England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM the Chancery Division of the High Court of Justice
Mr Anthony Boswood QC sitting as a Deputy High Court Judge
TLC/680/02

		Royal Courts of Justice Strand, London, WC2A 2LL
		28th July 2004

Lord Justice Waller :

1. Mr Anthony Boswood QC sitting as a Deputy High Court Judge by a judgment dated 10^th September 2003, held on the main issue before him that the first defendant (Orion), who held certain shares as nominee for the claimant (Montrose), had acted in breach of trust by exchanging the same for shares in a different company, and by arranging for those shares to be registered or held in the name of a further nominee without the consent of Montrose. He then also held on the Part 20 claim "unenthusiastically" that Orion had no claim against the "further nominee" Mr Richard Upton (Mr Upton); he held any claim to the shares or the proceeds thereof against Mr Upton would have to be brought by Montrose.
2. An appeal was launched in relation to the main issue but a compromise reached left only the issue decided in the Part 20 proceedings as live. That issue has been argued by Mr Hill-Smith for Orion and Mr Upton acting personally but being assisted by Mr Lyons as he was below. During the course of argument it became apparent that the compromise between the main protagonists had rendered the question of whether the judge was right or wrong on the point relevant in only two respects. It seems that Montrose did sue Mr Upton as suggested by the judge and the indications during argument were that the result of a compromise between those two plus the compromise between the other protagonists on the appeal will make the point in issue relevant only to (a) whether Mr Upton has any obligation to account to Orion rather than as he would submit to those for whom Orion held shares as nominees, and (b) to the question of costs.
3. In those circumstances it ought to have been easy to explain the facts by reference to which the Part 20 question arises and deal with the issue shortly. But the parties chose to shroud their dealings in an obfuscation of off-shore entities coupled with an astonishing degree of informality. That obfuscation raises in my mind serious anxieties as to what was actually being concealed but that will be for others to explore. I have no choice but to attempt to set out first the basis now not in issue as to how Orion was found to be in breach of trust, and how the point arises as to whether Orion has any claim against Mr Upton.
4. It is common ground that by 1994 Orion was the registered holder of 400,000 ordinary shares in Micro Group Limited (Micro Group). It is further common ground that Orion held 100,000 of those shares as nominee for a British Virgin Island corporation Montrose, the corporate vehicle through whom Mr Keith Chapman (a chartered accountant who incidentally was a partner in the firm of accountants who audited the accounts of Micro Group) held these and other investments. Montrose was administered by Richmond Corporate Services Limited (Richmond) a Guernsey Company (the second defendant in the main action). A director and driving force of Richmond was a Mr Chick. It was Richmond that incorporated and used Orion as a nominee company.
5. It is also common ground that Orion held the remaining 300,000 ordinary shares in Micro Group as nominee of "the Leat Investors". This group was headed by Mr John Leat, and included his brothers and other business colleagues as described in paragraph 11 of the judge's judgment. They were original investors in Micro Group.
6. It is further common ground that Orion acquired 250,000 preference shares in Micro Group of which it held 50,000 as nominee for Montrose.
7. In June 1996 certain employees of Micro Group were granted options to acquire shares. These options were exercised immediately prior to the acquisition of Micro Group shares in 1999 to which I now turn.
8. During September 1998 Mr Chick and Mr Chapman fell out, a falling out which accounts for many of the problems that have given rise to this litigation. Also during late 1998 it seems that Mr Rickard, an employee and major shareholder in Micro Group, wished to dispose of his majority shareholding. Mr Rickard was related by marriage to and advised by Mr Chapman. At first a management buy-out was contemplated, but, ultimately, on the introduction of Mr John Leat in the spring of 1999, Mr Upton and his colleague Mr O'Brien appeared on the scene as potential investors. The judge describes in paragraph 18 the nature of the totally informal relationship and understandings that existed between Mr Leat and Mr Upton.
9. Ultimately what was contemplated was an offer for the Micro Group shares partly in cash and partly in shares in a new company. Obviously Mr Rickard and other employees wanted cash, and it is in this context that Mr Chapman wrote what the judge described as the "delphic" paragraph in a letter of 4^th June 1999 which to the informed reader (not including Mr Upton) might have indicated that Mr Chapman desired cash for the shares held by Orion for Montrose.
