either to Mr. Kirkland or at all,
nor that he said to Mr. Kirkland in terms, "These funds will be owned by or
belong to Wallace International". He did say this would have been clear as the
effect of what he was saying."
26. The judge then quoted extensively from the transcript of the
cross-examination of Mr Hughes and turned to the evidence of Mr Kirkland. The
judge referred to other passages in his witness statement where Mr Kirkland
said that
"He did not recall a telephone call to himself from Mr. Hughes on 31st January
at all, and believed it may have been to someone else at RBS. He also said he
could not recall seeing the 31st January letter, although undoubtedly he
accepted that he did see it. He said he recalled making the telephone call,
probably to Mr. Hughes, on receipt of the 31st January letter, which he
received on 1st February, raising the question about the Wallace accounts and
being told about the change in instruction later reflected in the 5th February
letter. He did not think there was a call on 5th February and he did not
accept he was told anything about a difficulty in controlling Wallace or a need
to segregate funds for that purpose. He said he would have been worried about
any suggestion of a lack of control as regards the risk element in the
facilities. Since on any basis RBS was not lending or extending facilities to
WI, it is not clear to me whether that would have been a very present worry for
him."
27. The judge then considered and quoted at length from the cross-examination
of Mr Kirkland. His conclusion was
"I find that what happened was as Mr. Hughes gave evidence, subject to the
possibility that Mr. Kirkland telephoned Doctus on 1st February, in Mr. Hughes'
absence to point out that there were no mandates for WI or Wallace Inc. I
accept Mr. Hughes' evidence as to what he said to Mr. Kirkland on 5th February,
as well as on 31st January.
I do not accept Mr. Kirkland's evidence in paragraphs 12 and 13 of his witness
statement, which are inconsistent with his oral evidence. I find that what was
said to Mr. Kirkland, as well as the designation of the account, made it plain
to him that WI was the true owner of the credit balance, Doctus being a trustee
or nominee.
I consider that Mr. Kirkland's explanation in his witness statement as to what
he would have done if that had been made clear to him was a rationalisation of
not a recollection."
28. Later the judge added
"I find that Mr. Kirkland did realise that the money would be treated as
funds of WI. No doubt, as he says in his paragraph 11, he was of the view that
this was consistent with the security arrangements that had been put in place.
It may be that he thought that there was a WI guarantee or it may be that he
simply did not think through the implication of WI's ownership of the funds.
Either of these would account for his failure to raise a question as to the
need to get a consent from WI.
"On that basis I accept the plaintiff's contention that from the moment that the instructions were accepted by RBS to open the Doctus account, RBS knew that the credit balance was to be and, when opened, was, in fact, held by Doctus on behalf of and in trust for WI."
29. RBS contends that the judge was wrong to conclude that RBS through Mr
Kirkland knew that the Doctus WI account credit balance was held by Doctus as
trustee for Wallace. I have already dealt with and rejected the reasons
advanced by RBS in support of its contentions that there never was a trust or
if there was it did not take priority over the rights of RBS as the banker.
Consequently the case for RBS on knowledge rests on its submission that the
finding of the judge regarding the knowledge of Mr Kirkland was against the
weight of the evidence. The points advanced in support of that submission
fall into two categories, namely the events contemporaneous with the opening of
the Doctus WI Account and subsequent events said to be inconsistent with the
evidence of Mr Hughes or the judge's findings.
30. RBS contends that the judge failed adequately to recognise that Mr
Kirkland's background knowledge was not as ample as that of Mr Hughes, being
limited to what he could deduce from the bank's file, or the probable reaction
of Mr Kirkland if he had been told what Mr Hughes said that he told him. The
first point is little more than reinforcement for the second but insofar as it
may be a separate point I do not accept it. It is clear from the judge's
description of Mr Kirkland [transcript p.18] that his background knowledge as
to the events before the end of January 1990 was largely confined to what could
be gleaned from the Bank's file. But the allegation of knowledge arose from
what Wallace contended that Mr Kirkwood had been told during the conversation
with Mr Hughes on 5th February 1990. On this point RBS contends that the
judge was wrong to have accepted Mr Hughes version of events. RBS relies on
the fact that the letter dated 5th February inviting RBS to open the Doctus WI
Account was silent as to the reason. If, RBS submits, Mr Hughes had indeed
told Mr Kirkland about the desire of Doctus to control the funds of Wallace and
if Mr Kirkland had concluded from the conversation with Mr Hughes that the
money in the account, once opened, would belong to Wallace and not Doctus then
his reaction must have been different from what it was. He knew that RBS had
special procedures for opening trust accounts and he knew that RBS was not
obtaining any security from Wallace, yet he merely complied with the request.
