England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM MR KEVIN GARNETT QC
(sitting as a Deputy Judge)
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		11 October 2001

Lord Justice Chadwick :

1. This appeal and cross-appeal are from an order made on 7 December 2000 by Mr Kevin Garnett QC, sitting as a Deputy Judge of the High Court in the Chancery Division, in proceedings brought by J J Harrison (Properties) Limited against Mr Peter Harrison, a former director of that company, in relation to the purchase by Mr Harrison in February 1986 of land at Arkendale, North Yorkshire. The land was purchased by Mr Harrison from the company in circumstances in which Mr Harrison, as the judge held, failed to make proper disclosure to the board of directors of the company of information which was material to its value.
2. The judge was satisfied that, for so long as the land remained vested in Mr Harrison as purchaser from the company, the conveyance or transfer to him was liable to be set aside at the suit of the company without enquiry as to the adequacy of the price which Mr Harrison had paid. But the land had long since been sold on by Mr Harrison to third party purchasers; with the consequence that the court could not order the land to be retransferred to the company. In those circumstances the judge made an order that Mr Harrison account for the profits he had made from the land. Mr Harrison does not challenge the judge's finding that he failed to make proper disclosure to the board of directors of the company at the time of his purchase in February 1986. He appeals against the judge's order on the grounds (i) that the judge ought to have held that the company's claim against him was barred by the Limitation Act 1980, alternatively (ii) that the judge was wrong to reject his defence based on laches. The company cross-appeals on the grounds that the judge ought to have ordered Mr Harrison to account to it for the value of the land as at 23 December 1988; that being the date upon which part of the land was first sold on to a third party.

The underlying facts

3. The company, to which I will refer as "Harrison Properties", was, until 1993 or thereabouts, a wholly owned subsidiary of J J Harrison Investments Limited. Harrison Investments was the holding company of a group of construction, property and investment companies established by Mr Harrison's father, the late Mr James Joseph Harrison. In or about 1949 Mr J J Harrison transferred the shares which he held in Harrison Investments to the trustees of settlements which he had made for the benefit of his six children. Harrison Investments was placed in voluntary liquidation in March 1992 in accordance with terms of compromise agreed following the presentation by the children of Mr Peter Harrison's brothers (Mr David Harrison and Mr Michael Harrison) of a petition seeking relief under section 459 of the Companies Act 1985. In 1993 a scheme was agreed under which Harrison Properties (and other subsidiaries of Harrison Investments) was transferred to a new company, J J Harrison Estates Limited and the shares of the petitioners in Harrison Investments were converted into shares in Harrison Estates and bought out. The effect of that transaction is that, since 1993, Harrison Properties has been owned by Mr Peter Harrison and his three sisters (Miss Marie-Therese Harrison, Mrs Christine Lean and Mrs Mary Farmer) and their children through the trustees of their respective settlements.
4. From 1975, or thereabouts, the directors of Harrison Properties were Mr Peter Harrison and his three sisters. The three sisters took little or no part in the day to day affairs of the company, which was managed by their brother. That remained the position until March 1992, when Mr Peter Harrison resigned as a director of Harrison Properties (and as a director of other subsidiaries of Harrison Investments) in order to give effect to the terms of compromise to which I have referred. Thereafter the company has been managed by Miss Marie-Therèse (Terry) Harrison and Mrs Gwen Fuller. Mrs Fuller has been employed by Harrison Properties since September 1990; initially as personal assistant to Mr Peter Harrison and, from 1992, as general manager.
5. In the 1980's Harrison Properties owned a considerable amount of agricultural and residential land in Yorkshire. As the judge held, its general policy was to maximise the development potential of land which it owned and then to sell it. The claim in this action relates to land in and around the village of Arkendale (where Mr Peter Harrison had his home) known as Holgate Bank Farm. The judge described the position at paragraphs 5 to 7 of his judgment:

"5. . . . Holgate Bank Farm consisted of a farm house, a number of outbuildings close by and about 136 acres of farmland. In the early 1980's it was subject to a tenancy in favour of a Miss Naylor, who had succeeded to the tenancy on her father's death. It seems she was finding it difficult to make a success of the farm and in the summer of 1984 she eventually agreed to vacate for £37,500. She gave up the farmland itself shortly afterwards and it was amalgamated with the nearby Hollins Farm, which was being operated by another tenant farmer of Harrison Properties.

6. By April 1985, she had also vacated the farmhouse. As to this the plan was for it to be renovated and sold to Mrs Farmer's son, Mr Sean Frank. In the event this did not happen, and the renovated property was later sold off to a third party.

7. As I have already indicated, apart from the farmhouse and farmland, Holgate Bank Farm consisted of a number of outbuildings, including a large barn (the "Barn") and a further large farm building to the rear. There was also an adjoining paddock, the whole site extending to something over 3 acres. I will refer to this site as the Development Land. The buildings were generally in a very poor state of repair. Harrison Properties had for some time been attempting to do something with them and in July 1983 had applied for planning permission to convert the Barn into two residential units and the farm building to the rear into one residential unit. The application was refused on the basis, it seems, that conversion of the existing buildings would only be allowed if they were redundant as agricultural buildings, and the Planning Authority were not satisfied that this was the case. The possibility of the Barn becoming listed was also raised and in fact this happened shortly afterwards."

6. The position altered on the vacation of Holgate Bank Farm by Miss Naylor and the sale off of the farmhouse. Thereafter the existing buildings on the Development Land were no longer required for agricultural use. On 17 June 1985 Mr Reeves, then general manager of Harrison Properties, sought a valuation of the Development Land from a local valuer. He did so on the instructions of Mr Peter Harrison. The valuation obtained, dated 13 July 1985 and sent to Mr Reeves under cover of a letter dated 15 July 1985, placed a value of £8,400 on the land with vacant possession. The letter contained the following comment:

"I would point out, as you will be aware, that the Farm buildings are in a very dilapidated condition and as such are really of very little value. I appreciate the brick barn may have some development potential for conversion purposes and I have not taken this into account in my Valuation."