10. The new company which made the offer for the Micro Group shares became Heapdawn Limited (Heapdawn). That offer was partly in cash and partly shares in Heapdawn. The original intention appears to have been that Orion should receive 906,667 shares in Heapdawn in exchange for its 400,000 ordinary shares in Micro Group, and 250,000 preference shares in Heapdawn for its 250,000 preference shares in Micro Group. If that is all that had occurred, clearly Orion would hold the shares in Heapdawn for Montrose and the Leat Investors in the same proportions as it had held the Micro Group shares previously.
11. Mr Upton, who had raised part of the finance to provide the cash element, was to be issued with shares in Heapdawn. Mr Upton was to hold his shareholding through a further British Virgin Islands company Birchall Ventures Limited (Birchall) a company administered by Latour Trust Company Limited (Latour Trust), a company providing "fiduciary duties" out of Jersey.
12. On 4^th August 1999, the date of completion of the Heapdawn transaction, in addition to the ordinary shares and preference shares in Micro Group being as envisaged exchanged for Heapdawn shares, without (as the judge found) any consultation with Mr Chapman, and without his knowledge, the 906,667 Heapdawn shares which would have been registered in the name of Orion were exchanged for 25,000 shares in Birchall, in whose name the Heapdawn shares would be registered. Mr Chapman said he would not have agreed to this transaction if asked because it would have been disadvantageous in that it made Orion and those for whom Orion acted as nominee minority shareholders in Birchall (their shareholding being 45%), whereas they would have been 56% shareholders in Heapdawn. The judge accepted that evidence. He held that that this was the first breach of trust for which Orion was liable.
13. The judge held that Mr Upton and Mr O'Brien were unaware of there being anything improper in the transaction because they thought that Orion held the shares in Heapdawn for the Leat Investors only and that the exchange had been agreed with the Leat Investors.
14. Mr Chick's case at trial was that he thought that what was happening was that an arrangement was being made which would sever Richmond from Montrose, under which Montrose would receive cash for its beneficial interest in 100,000 ordinary shares in Micro Group and that the 25,000 shares in Birchall were being held for the Leat Investors alone. Furthermore his evidence was that he thought that in some way Orion was to drop out. The judge rejected the notion that Mr Chick could have had this understanding, pointing out that even in the amended Defence it was being asserted that Orion held shares in Birchall (see paragraphs 42 and 43 of the judgment).
15. On completion of the above, Latour Trust needed to register Orion as a shareholder in Birchall. Mr Guillou (of Latour Trust) in order to satisfy Latour Trust's internal procedures and money laundering regulations sought information as to the identities of the beneficial owners of Orion. That led to Mr Chick for Orion agreeing that instead of the 45% shareholding in Birchall being held in the name of Orion, it should be held by Mr Upton as the judge records "beneficially on behalf of the Leat Investors". As the judge further records "Whatever instructions Mr Chick may have had from the Leat Investors to authorise this course he certainly never discussed it with Mr Chapman. This is all the more remarkable given that Mr Chick accepted in evidence that, by this stage, he had been told by Mr Leat that Mr Chapman had not, or at least not yet, been bought out for cash." This was held to be a second breach of trust by Orion.
16. I would also add that even if it were the instructions of Mr Chick that Mr Upton should hold the shares beneficially for the Leat Investors, that cannot alter the fact that the true beneficial owners were Montrose as well as the Leat Investors through their nominee Orion. Furthermore, there is no doubt if it be relevant that Latour Trust and Birchall would have been be aware that the shares being transferred to Birchall were the shares in Heapdawn issued to Orion as nominee for whomever, and thus that the shares being issued in Birchall were intended for Orion as nominee for whomever, even if the impression being given by Mr Chick was that the whomever was limited to the Leat Investors. This is apparent from Fladgate Fielder's letter to Latour trust of 13^th January 2000 and the letter from Orion itself signed by Mr Chick dated 18^th January 2000. There was no question of Mr Chapman representing or authorising anyone to represent on his behalf that he was no longer a person for whom Orion was nominee.
17. The judge succinctly summarised the position at this stage in the following terms:-