It is submitted that either Mr Hughes did not tell Mr Kirkland what the judge
found that he did or he told him something more so as to allay his concern.
31. What was said during the telephone conversation and what Mr Kirkland
understood from it were matters of primary fact for resolution by the judge
having seen and heard the evidence of the only two parties to the conversation.
His conclusion, dependent as it is on his view of the reliability of their
evidence, cannot, in my view be challenged unless RBS can demonstrate to the
high standard required that the judge's acceptance of the evidence of Mr Hughes
and his rejection of that of Mr Kirkland as the product of reconstruction is
unsound. The judge's conclusion could not have been clearer. Of Mr Kirkland's
assertion that he must have been satisfied that the Doctus WI account was
covered by the security arrangements which RBS was putting in place he said
"That, I have to say is a paradigm example of reconstruction, not recollection.
I am satisfied that Mr Hughes did explain the position to Mr Kirkland fully so
that Mr Kirkland understood that the funds, though in a Doctus account, would
still be regarded as belonging to WI, as they had in Midland's account."
As on the issue of whether there was a trust RBS relies on subsequent events,
that is the second category to which I referred in paragraph 29 above, as
demonstrating the unreliability of the evidence of Mr Hughes.
32. RBS relied on subsequent events involving Mr Hughes. The first was a
letter dated 30th January 1991 from Mr Hughes to Mr Kirkland in which he failed
to show that Wallace banked at RBS as well as Barclays. This point was put to
Mr Hughes in cross-examination. He accepted that in that respect his letter
was wrong and misleading. But this point was put in argument to the judge too.
He dealt with it as demonstrating the frankness of the evidence of Mr Hughes
and as confirming, rather than undermining, his credibility. I see no reason
to disagree with the judge's conclusion, particularly in the light of letters
from Mr Hughes to RBS dated 25th February 1991 and to Touche Ross dated 21st
May 1991 showing the balance on the Doctus WI Account as being the funds of
Wallace.
33. RBS also relied on the undisputed facts that Mr Hughes knew that thereafter Doctus credited Wallace with interest on the credit balance and RBS took that balance into account in computing the use of the Doctus facility. These factors were considered by the judge. They did not cause him to take a different view as to the reliability of the evidence of Mr Hughes and I see no reason why they should. The crediting of interest is consistent with the balance belonging to Wallace. Mr Hughes was not concerned with what security was to be or had been given to RBS.
34. The other subsequent events relied on did not involve Mr Hughes. They
are, therefore, more relevant to the issues of acquiescence and estoppel and I
will deal with them at that stage. At this point it is sufficient to hold that
I can see no basis on which this court could interfere with the judge's
findings as to the respective reliability of the evidence of Mr Hughes and Mr
Kirkland or the validity of the conclusions he reached in consequence.
35. It was also submitted that the judge's conclusion that Mr Kirkland, and
therefore RBS, had actual knowledge of the trust was inconsistent with the
concession made by counsel for Wallace in opening his case before the judge
that he did not allege any want of probity on the part of RBS or its officers.
But this is to misunderstand the case for Wallace that RBS was not entitled to
combine the Doctus WI account with other accounts of Doctus at the time it
purported to do so. Accordingly for all these reasons I would reject the third
ground set out in paragraph 8 above also.
36. I did not understand it to be disputed that if the first three grounds of
appeal were rejected then the judge's conclusion that, subject to the issues of
acquiescence or estoppel, RBS was not entitled to any security interest whether
by way of combination of accounts or under the debenture Doctus had given to
RBS must stand. In my view that is right. The authorities on which Wallace
relies, namely Pannell v Hurley (1845) 2 Coll. 241, 245; Bodenham v
Hoskyns (1852) 2 De G, M&G 903, 905 and Re: Gross, ex parte
Kingston (1871) LR 6 Ch.App. 632 clearly establish that a bank is not
entitled to set off against a debit balance of its customer a balance standing
to the credit of its customer on another account which it knows to be in the
beneficial ownership of a third party. Given the findings of the judge, with
which I agree, RBS is liable to Wallace for the amount of the credit balance in
the Doctus WI Account as at 20th June 1991 unless its claim that Wallace is
precluded by acquiescence or estoppel is made out.