7. Mr Peter Harrison was interested in acquiring the Development Land for himself. Without reference to the board of directors of Harrison Properties, but on the instructions of Mr Reeves, solicitors prepared a contract for the sale of the land to Mr Harrison at the valuation figure of £8,400. The contract was signed by Mr Harrison as purchaser, and by the company secretary on behalf of Harrison Properties, on or about 6 September 1985. The contract provided for completion within twelve months.
8. On 1 November 1985 a further application was made for planning permission in respect of the Development Land. The application was made on behalf of Harrison Properties; and was for the conversion of the Barn into a single dwelling, for the demolition of the derelict farm buildings and for the construction of a replica Elizabethan manor house in their place. As the judge commented: "Quite how it was considered appropriate in November 1985, at a time when the company had contracted to sell the property to Peter Harrison, for the company to have development plans prepared for it, and to have a planning application made in the company's name, was not explored in the evidence."
9. The application was refused by the local planning authority at a meeting on 6 January 1986. The refusal was on specified grounds, wich included an objection in relation to the proposed access to the highway. But further negotiations then took place between the architect instructed by Harrison Properties, the county surveyors and the planning officers. The progress made in those negotiations enabled the architect to inform Mr Peter Harrison, by letter dated 20 January 1986, that:

"I am pleased to say that my negotiations with the County Surveyors at Skipton have been successful in so far as they will totally withdraw their objections if we omit the vehicular access through the archway of the barn and make that access into a pedestrian one only.

I have taken the opportunity to inform Mr Colin Brown, the Chief Planning Officer, of this situation, and although he was not at the Committee Meeting on site, he felt that by removing the direction for refusal we have a greatly improved chance of success. I enclose a set of drawings with revisions that I suggest we make marked in red, and would strongly recommend that a new application be made which, even if refused by the committee would certainly put us in a very strong position on Appeal.

If you are anxious to proceed urgently with the barn conversion, I see no reason why we should not make two applications on the same plans as I feel it will be now virtually impossible to refuse that part of the scheme."

Following that letter, Mr Peter Harrison authorised the architect to make a fresh planning application in the name of Harrison Properties. That application was submitted on 5 February 1986. It was granted on 3 April 1986 (together with listed building consent in respect of the barn conversion) without the imposition of any significant planning conditions. The architect invoiced Harrison Properties for his work shortly thereafter.

10. In the meantime, the sale of the Development Land to Mr Peter Harrison had been considered at a meeting of the board of directors of Harrison Properties held on 10 February 1986. The minutes of that meeting record:

"Conveyance of 3.28 acres of land forming part of Holgate Farm to Mr J P Harrison at the price of £8,400.00 as shown in the valuation by James Johnston. Mr Harrison, having an interest, did not vote and in order to obtain a quorum on this matter, Mrs Farmer was contacted by telephone.

Resolved by Mrs M. C. Farmer and Miss M.T. Harrison that the transaction be approved and the Common Seal of the Company be affixed by one Director and Secretary."

The conveyance of the land to Mr Harrison was completed on 12 February 1986.

11. The judge found the following facts in relation to the meeting of 10 February 1986: (i) the valuer's letter of 15 July 1985 – which pointed out that his valuation did not take account of any development potential – was not disclosed at the meeting; (ii) that the meeting was not told of the planning application made in November 1986, nor – more pertinently - of that made on 5 February 1986; (iii) that the meeting was not told of the advice from the architect, in his letter of 20 January 1986, that there was now "a greatly improved chance of success" and that, in relation to the barn conversion, "it will now be virtually impossible to refuse that part of the scheme"; and (iv) that Miss Terry Harrison did not know of those matters from any other source. The judge found that she "knew something of Peter Harrison's wish to buy the land"; that she understood that "he wished to buy the land to plant trees", and that "she thought £8,400 was rather a lot just for this." She had never heard of his plans to build a replica Elizabethan manor house. There was no evidence as to Mrs Farmer's state of knowledge and the judge made no express finding as to what she did or did not know. It is implicit, I think, that he assumed that she had no relevant knowledge.
12. Following the conveyance to Mr Harrison, some work was done on the barn; but (as the judge found), its development was never completed and it was sold on in December 1988 on the basis that it was in need of conversion. The price obtained by Mr Harrison on that sale was £110,300. The position in relation to the remainder of the land is described by the judge at paragraph 35 of his judgment:

"Peter Harrison also started construction work on the Manor House but for various reasons he decided not to pursue this project. He was running into financial difficulties, his builder had died and the market had collapsed. The Manor House site was put up for sale with only some foundations in place. A sale to a Mr Newsham fell through in 1991 but the property was eventually sold to a Mr and Mrs Braithwaite in April 1992 for £122,500."

13. Until Mr Peter Harrison resigned as a director of Harrison Properties in March 1992, and thereupon ceased to have any executive role in its affairs, Mrs Fuller was his personal assistant. She was involved, on his behalf, in providing answers to pre-contract enquiries raised by the solicitors acting for the purchasers, Mr and Mrs Braithwaite. She became aware that planning permission had been granted on 3 April 1986, following the earlier refusal in January 1986. She accepted that she also became aware that part of the land for which Mr Harrison had paid £8,400 in February 1986 had been sold in 1988 for £110,300; and that the remainder of the land was about to be sold to Mr and Mrs Braithwaite for £122,550. It struck her that Mr Harrison had made a substantial profit. She told the judge that, when she mentioned that to him, Mr Harrison's comment was that he had 'got lucky'. She had some conversation with Miss Terry Harrison about the matter at the time.
14. The judge's conclusion was that, although Mrs Fuller was curious in 1992 as to the circumstances in which the profit had arisen "she learnt nothing which made her think that anything improper had taken place or that there was any reason for thinking that the directors might not have been properly informed." In relation to Miss Terry Harrison's knowledge at that time, the judge said this, at paragraph 42c of his judgment:

". . . I find that she did not appreciate from the questions which Mrs Fuller asked her, or from what she learnt from Mrs Fuller about the apparent profit which Peter Harrison had made, that planning matters had reached the stage which they in fact had at the date of the February 1986 meeting. Her knowledge about these matters in 1992 was no different from what it had been at the date of the meeting. It seems likely that Mrs Fuller did mention the date of the planning permission to her, and I so find, but I think this was only in passing and I do not think it had the significance for her which is now claimed. I should again make the point that, at this time, relations between Terry Harrison and Peter Harrison were not especially strained and she had no other reasons for being suspicious of Peter Harrison."