"The upshot was that Mr Chapman's beneficial interest in 100,000 ordinary shares in Micro Group had been transmogrified first, with his knowledge if not active consent, into an interest in 226,667 ordinary shares in Heapdawn, then, without his knowledge or consent, into an interest in 6,250 ordinary shares in Birchall. And the legal owner of those shares, Mr Upton, had, as I find, no knowledge at this time of Mr Chapman's beneficial interest."

18. Mr Upton was not in fact the legal or registered owner of any shares in Birchall because he himself held his shares through a nominee Latour Trust. Thus at this stage Birchall's shares were registered as to 10% in a nominee company being held for Mr O'Brien, and as to the remaining 90% in the name of Latour Trust as nominee for Mr Upton. [There might have been an issue as to whether Mr Upton held 45% for Orion and the Leat Investors, and 45% for himself, or 50 % for Orion and thus only 40% for himself, but Mr Hill-Smith did not pursue this point, and it can be ignored].
19. Unsurprisingly the hope of Mr Upton and Mr O'Brien and the Leat Investors was that Micro Group would continue to prosper, and that they would be able to realise a healthy profit. As the judge said, this hope was realised much sooner than expected. It matters not how it happened, for present purposes it is sufficient to say that on 8^th February 2000 there was completed a sale of the entire issued share capital of Heapdawn plus the preference shares. Taking account of a property which was retained by Birchall at a value of £116,000, a total purchase consideration of £7,250,233 was received by Fladgate Fielder as solicitors acting for Birchall.
20. Fladgate Fielder's completion statement shows what happened to the money. After certain deductions were made for expenses including Fladgate Fielder's costs, certain sums were paid to the employees representing the value of the shares the subject of their share options; a substantial sum was paid to Latour Trust; and £530,000 was paid to Mr O'Brien representing his 10% shareholding in Birchall. The relevant sum for the purposes of the issue under appeal is the sum of £4,975,000 which was paid to Mr Upton on his instructions, being the instructions of the person for whom Latour Trust held the remaining 90% of the shares in Birchall.
21. As at 9^th February 2000 when Mr Upton received these moneys, his state of mind as I understand the judge's findings was that he thought (1) that he held part of the money as representing his own beneficial interest in 45% of the shares of Birchall, and (2) that he held the further part either for Orion as nominee of the Leat Investors, or for the Leat Investors directly.
22. If Mr Upton had ever asserted that he had made a distribution based on his then state of knowledge, that might give rise to the necessity of considering the attack that Orion make on the judge's finding as to whether Mr Upton's state of knowledge was as he claimed, and/or would provide a different set of circumstances in which to consider the question which arises on this appeal. But before distribution and as the judge held at or shortly before a meeting in March 2000 at which Mr Chapman for Montrose made a claim to part of the proceeds of sale of the shares in Heapdawn, Mr Upton knew of the Chapman/Montrose claim. Thus before distribution he knew that Montrose were asserting a claim through their nominee Orion, and that Orion had not "dropped out". He knew that the primary entity to whom he should be accounting was Orion, leaving it to Orion to disentangle for whom they were acting as nominees.
23. The question as to whether Orion has a claim against Mr Upton to account for the proceeds which represented 45% of the shareholding in Birchall is in my view more straightforward than it appeared to the judge or perhaps than it was made to appear to him. I do not think that it has anything to do with there being a resulting trust rightly rejected by the judge in paragraph 75. Nor do I think that is necessary to analyse the case in terms of constructive trusteeship as the judge does in paragraph 78. The real question is whether the judge was right in saying that because Orion acted in breach of trust in transferring the Heapdawn shares to Birchall and the Birchall shares to Mr Upton, it divested itself of the capacity of trustee, or as he must mean divested itself of any remedy against Mr Upton as transferee.
24. I do not see why logically one should follow from the other. I have found it useful to test the matter this way. Firstly, suppose that Montrose had consented to the transactions which have been held to be in breach of trust but on the basis that their entitlement was maintained, but Mr Upton was refusing to account for the proceeds, who would have the claim to an account? The answer seems to me that it would be Orion. Why, I ask rhetorically, have they lost that right? Secondly, suppose that Montrose had discovered before any proceeds of the sale had been paid to Mr Upton that the Heapdawn shares had been transferred in breach of trust, and that Mr Upton now held the Birchall shares, and suppose Orion had accepted there had been a breach of trust but in order to rectify matters had sought a declaration against Mr Upton that he held the shares for them. Would Mr Upton have been entitled to say no claim lies against me because there had been a breach of trust as between Orion and Montrose? I cannot see save on some ground of public policy which has not been suggested why a breach of trust as between beneficiary A and trustee B, precludes B from enforcing such trust obligations as may arise between B and a transferee of the trust property C. Indeed, it seems to me that where it is the very transfer of the trust property from B to C which constitutes the breach of trust , public policy positively requires that B should be in a position to assert a claim for the recovery of the trust property or its proceeds from C.
25. The position as I see it is that, albeit wrongfully as between Orion and Montrose, Orion placed shares with Birchall in return for shares issued by Birchall which Mr Upton then held through Latour Trust for Orion. Even if he did not always appreciate that he held them for Orion, he came to appreciate that fact before distribution of the proceeds from those shares. Orion thus had an enforceable right to an account of those proceeds. It does not lie in Mr Upton's mouth to rely on the fact that Orion was acting in breach of trust vis à vis Montrose as any answer to Orion's claim against him.
26. To be fair to Mr Upton and Mr Lyons who argued the appeal for Mr Upton, their main argument was not that Orion's own breach of trust precluded Orion claiming an account from Mr Upton, but that in some way because Mr Upton thought that Orion had "dropped out", his obligation to account was to the Leat investors alone. But since the truth was that Orion had not "dropped out" and before distribution of any proceeds Mr Upton knew that, that point is a bad one.
27. I would thus allow the appeal on the Part 20 claim and order that an account be taken as between Orion and Mr Upton.

Lord Justice Jonathan Parker: I agree

Lady Justice Arden: I agree