37. I turn then to the questions of acquiescence and estoppel. The judge set
out at some length what occurred after the Doctus WI Account had been opened
and credited with a sum equal to that formerly standing to the credit of the
account of Wallace with Midland. As I have mentioned, Doctus credited Wallace
with interest through an intercompany account and RBS, to the knowledge of
Doctus, took account of the credit balance from time to time in its calculation
of the usage of the Doctus facility which had been finally agreed in March
1990. In May 1990 Mr Fearnley confirmed to RBS that he had opened discussions
with Barclays on the question of RBS having some pari passu arrangement
concerning security over the assets of Wallace. In December 1990, Mr Fearnley
told RBS that Doctus was intending to sell Wallace so as to alleviate its own
financial difficulties. At about this time a sales memorandum was produced by
Touche Ross on behalf of Doctus. It correctly included in the cash at bank of
Wallace the credit balance in the Doctus WI account but wrongly stated that all
such cash was liable to be set off against the overdrafts of other Doctus
Companies. Lloyd J attached no significance to this treatment regarding it
only as an indication that the point had not at that stage been spotted.
38. On 30th January 1991 Mr Hughes wrote the letter to RBS to which I have
referred in paragraph 32 above. That letter, but not the two later letters, to
which I have already referred did not indicate that Wallace banked at RBS. On
13th June 1991 Mr Bolton had a telephone conversation with an officer of RBS in
which he did not identify Wallace as being a company with an account at RBS.
39. Also on 13th June 1991 3i offered to buy Wallace from Doctus. The terms of
the offer show that the offeror considered that the credit balance in the
Doctus WI account belonged to Wallace. This view as to the ownership of the
credit balance was subsequently noticed by RBS and led to RBS taking steps on
20th June 1991 to combine the Doctus WI accounts with the other Doctus
accounts. The immediate reaction of Mr Blake and Mr Greenough, another
director of Doctus, was that the combination, and consequent removal from
Wallace, of the credit balance would not prejudice the sale. But there is no
doubt that on 20th July 1991 at a meeting attended by Mr Greenough and Mr
Hughes on behalf of Doctus and officers of RBS it was made plain that it was
considered that the credit balance was held by Doctus in trust for Wallace.
RBS declined to refund the amount of the credit balance and in due course the
receivers were appointed and this action commenced as I have already
described.
40. RBS sought to rely on the letter from Mr Hughes dated 30th January 1991,
the statement made by Mr Bolton in the course of the conversation on 13th June
1991 and the indications given in the Sales Memorandum to which I have referred
as constituting express representations made on behalf of Wallace giving rise
to acquiescence or an estoppel precluding Wallace relying on RBS's lack of
security over the credit balance. Lloyd J refused to deal with those
submissions on the basis that they had never been pleaded. In my view he was
right so to do for Wallace might have called further evidence if they had been.
In the written argument of counsel for RBS reliance is again placed on those
three matters as "strengthening" the case for RBS. But that is no more
legitimate than the previous reliance on them as express representations for
they were never pleaded as relevant to the form of estoppel ultimately relied
on.
41. Thus in the absence of those allegedly express representations the case for
RBS on estoppel and acquiescence was and is to the effect that Wallace is not
entitled to assert rights inconsistent with the alleged right of RBS to set off
the credit balance in the Doctus WI Account against debit balances in the other
group accounts because Wallace knew that RBS assumed that it, RBS, had the
right of set off but did not correct its false assumption. This is a case of
estoppel by silence and depends, as the judge recognised, on RBS establishing
that Wallace had "a duty to speak".
42. Lloyd J pointed out that a customer may be under such a duty in the
circumstances indicated in London Joint Stock Bank Ltd v Macmillan
[1918] AC 777 and Greenwood v Martins Bank Ltd [1933] AC 51. But, as he
also pointed out, those cases do not help RBS. Wallace was not a customer of
RBS and the circumstances did not come within the principle of those cases as
circumscribed by the Privy Council in Tai Hing Cotton Mill Ltd v Liu Chong
Hing Bank Ltd [1986] AC 80. RBS does not challenge that conclusion.