15. It was not until late 1997 that Mrs Fuller became aware of Mr Johnston's letter of 15 July 1985, and of the architect's letter of 20 January 1986. Those letters came to light on a search of Harrison Properties' files in connection with a possible disposal of Hollins Farm for use as a motor way services area adjacent to the proposed A1(M) extension. When Mrs Fuller put those letters onto a single chronological file, with the planning consents and other documents relating to Holgate Bank Farm, she realised what had happened. In particular, she appreciated that, at the time when the board of directors considered the sale in February 1986, Mr Johnston's valuation of 13 July 1985 had been overtaken by events. The discovery of those letters, and the conclusion that Mrs Fuller and, subsequently, Miss Terry Harrison and her co-directors (after receiving legal advice) drew from them, led to the claim in these proceedings. A letter before action was sent in March 1998.

These proceedings

16. These proceedings were commenced by writ issued on 6 July 1998. Paragraph 19 of the statement of claim, endorsed on the writ, contains the assertion that, by reason of the non-disclosure to the meeting of 10 February 1986 of the matters to which I have referred "and on account of the Defendant's use of the resources of the Company and diversion to himself of the business opportunity presented by the possible residential development of the Land which it was his duty to realise for the Company" Mr Harrison held the Development Land on trust for the company as constructive trustee. The claim is for an account of the proceeds of sale of the land, with compound interest; alternatively for equitable compensation for fraudulent breach of trust and breach of fiduciary duty.
17. A defence was served on or about 5 November 1999 in which the allegations of non-disclosure were put in issue. Paragraph 21 of that defence contained the assertion that "insofar as the Plaintiff's claim is based upon allegations of breach of trust and/or fiduciary duty, the same are statute barred and any allegation of fraud is denied." The trial commenced on 18 October 2000. On the first day of the trial, Mr Harrison sought and obtained permission to make extensive amendments to his defence; the purpose of which was to set up a defence of laches based on the company's alleged knowledge (through, in particular, Mrs Fuller and Miss Terry Harrison) of, and acquiescence in, the circumstances surrounding the sale to him of the land since "at least 1992". It is, however, pertinent to note that he was not given the permission which he had sought to make amendment in the following terms:

"In the premises, at all material times until March 1998 the defendant was led to believe by the plaintiff that the said sale was a proper and unimpeachable transaction. In reliance upon the said belief, the defendant has changed his position and/or acted to his detriment by concurring with two shareholder buyouts by the plaintiff in 1990 and 1994 and in particular, by entering into an agreement dated 16 January 1990."

The effect of refusing to allow that amendment was that the judge did not have to consider a defence of laches based upon change of position.

18. The judge delivered a written judgment on 27 November 2000. He held that there had been a failure by Mr Harrison, in February 1986, to disclose to his co-directors of Harrison Properties material facts in relation to the value of the land which he was buying; in particular, a failure to disclose that the planning position had changed, that there was a strong prospect that planning permission would be granted for the conversion of the barn and the development of the remainder of the site, and that Mr Johnston's valuation, made in July 1985, had taken no account of development potential and so could not be relied upon. In the light of that failure to disclose material facts, Mr Harrison was in breach of the duties imposed upon him as a director by regulation 84(1) of Part 1 of Table A in the First Schedule to the Companies Act 1948 and section 199 of that Act (now section 317 of the 1985 Act). He was subject to the rule identified in Aberdeen Railway Company v Blaikie Bros (1854) Macq. 461 – see, in particular, the passage in the speech of Lord Cranworth, Lord Chancellor, at page 471, cited by Viscount Sankey in Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378, 382A-B, [1967] 2 AC 134n, 138. Subject to any equitable defences, Harrison Properties was entitled to set the transaction aside or to other appropriate relief without any enquiry whether the sale was on proper or fair terms. At paragraph 54 of his judgment the judge said this:

". . . subject to the defence of laches, acquiescence and delay which is raised by Peter Harrison, Harrison Properties would have been entitled to set aside the conveyance of the Development Land without further inquiry. As the land has now all been sold to third parties, this is no longer possible and so the available remedies are either an account of profits or equitable compensation. See, for example, Movitex Ltd v Bulfield [1988] BCLC 104 at 125e."

19. The judge went on to consider whether, in addition to the breach of the statutory duties of disclosure, Mr Harrison was in breach of his equitable duty to act bona fide in the best interests of the company. The judge held that he was – see, at paragraph 58 of the judgment:

"Further, I accept that Peter Harrison was in breach of his duty to act bona fide in the best interests of Harrison Properties. It seems to me that his breaches included his failure to inform the other directors of the company fully of the facts about the planning status of the Development Land, his failure to do what he could to ensure that, if the company decided to sell the land, whether to him or to someone else, steps were taken such that it was sold at its full market value, and finally the use of the company's resources to prepare and apply for planning permission in the company's name at a time when Peter Harrison intended that he should buy the property and thus have the benefit of that work."

Nevertheless, the judge was not prepared to hold that Mr Harrison held the land conveyed to him in consequence of those breaches of duty on trust for the company.

20. It is not at all clear, at least to me, whether – and, if so, to what extent - the judge was invited to deal with the Limitation Act defence raised in Mr Harrison's pleaded case. We were told that counsel took the view that the defence was unlikely to succeed at first instance in the light of observations made by Sir Robert Megarry, Vice-Chancellor, in Tito v Waddell (No 2) [1977] 106, 249F-250B. It may be that, having reached the conclusion that Mr Harrison never held the land as trustee, the judge himself took the view that the company's claim did not fall within section 21(3) of the Act. Whatever the reason, the judge did not find it necessary to refer to the Limitation Act defence in his judgment. He dealt with the matter on the basis that relief should be granted unless barred by the equitable defences of laches, acquiescence or delay. In that context he held that, although the company knew some of the relevant facts by 1992, and had the means to find out all of them, it did not discover the most significant of the relevant facts, and did not appreciate the significance of what had not been disclosed, until the second half of 1997. In those circumstances the judge was not persuaded that it would be unconscionable for Harrison Properties to assert its claim.
21. As I have indicated, the judge had directed himself that the available remedies were either an account of profits or equitable compensation - see the passage at paragraph 54 of his judgment which I have set out, and a further passage at paragraph 60 to the same effect. Faced with a choice between one or other of those remedies, the company elected for an account of profits. The judge's order of 7 December 2000 reflects that choice. It is fair to point out, however, that the company has never abandoned its claim to an account of the proceeds of sale. Indeed, the primary claim advanced at the trial – to which the judge referred at paragraph 55 of his judgment - was to payment of a sum representing the value of the land as at 23 December 1988.