43. Before this court the case for RBS was limited to a duty to speak arising
from the well known principle exemplified in Ramsden v Dyson (1866) LR 1HL 129, 140 that
"If a stranger begins to build on my land supposing it to be his own, and I,
perceiving his mistake, abstain from setting him right, and leave him to
persevere in his error, a Court of Equity will not allow me afterwards to
assert my title to the land on which he had expended money on the supposition
that the land was his own. It considers that when I saw the mistake into which
he had fallen, it was my duty to be active and to state my adverse title; and
that it would be dishonest in me to remain wilfully passive on such an
occasion, in order afterwards to profit by the mistake which I might have
prevented."
44. If this principle is to be applied RBS must demonstrate that Wallace, not
Doctus, knew that RBS was dealing with Wallace's property under a mistake as to
its rights and inconsistently with the rights of Wallace. The inconsistent
dealing relied on is the grouping of the Doctus WI account with all other
Doctus group account for the purpose of (a) calculating the interest payable by
or to RBS, and (b) ascertaining whether the net borrowing of the Doctus group
was within the facility agreed between Doctus and RBS in March 1990.
45. Lloyd J rejected the claims of RBS on a number of grounds. First he did not
accept the contention that Mr Hughes knew that RBS was assuming that it had the
right to set-off the Doctus WI account against the other Doctus accounts. In
respect of that contention the judge said
"In any event, it is necessary to examine carefully what Mr. Hughes did know.
Mr. Hughes knew that RBS was counting the 2.7 million in when calculating and
applying the overall facility limit. It was not, however, pleaded that he or
anyone else knew that RBS was assuming that it had the right to set off the
account against others. He, in fact, denied in cross-examination that he knew
that.
Since this was not pleaded, and as an allegation as to Doctus' knowledge it
clearly should have been pleaded, I am not prepared to make any finding adverse
to [Wallace] on this point. All I accept that Doctus knew, through Mr. Hughes,
was that RBS was, in fact, bringing the account into the calculation. To a
lawyer it is an obvious inference that they were doing so in the belief that it
was within their security. That inference may not have been obvious to Mr.
Hughes, as a management accountant. At all events it was neither pleaded nor
put to him."
It was submitted for RBS that the conclusion drawn by the judge that Mr Hughes
may not have drawn the relevant inference was perverse. I disagree. Given
the circumstances described by the judge it was, in my view, a factual finding
he was entitled to make.
46. The judge also found that Mr Shaffer, who was at all material times a
director of Wallace, only knew that Wallace was receiving interest in respect
of the credit balance through inter-company accounts with Doctus. This he
correctly observed was not enough. Lloyd J then considered the submission of
RBS that the knowledge of Mr Hughes and Mr Fearnley, who had been appointed a
director of Wallace on 19th March 1990, should be attributed to Wallace on the
basis that Wallace had delegated to the staff of Doctus the overall control of
its finances. Lloyd J considered that this submission involved the proposition
that the knowledge of a trustee who assumes that he is entitled to use his
beneficiary's money to repay his own debt is to be attributed to the
beneficiary. The consequence suggested by RBS was that if the beneficiary did
not thereafter protest to any third party involved he would be estopped as
against that third party from thereafter complaining. The judge rejected this
submission that
"the knowledge of the trustee and its officers as regards a breach of trust
should be attributed to the beneficiary who knows nothing about it and has not
consented to the dealings with the account for the trustee's own benefit
as untenable in view of the conflict of duty and interest to which the trustee
was exposed.
47. RBS criticises this conclusion on the grounds that the judge had not found
that any breach of trust had been committed by RBS grouping the accounts for
the purposes of interest and overdraft calculation. In my view the criticism
does not meet the judge's point. The question was whether the knowledge of Mr
Hughes and Mr Fearnley should be attributed to Wallace. If they had
appreciated that RBS considered that it had the right to combine the Doctus WI
account with the other overdrawn accounts for which Doctus was liable, which as
the judge had observed was not pleaded, then as representative of the trustee,
Doctus, it was their duty to disabuse RBS. If they failed to do so then
knowledge of their failure cannot on ordinary principles be attributed to the
beneficiary. Without knowledge of the breach of duty by the trustee the
beneficiary cannot be estopped.