The new evidence

22. Mr Harrison did not lodge an appellant's notice within the time limited by the rules. Indeed he accepts, I think, that he had decided not to appeal; in the belief that it would appear, on the taking of an account of profits, that there was nothing due from him to the company. In those circumstances it is unfortunate that the appeal now before us was provoked by a letter sent to Mr Harrison by Mr Nicholas Giles, a partner in the firm of solicitors formerly instructed by the company in these proceedings and, himself, a director of Harrison Estates. In that letter, dated 23 February 2001, Mr Giles wrote:

"When you left the company in what might best be described as ignominious circumstances, Terry was most concerned that your reputation should not be tarnished and there should be no muck raking about your stewardship of the company. It was hoped that you would be able to enjoy a dignified retirement with your reputation intact and with a reasonable standard of living."

Mr Harrison has taken that letter to be an acknowledgement – by Mr Giles, at least – that Miss Terry Harrison made a conscious decision in or shortly after March 1992 that the company would not pursue any claims against him. Further, he submits that the letter shows that, contrary to the evidence which the judge accepted, Miss Terry Harrison had suspicions about his stewardship of the company at the time of his resignation as a director. It is said that, if that material had been before the judge, he would have reached a different conclusion on the issue of laches.

This appeal

23. It was in those circumstances that Mr Harrison sought permission, by notice dated 27 March 2001, to appeal out of time and to adduce the letter of 23 February 2001 at the hearing of that appeal. Permission was granted by this Court (Lord Justice Mummery and Mr Justice Wilson) on 16 July 2001. The Court granted permission to appeal, not only on the issue of laches but also on the ground that the company's claim was barred under the provisions of sections 21(3) and 23 of the Limitation Act 1980. The grant of permission to appeal prompted an application by Harrison Properties for permission to cross appeal against the judge's refusal to hold that Mr Harrison was trustee of the land for the company. The object of that challenge is to provide a foundation for the company's claim that he should be required to account for the value of the land as at 23 December 1988. Permission to cross-appeal was granted by Lord Justice Robert Walker on 16 August 2001. The hearing of the appeal and cross-appeal has been expedited in order that the question whether the judge's order should stand in its present form should be resolved before the parties proceed to a contested hearing on the taking of the account; a hearing which, we understand, is fixed to commence at the end of this month with an estimated duration of five days.
24. It is convenient to consider, first, the issue raised by the cross-appeal: whether Mr Harrison held the land conveyed to him in 1986 as constructive trustee for the company of which he was a director. Resolution of that question provides the foundation upon which to address the first issue raised by the appeal: whether the company's claim is barred by limitation. It is only if that issue is determined against Mr Harrison that it is necessary to go on to consider the equitable defence of laches.

The constructive trust issue

25. I start with four propositions which may be regarded as beyond argument: (i) that a company incorporated under the Companies Acts is not trustee of its own property; it is both legal and beneficial owner of that property; (ii) that the property of a company so incorporated cannot lawfully be disposed of other than in accordance with the provisions of its memorandum and articles of association; (iii) that the powers to dispose of the company's property, conferred upon the directors by the articles of association, must be exercised by the directors for the purposes, and in the interests, of the company; and (iv) that, in that sense, the directors owe fiduciary duties to the company in relation to those powers and a breach of those duties is treated as a breach of trust. If authority for those propositions is required it can be found in In re Lands Allotment Company [1894] 1 Ch 616 - see the judgments of Lord Justice Lindley, at page 631, and Lord Justice Kay, at page 638 - Cook v Deeks [1916] AC 555 – see the advice of the Privy Council delivered by Lord Buckmaster, Lord Chancellor, at page 564 - and Belmont Finance Corporation v Williams Furniture Ltd and others (No 2) [1980] 1 All ER 393 - see the judgment of Lord Justice Buckley (with whom the other members of the Court agreed), at page 405c-f.
26. It follows from the principle that directors who dispose of the company's property in breach of their fiduciary duties are treated as having committed a breach of trust that a person who receives that property with knowledge of the breach of duty is treated as holding it upon trust for the company. He is said to be a constructive trustee of the property. The position was explained by Lord Justice Buckley in the Belmont case, in the passage to which I have just referred:

"So, if the directors of a company in breach of their fiduciary duties misapply the funds of their company so that they come into the hands of some stranger to the trust who receives them with knowledge (actual or constructive) of the breach, he cannot conscientiously retain those funds against the company unless he has some better equity. He becomes a constructive trustee for the company of the misapplied funds. This is stated very clearly by Jessel MR in Russell v Wakefield Waterworks Co [(1875) LR 20 Eq 474, 479], where he said:

'In this Court the money of the company is a trust fund, because it is applicable only to the special purposes of the company in the hands of the agents of the company, and it is in that sense a trust fund applicable by them to those special purposes; and a person taking it from them with notice that it is being applied to other purposes cannot in this Court say that he is not a constructive trustee.'

27. It follows, also, from the principle that directors who dispose of the company's property in breach of their fiduciary duties are treated as having committed a breach of trust that, a director who is, himself, the recipient of the property holds it upon a trust for the company. He, also, is described as a constructive trustee. But, as Lord Justice Millett explained in Paragon Finance plc v D B Thakerar & Co [1999] 1 All ER 400, at page 408g-409g, his trusteeship is different in character from that of the stranger. He falls into the category of persons who, in the words of Lord Justice Millett (at [1999] 1 All ER 400, 408j) . . . "though not strictly trustees, were in an analogous position and who abused the trust and confidence reposed in them to obtain their principal's property for themselves."
28. Lord Justice Millett referred to persons within that category – that is to say, persons who had abused their powers so as to obtain their principal's property for themselves - as "persons [who] are properly described as constructive trustees". He went on to say this:

"Regrettably, however, the expressions 'constructive trust' and 'constructive trustee' have been used by equity lawyers to describe two entirely different situations. The first covers those cases already mentioned, where the defendant, though not expressly appointed a trustee, has assumed the duties of a trustee by a lawful transaction which was independent of and preceded the breach of trust and is not impeached by the plaintiff. The second covers those cases where the trust obligation arises as a direct consequence of the unlawful transaction which is impeached by the plaintiff.

A constructive trust arises by operation of law whenever the circumstances are such that it would be unconscionable for the owner of property (usually but not necessarily the legal estate) to assert his own beneficial interest in the property and deny the beneficial interest of another. In the first class of case, however, the constructive trustee really is a trustee. He does not receive the trust property in his own right but by a transaction by which both parties intend to create a trust from the outset and which is not impugned by the plaintiff. His possession of the property is coloured from the first by the trust and confidence by means of which he obtained it, and his subsequent appropriation of the property to his own use is a breach of that trust. . .

The second class of case is different. It arises when the defendant is implicated in a fraud. Equity has always given relief against fraud by making any person sufficiently implicated in the fraud accountable in equity. In such a case he is traditionally though I think unfortunately described as a constructive trustee and said to be 'liable to account as a constructive trustee'. Such a person is not in fact a trustee at all, even though he may be liable to account as if he were. . . ."

29. There is no doubt that Lord Justice Millett regarded it as beyond dispute that a director who obtained the company's property for himself by misuse of the powers with which he had been entrusted as a director was a constructive trustee within the first category. He referred to "directors and other fiduciaries" in that context – at [1999] 1 All ER 400, 408h-j. There is also no doubt, if I may say so, that he was correct to do so – see In re Sharpe, In re Bennett, Masonic and General Life Assurance Company v Sharpe [1892] 1 Ch 154, 172, Soar v Ashwell [1893] 2 QB 390, 398. The reason is that a director, on appointment to that office, assumes the duties of a trustee in relation to the company's property. If, thereafter, he takes possession of that property, his possession "is coloured from the first by the trust and confidence by means of which he obtained it". His obligations as a trustee in relation to that property do not arise out of the transaction by which he obtained it for himself. The true analysis is that his obligations as a trustee in relation to that property predate the transaction by which it was conveyed to him. The conveyance of the property to himself by the exercise of his powers in breach of trust does not release him from those obligations. He is trustee of the property because it has become vested in him; but his obligations to deal with the property as a trustee arise out of his pre-existing duties as a director; not out of the circumstances in which the property was conveyed.
30. In the present case the judge found that, on the conveyance of the Development Land to Mr Harrison in February 1986, there was a failure by Mr Harrison to comply with the requirements of section 199 of, and regulation 84 in Part 1 of Table A in schedule 1 to, the Companies Act 1985. But, more pertinently in this context, the judge also found that Mr Harrison acted in breach of his fiduciary duties as a director in failing to ensure that the land was sold at its full value – see the passage at paragraph 58 of the judgment to which I have referred. Not only did Mr Harrison fail to make a proper disclosure of his interest; his existing duties as a director required him to ensure that the development land was not conveyed at all until the company had received and considered advice as to its value in the light of the change in planning potential. In those circumstances it seems to me impossible to reach a conclusion that Mr Harrison did not hold the Development Land as a constructive trustee, in the sense described by Lord Justice Millett in the first of the two categories identified in the Paragon Finance case. The judge does not explain the basis for his finding, in paragraph 59 of his judgment, that: "It does not follow, however, that because of these breaches [Mr Harrison] held the Development Land on trust for Harrison Properties." In my view there can be no basis for that finding. I would reverse the judge on that point.

The defence under the Limitation Act 1980

31. Sections 21 and 23 of the Limitation Act 1980 are in these terms, so far as material:

"21(1) No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action –

(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party of privy; or

(b) to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee, or previously received by the trustee and converted to his use.

. . .

(3) Subject to the preceding provisions of this section, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this Act, shall not be brought after the expiration of six years from the date on which the right of action accrued.

23 An action for an account shall not be brought after the expiration of any time limit under this Act which is applicable to the claim which is the basis of the duty to account."

In the present case, section 23 requires no separate consideration. The relevant question is whether Mr Harrison can rely upon the six year period of limitation prescribed by section 21(3) of the Act. The answer to that question turns upon two sub-issues: (i) whether the present action is "an action by a beneficiary to recover trust property or in respect of any breach of trust"; and (ii), if so, whether the present action is taken out of section 21(3) by the provisions of section 21(1)(b) of the Act.

32. As I have indicated, it seems that, at trial, both counsel took the view that an action to recover property from a person subject to the self dealing rule in circumstances in which, in breach of that rule, there had not been proper disclosure, was not an action to which section 21(3) of the 1980 Act had any application. That view was based upon observations made by Sir Robert Megarry, Vice-Chancellor, in Tito v Waddell (No 2) [1977] Ch 106, 246E-250B. Put shortly, the Vice-Chancellor held that a trustee was not, or not necessarily, in breach of duty if he purchased trust property without making proper disclosure of his interest; the true analysis was that the fair dealing rule or the self dealing rule (as the case might be) imposed a disability on the person subject to the rule. The effect of that disability was that a person subject to the rule who had not made the disclosure required by the rule had no answer to a claim to set the purchase aside – see, in particular, at [1977] Ch 106, 248D-H.
33. It is unnecessary to decide, on the present appeal, whether the Vice-Chancellor was correct in his analysis in Tito v Waddell (No 2). For my part I can see force in the proposition that a trustee is not necessarily in breach of a duty if he purchases trust property without making proper disclosure of his interest. It is not difficult to envisage circumstances where the sale of the trust property – at the given price and at the relevant time – is unquestionably in the interests of the trust; and where the only feature which engages the self dealing rule is the trustee's inadvertent failure to disclose that he has some interest in the purchaser. But I am not at all sure why, in such a case, an action to set aside the sale does not come within the other limb of what is now section 21(3) of the 1980 Act – "an action to recover trust property". Be that as it may, this is not a case in which the sale of the company's property to Mr Harrison in February 1986 was unquestionably in the interests of the trust. This is a case in which, as the judge has found, Mr Harrison was in breach of trust in allowing the sale to proceed without insisting on an up to date valuation. The answer to the question whether section 21(3) of the 1980 Act has any application to the present case is not to be found in Tito v Waddell (No 2).
34. The answer, in the present case, is provided by Lord Justice Millett's historical analysis in Paragon Finance plc v D B Thakerar & Co [1999] 1 All ER 400. After describing the distinction between the two categories of constructive trustee, in the passages to which I have already referred, he went on, at pages 409h – 410f:

"The importance of the distinction between the two categories of constructive trust lies in the application of the statutes of limitation. Before 1890 constructive trusts of the first kind were treated in the same way as express trusts and were often confusingly described as such; claims against the trustee were not barred by the passage of time. Constructive trusts of the second kind however were treated differently. They were not in reality trusts at all, but merely a remedial mechanism by which equity gave relief for fraud. The Court of Chancery, which applied the statutes of limitation by analogy, was not misled by its own terminology; it gave effect to the reality of the situation by applying the statute to the fraud which gave rise to the defendant's liability: see Soar v Ashwell [1893] 2 QB 390 at 393, [1891-4] All ER Rep 991 at 993 per Lord Esher MR:

'If the breach of the legal regulation relied on . . . makes, in the view of a Court of Equity, the defendant a trustee for the plaintiff, the Court of Equity treats the defendant as a trustee . . . by construction, and the trust is called a constructive trust; and against the breach which by construction creates the trust the Court of Equity allows Statutes of Limitation to be vouched.'

Lord Esher MR's reference to the breach of the legal relation shows that while the first kind of constructive trust was a creature of equity's exclusive jurisdiction the second arose in the exercise of its concurrent jurisdiction. For a fuller discussion of the distinction between the two categories of constructive trust, see Hovenden v Lord Annesley (1806) 2 Sch & Lef 607 at 632-633, Soar v Ashwell, Taylor v Davies [1920] AC 636, Clarkson v Davies [1923] AC 100, Selangor United Rubber Estates Ltd v Craddock (No 3) and Competitive Insurance Co Ltd v Davies Investments Ltd [1975] 3 All ER 254, [1975] 1 WLR 1240.

It was evidently considered unduly harsh that trustees should remain liable indefinitely for innocent breaches of trust when even common law actions for fraud were barred after six years and section 8 of the 1888 Act introduced a period of limitation (effectively six years) for such claims. Its purpose was to provide protection for trustees who would otherwise be liable without limitation of time (laches and acquiescence apart) where the breach of trust was committed innocently; see Re Richardson, Pole v Pattenden [1920] 1 Ch 423 at 440. It excepted two cases from its provisions: (i) where the claim was founded upon any fraud or fraudulent breach of trust to which the trustee was party or privy, and (ii) where the proceeds were still retained by the trustee or had previously been received by the trustee and converted to his use. The same scheme was adopted by s 19 of the 1939 Act and s 21 of the 1980 Act."

The position, therefore is that, since the coming into operation of section 8 of the Trustee Act 1888, express trustees and constructive trustees within Lord Justice Millett's first category have been able to rely upon the limitation period now prescribed by section 21(3) of the 1980 Act, subject to the saving provisions now contained in section 21(1) of that Act.

35. Mr Hollington QC, on behalf of Mr Harrison, while urging us to take the view that this was "an action by a beneficiary . . . in respect of any breach of trust" within section 21(3) of the 1980 Act – so that the six year period prescribed by that section applied - sought to persuade us that it was not "an action by a beneficiary under a trust . . . to recover from the trustee trust property . . . previously received by the trustee" within section 21(1)(b) of that Act. He submitted, in effect, that it would be wrong to treat a director who, through an abuse of the trust and confidence reposed in him as such, had taken a transfer of the company's property to himself as if he were a trustee who had received trust property. In support of that submission he referred us to two of the cases cited by Lord Justice Millett in the passage which I have just set out: Taylor v Davies [1920] AC 636 and Clarkson v Davies and others [1923] AC 100. In both cases the decision to which we were referred was that of the Privy Council on appeal from the Supreme Court of Ontario, Appellate Division. The relevant statutory provisions were those in section 47 of the Limitations Act of 1914, then in force in Ontario (R.S. Ont. 1914 c.75). The section – which is set out at [1920] AC 636, 649 - contained provisions which corresponded with those in section 8 of the Trustee Act 1888. In particular, section 47(2) contained the saving provisions formerly in section 8(2) of the 1888 Act and now found in section 21(1)(b) of the 1980 Act.
36. The first question in Taylor v Davies was whether the principal defendant to the action (Mr Davies) could rely upon a transfer of property made by the assignee under an assignment for the benefit of creditors – itself made under the Assignments and Preferences by Insolvent Persons Act of 1897 (R.S. Ont 1897 c.147) - in circumstances where he, the defendant, was an inspector appointed for the purposes of section 20 of that Act. The complaint against the defendant was that he had failed to make disclosure of all material facts within his knowledge and to obtain the informed consent of the creditors to the transfer. That question was determined against the defendant by the trial judge. The second question was whether the defendant could rely on the Limitations Act. That turned on whether he was a person within the saving provisions in section 47(2) of that Act – that is to say, whether he was to be treated as a trustee for the purposes of those provisions. It was held that he was not; and that, accordingly, he was not precluded from relying upon a limitation defence under section 5 of that Act. In delivering the advice of the Privy Council, Viscount Cave said this, at pages 650-651:

"In order to ascertain the effect of the Trustee Act, 1888, and the corresponding Canadian statute, it is necessary to refer to the antecedent law of limitation as it applied to trustees. It is clear that apart from these statutes an express trustee could not rely, as a defence to an action by his beneficiary, either upon the statutes of limitation or upon the rules which were enforced by Courts of equity by analogy or in obedience to those statutes. The possession of an express trustee was treated by the Courts as the possession of his cestuis que trustent, and accordingly time did not run in his favour against them. This disability applied, not only to a trustee named as such in the instrument of trust, but to a person who, though not so named, had assumed the position of a trustee for others or had taken possession or control of the property on their behalf, such (for instance) as the persons enumerated in the judgment of Bowen LJ in Soar v Ashwell,, or those whose position was in question in Burdick v Garrick, In re Sharpe, Rochefoucauld v Boustead and Reid-Newfoundland Co v Anglo-American Telegraph Co. These persons, though not originally trustees, had taken upon themselves the custody and administration of property on behalf of others; and though sometimes referred to as constructive trustees, they were, in fact, actual trustees, though not so named. It followed that their possession also was treated as the possession of the persons for whom they acted, and they, like express trustees, were disabled from taking advantage of the time bar. But the position in this respect of a constructive trustee in the usual sense of the words – that is to say, of a person who, though he had taken possession in his own right, was liable to be declared a trustee in a Court of equity – was widely different, and it had long been settled that time ran in his favour from the moment of his so taking possession."