48. Finally it was contended before the judge that it was within the delegated
authority of Mr Hughes and Mr Fearnley from Wallace to agree that RBS should
have rights of set-off over the credit balance. Lloyd J rejected this
submission because
"I do not accept that the evidence justifies the submission that Wallace gave
Doctus authority to deal with its property, such as the bank account, as its
agent. Certainly it was for Doctus, controlling the group, to take strategic
decisions as to banking and to negotiate the facilities for the group and the
terms of such facilities, but the implementation of any decision taken by
Doctus was for each subsidiary to process in the normal and correct manner."
RBS challenged this conclusion as being against the weight of the evidence.
For my part I can see no ground on which this court could interfere with the
judge's finding of fact.
49. For all these reasons I agree with the judge that Wallace did not acquiesce
and is not now estopped from contending that RBS had no right to combine the
Doctus WI Account with the other Doctus Accounts. In the end it is necessary
to stand back from the detail and remember that RBS knew that it did not have
any security interest over the assets of Wallace, hence its concern to get some
pari passu arrangement with Barclays, and that Doctus was deliberately telling
Wallace as little as it could about what was happening or had happened to the
balance formerly standing to the credit of its account with Midland. In those
circumstances it is hard to see any merit in the suggestion that Wallace should
be denied its rights to the credit balance with the consequence that the loss
would fall on Wallace rather than either RBS or Doctus. For all these reasons
I would reject the fourth ground of appeal also.
50. The fifth and final ground is whether the judge was right to award Wallace
compound interest with quarterly rests at 1% over base rate. This was dealt
with by the judge having heard further argument after his judgment on
liability. He cited a passage in the judgment of Lord Denning MR in
Wallersteiner v Moir (no.2) [1975] QB 373, 388 that equity awards
compound interest
"whenever money is misused by an executor, trustee or any one else in a
fiduciary capacity who has misapplied the money and made use of it himself for
his own benefit."
He also referred to the dictum of Lord Hatherley LC in Burdick v Garrick
5 Ch App. 233, 242 quoted with approval by Lord Denning MR in Wallersteiner
v Moir (no.2) [ibid] that the court presumes against the party against whom
relief is sought that he has made that profit from the misapplied money which
persons ordinarily do make in trade. On that basis he decided that RBS should
pay compound interest.
51. The judge then considered what profit a bank can be assumed to have made
from the use of the money in its business. He had regard to the terms of the
facility and rejected the suggestion that RBS must be presumed to have put the
money on the money market and earned interest at base rate only. In the light
of the limited evidence before him the judge considered that compound interest
at 1% over base rate with quarterly rests to be appropriate.
52. RBS submits that this award is too generous to Wallace. It is not
disputed that the proper basis for the award of interest is to deprive the bank
of the profit it must be presumed to have made by awarding it to the equitable
owner of the money. But, it is submitted, in Wallersteiner v Moir
(no.2) compound interest was awarded with only annual rests. In this case,
unlike that, there has been, as conceded, no want of probity. With regard to
the rate the argument before the judge that the bank should not be assumed to
have derived any profit above base rate was repeated.
53. For my part I would reject all these points. First, I do not think that
the fact that only annual rests were ordered in Wallersteiner v Moir
(no.2) and El Ajou v Dollarland Holdings (No.2) [1995] 2 AER 213 is
relevant. The business of the fiduciary was not in either case that of a
clearing bank. Second, as the quotations from the judgment of Lord Denning MR
show the award of compound interest is not by way of punishment for any want of
probity; it is intended to deprive the person in a fiduciary capacity of any
profit from misusing the money of the beneficiary. It is plain that on the
findings of the judge, with which I agree, RBS falls within that description.
Third, the evidence before the judge showed that Doctus was being charged 1.5%
above base rate compounded quarterly. This confirmed what the judge considered
in my view rightly to be the very normal banking practice of quarterly rests.
He might have added that it is also normal banking practice to lend to
customers at a rate of interest in excess of base rate. Fourthly, the basis
for the award of interest was a matter within the discretion of the judge. I
see no ground on which this court could interfere with the exercise of that
discretion by Lloyd J.
54. For all these reasons I would dismiss this appeal.
LORD JUSTICE MAY:
I agree that this appeal should be dismissed for the reasons given by Lord
Justice Morritt.
MR. JUSTICE WALL:
I also agree.