It is plain, therefore, that the Privy Council, in Taylor v Davies, recognised the distinction, to which Lord Justice Millett referred in the Paragon Finance case some 70 years later, between constructive trustees of the first category and what Viscount Cave described as "a constructive trustee in the usual sense of the words" – that is to say, a person in Lord Justice Millett's second category (to whom, I think, he would prefer to deny the description 'constructive trustee' at all, if it were not already so deeply entrenched – see [1999] 1 All ER 400, 409e-f, 414g).

37. The problem addressed in Taylor v Davies was whether section 47(1) of the Ontario statute – which defined a trustee to include " a trustee whose trust arises by construction or implication of law" had altered the pre-existing law, so as to apply the saving, or exclusionary, provisions of section 47(2) to property in the hands of a constructive trustee in the second category. Lord Justice Millett addressed the same problem, in the context of section 19 of the Limitation Act 1939 and section 21 of the 1980 Act, in the Paragon Finance case – see [1999] 1 All ER 400, 411d- 414e. The conclusion, in Taylor v Davies, was that the pre-existing law had not been altered in that respect. That is not the problem in the present case. The relevance of Taylor v Davies in the present context is that the Privy Council rejected the submission that the defendant fell within the first category of constructive trustee – see [1920] AC 636, 650. He was treated as within the second category of constructive trustee. It is clear that, if he had fallen within the first category of constructive trustee, he would not have been able to take advantage of a limitation defence. The reason why he was not within the first category is that he did not have power to dispose of the company's property; that power lay in the assignee, subject to the supervision of the inspectors. Taylor v Davies is not authority for the proposition that a person in the position of Mr Harrison is not within the first category of constructive trustee; and, not being authority for that proposition, it does not assist Mr Hollington's argument. The decision provides support (if support be needed) for Lord Justice Millett's approach in the Paragon Finance case.
38. The other decision upon which Mr Hollington QC relies in this context, Clarkson v Davies [1923] AC 100, takes the point no further. The distinction made in Taylor v Davies some three years earlier between "a trust which arises before the occurrence of the transaction impeached and cases which arise only by reason of that transaction" was recognised and applied – see [1923] AC 100, 111. The defendant in Clarkson v Davies was a director of Provincial Building and Loan Association, whose assets were sold to Dominion Permanent Loan Company; but he was not a director of the Dominion company. The claim by the liquidator of the Dominion company to recover $30,000 paid to the defendant out of the assets of the Dominion company on the occasion of the sale was met by a defence under the Limitations Act; on the basis that, if the defendant became a constructive trustee of that money, the trust arose by reason of the transaction. In relation to that money he owed no duties to the Dominion company prior to the occurrence of the transaction impeached; he was a constructive trustee (if at all) within the second category.
39. In the context of a claim against a director who, in breach of trust – that is to say, through an abuse of the trust and confidence reposed in him as a director – has taken a transfer of the company's property to himself, "the beneficiary", for the purposes of section 21(1)(b) of the Act is the company, "the trustee" is the director and "the trust property" is the property which has been transferred from the company to the director. That must follow from the proposition that a director is, in those circumstances, to be treated as a trustee within the first of Lord Justice Millett's categories. I go on, therefore, to consider whether the present action is "an action … to recover … trust property or the proceeds of trust property in the possession of the trustee or previously received by the trustee and converted to his use".
40. The present action is not an action "to recover trust property or the proceeds of trust property in the possession of the trustee". That is because the development land is no longer vested in Mr Harrison; and there is no claim to trace the proceeds of the sales off in 1988 and 1992. But the action is an action "to recover trust property or the proceeds of trust property previously received by the trustee and converted to his use." The effect of the provisions now found in section 21 of the 1890 Act was put succinctly by Mr Justice Kekewich in In re Timmis, Nixon v Smith [1902] 1 Ch 176, at page 186:

"The intention of the statute was to give a trustee the benefit of the lapse of time when, although he had done something legally or technically wrong, he had done nothing morally wrong or dishonest, but it was not intended to protect him where, if he pleaded the statute, he would come off with something he ought not to have, i.e. money of the trust received by him and converted to his own use."

41. I accept, therefore, that Mr Harrison is a person within section 21 of the 1980 Act. But if he were permitted to rely on the period of limitation prescribed by section 21(3) of that Act, he would, indeed, be a person who "would come off with something he ought not to have"; that is to say, he would retain, to the exclusion of the company, the benefit of the moneys which he received on the sale off of the Development Land in 1988 and 1992. It is to prevent that result that section 21(1)(b) of the Act contains the saving provisions which it does. In that way the position as it was before 1890 is preserved in those cases where the trustee would otherwise profit from his breach of trust. For those reasons I would hold that the Limitation Act 1980 provides no defence in the present case.

Laches

42. Mr Harrison's first challenge is to the conclusion which the judge reached on the evidence before him. It is said, in the grounds of appeal set out at section 7 of the appellant's notice, that the judge failed to give sufficient weight to the findings summarised in paragraph 62 of his judgment and gave excessive weight to his views, expressed in paragraph 63, that the failure to disclose was serious and that Harrison Properties "did not discover what had really happened until 1997".
43. For my part I would reject any submission that the failure to disclose can be dismissed as a technical breach of trust. The true position was that Mr Harrison obtained property from the company on the basis of a valuation which, had he thought about the point at all, he must have appreciated had been overtaken by events. The judge acquitted Mr Harrison of dishonesty; and I do not, of course, go behind that finding. But a director who fails to appreciate that a valuation made on the basis that land has no planning potential provides no proper foundation upon which to proceed with the purchase of that land for himself after he has been told that "it will be now virtually impossible" for planning permission to be refused for part, at least, of the development which he proposes – and that, in relation to the other part of the development there was "a greatly improved chance of success" on a new application – cannot be heard to say that his breach of duty is "technical". The judge was correct to regard the failure by Mr Harrison to disclose to the board what he knew as a serious breach of duty.
44. Nor do I think that the judge's conclusion, on the evidence before him, that neither Miss Terry Harrison or Mrs Fuller appreciated, until 1997, what had really happened, can be challenged. He was entitled to accept their evidence that they did not, in fact, "put two and two together" until the relevant letters came to light, by chance, in 1997. There is no basis upon which an appellate court could properly interfere with the conclusion which the judge reached after hearing and seeing the witnesses. I would reject the appellant's challenge to the conclusion which the judge reached on the material before him.
45. Given the conclusion that neither Miss Terry Harrison nor Mrs Fuller appreciated, until 1997, what had really happened, the question whether the fact that the means of discovering the position earlier lay within the files of the company made it unconscionable for the company to assert its rights some six years after Mr Harrison had resigned as chairman and managing director was, essentially, a question for the trial judge. In my view it is impossible to hold that he erred in principle.
46. It is necessary, therefore, to go on to consider whether the new evidence – in the form of the letter from Mr Giles dated 23 February 2001 – alters the position. In particular it is necessary to consider whether the contents of that letter should lead this Court to take the view that the judge's conclusion that neither Miss Terry Harrison or Mrs Fuller were "on enquiry" as to Mr Harrison's conduct, in relation to his purchase of the development land, before 1997, was unsafe. It is plainly impossible for this Court to take the view, on the basis of the letter of 23 February 2001, that the judge's conclusion of fact on the relevant point should be reversed. In effect, the Court is asked to order a new trial, so that the evidence can be reheard in the light of the view which Mr Giles has now expressed.
47. It is important to have in mind that Mr Giles did not give evidence at the trial. Accordingly, nothing in his letter of 23 February 2001 casts doubt upon any finding based on evidence from him. Further, his perception that Mr Harrison left the company in 1992 "in what might best be described in ignominious circumstances" is clearly based upon the terms of the compromise agreement of 27 March 1992, under which Mr Harrison was required to give up his role at the helm of Harrison Properties. There is nothing new about that. If Mr Harrison had wished to advance a case at trial that the circumstances in which he left the company in 1992 were such as to put his sister on enquiry as to his purchase of the Development Land, he had the material to do so. The most that can be said is that if Mr Giles' view that Miss Harrison's concern, in 1992, that "your reputation should not be tarnished and there should be no muck raking about your stewardship of the company" had been known to Mr Harrison and his advisers at or before the trial, the point could have been put to Miss Terry Harrison in cross-examination. But I am not persuaded that, if that point had been put to Miss Harrison there is any real possibility that it would have received an answer which would have affected the judge's appreciation of the position in the light of all the evidence which he had heard.
48. In those circumstances I am satisfied that an order for a new trial so that Mr Giles' views, as they appear from his letter of 23 February 2001, could be put to Miss Terry Harrison would be a disproportionate response. I would hold that there is no basis upon which the judge's conclusion that laches afforded no defence in this case can be challenged.

The appropriate remedy

49. On the basis that Mr Harrison held the Development Land as trustee for the company, the remedy sought by the cross-appeal is an order that he account for the value of the land as at 23 December 1988 – that being the date of the sale of the barn.
50. It seems to me right that Mr Harrison should account for the £110,300 which he received on that sale. He should be entitled to bring to the credit of that account a proportionate part of the £8,400 which he paid for the Development Land and the cost of any works which led to an enhancement in the value of that part of the land. It is pertinent to have in mind that the costs of pursuing planning applications has already been born by the company.
51. I am not persuaded, however, that it would be right to require Mr Harrison to account for the value of the remainder of the Development Land – that is to say, the site of the replica Elizabethan manor house – at its 1988 value. I do not think that the decision upon which the company relies – Nant-y-glo and Blaina Ironworks Company v Grave (1878) 12 ChD 738 – requires an order to be made in those terms. It is, I think, clear that Lord Browne-Wilkinson, in Target Holdings Ltd v Redferns (a firm) and another [1996] AC 420, did not regard the decision in the Nant-y-glo case as authority for any such rule of law as that for which Mr Mann QC contends. As Lord Browne-Wilkinson pointed out, at [1996] AC 420, 440D-E, the claim in the Nant-y-glo case was not a claim against a trustee for breach of trust in relation to trust property. It was a claim for an account of profits made against a person (albeit a director) who, in relation to the property which he had received, was a constructive trustee within the second of the categories identified by Lord Justice Millett in the Paragon Finance case. The case is of no relevance in the present context.
52. In the absence of any evidence that the value of the Development Land as a whole was diminished by the sale of part in December 1988, it seems to me that the appropriate order is to require the value of the manor house site to be brought in at the price (£122,500) obtained on the further sale in April 1992. Again Mr Harrison can bring to the credit of that account the balance of the £8,400 and the cost of any works which led to an enhancement in the value of that part of the land. Subject to the proviso that he is not to take credit for expenditure which did not preserve or lead to an enhancement in the value of the land, the question what costs and allowances can be set off against the proceeds of sale will be determined on the taking of the account.

Conclusion

53. I would dismiss the appeal. I would allow the company's cross-appeal to the extent of substituting for the words "all profits" where they appear in paragraph (1) of the order of 7 December 2000, the words "the proceeds of the sales of the Land made by the defendant in 1988 and 1992 and all other profits". I would invite the parties to consider whether the order requires any other variation in the light of our judgments.

Laws LJ:

54. I agree.

Sir Anthony Evans:

55. I also agree.
Order: Appeal dismissed; cross-appeal allowed; respondents to have the costs of the appeal and the cross-appeal, to include the costs of the application for permission to appeal out of time; no order for an interim payment of costs; application for permission to appeal to the House of Lords refused. (Order not part of approved judgment)