England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CENTRAL LONDON CIVIL JUSTICE CENTRE
MRS. RECORDER WALDEN-SMITH

		Royal Courts of Justice Strand, London, WC2A 2LL
		28/07/2010

Lady Justice Arden :

1. This is an appeal from the order dated 24 November 2009 of Mrs Recorder Walden-Smith sitting in the Central London County Court in proceedings brought by Stablewood Properties Limited ("Stablewood") for possession of the property at 176 Jersey Road, Middlesex, against Mr and Mrs Virdi and their son.

Background

2. Mr Nagi and Mr Virdi first met in November 2002. At the time Mr Virdi, a solicitor, was in financial difficulties (the Law Society having intervened his practice in 2002), and he petitioned for his own bankruptcy in March 2003. He was discharged from bankruptcy in April 2005. Mr Nagi is a successful businessman who also has some interests in property. The two men discussed the possibility of business ventures together.
3. In March 2003, discussion began over the possible purchase of some farmland for use in connection with Mr Nagi's business. Mr Virdi introduced Mr Nagi to an offshore company called Mountfield Investments Holdings Limited ("Mountfield"). Mountfield owned some farmland near Windsor which it was suggested Mr Nagi might be interested in buying. Mr Nagi purchased the land, in three lots, between October 2003 and February 2004, for consideration totalling £500,000. £250,000 of that amount was held by Mr Nagi on trust at the direction of Mr and Mrs Virdi and for the benefit of their son, Anand. Much of this £250,000 was subsequently spent by Mr Nagi (at Mr and Mrs Virdi's direction), including £140,000 with a company called RK Joinery Ltd. The Recorder found that Mr and Mrs Virdi's claim that Mr Nagi also held another £250,000 in commission for the sale on trust for them was not well founded.
4. In December 2003 Stablewood was incorporated for the purpose of acquiring and developing 16 Walsingham, St John's Wood, London ("16 Walsingham"), with Mr Nagi as its sole director and shareholder, in the context of what was described by the Recorder as a "joint venture" between him and Mr Virdi. The purchase price was £540,000 and the sale completed in April 2004. The Recorder found that all of this money came from Mr Nagi, none of which was money held by him on trust for Mr and Mrs Virdi.
5. In the following month, refurbishment work began on 16 Walsingham, for which Mr Virdi was responsible. This work was still not completed by November 2004 (though it is disputed when Mr Nagi became aware of this, and the point was not addressed by the Recorder). Mr Virdi then stopped working for Mr Nagi.
6. On 7 February 2006, Mrs Virdi entered into a contract to buy 176 Jersey Road, Middlesex, which was the property next to Mr and Mrs Virdi's house, for £500,000. She then assigned the benefit of the contract to purchase to Stablewood. She had paid the deposit of £25,000 but this was refunded to her out of the proceeds of sale of 16 Walsingham. Before the contract was assigned, Mr Nagi, at the request of Mr and Mrs Virdi, countersigned the following letter written by Mrs Virdi, thus signifying his agreement to it:

"I note that it is agreed that you are holding all the issued shares in the above company [Stablewood] on trust for me [Mrs Virdi] and my family subject old account being cleared to be approved by company accountant.

In consideration of your holding the said shares on my and my family's behalf I undertake to be responsible for any tax liability on the transfer of the said shares to me or to my nominee.

Further for the same consideration I undertake to indemnify you in respect of any liability in regard to the company both as a trustee and as a director.

Kindly sign a copy of this letter."

7. This letter was dated 19 April 2006 and I refer to it below as "the April letter". The Recorder found that prior to signature Mr Nagi added to the letter the words: "subject old account being cleared to be approved by company accountant."
8. The purchase of 176 Jersey Road was completed on 4 May 2006. It was funded by a £325,000 loan from the Nationwide Building Society ("NBS") to Stablewood, with the balance coming from the sale of 16 Walsingham (which was sold for £695,000 on 13 April 2006). At some point afterwards the original tenant(s) of 176 Jersey Road, left and were replaced with new tenants by the Virdis without Mr Nagi's knowledge or consent.
9. The original intention of the parties was that 176 Jersey Road would be let and the rent used to repay the interest due to NBS. But at some date between May 2006 and October 2007, the tenants to whom Stablewood let the property terminated their lease, and Mr Nagi discovered that Mrs Virdi had herself let the property and was keeping the rent, leaving him to pay the interest due to NBS.
10. On 4 October 2007, Stablewood issued a claim for possession of 176 Jersey Road against Mr Virdi (as first defendant) and "persons unknown" (that is, the persons who were renting the property from Mrs Virdi) (as second defendant). Mrs Virdi was then joined as third defendant and allowed to make a Part 20 claim against Mr Nagi, and the case was transferred to the Central London County Court. The case was then tried before Mrs Recorder Walden-Smith.
11. At trial Mr and Mrs Virdi contended that Mr Nagi was removed as a director of Stablewood on 12 June 2007 by a resolution purportedly passed by Mrs Virdi, and that he held his shares in Stablewood on trust for Mrs Virdi and her family, and that Mr Nagi was not, therefore, entitled to bring the proceedings, since the claim was contrary to the interests of Mrs Virdi as beneficial owner of the shares. In addition, Mrs Virdi contended that she assigned the contract for the purchase of 176 Jersey Road to Stablewood on the basis that she and her family were the beneficial owners of the shares; since in relying on that arrangement she acted to her detriment, Mr Nagi should be estopped from bringing the claim.
12. Mrs Virdi also brought a counterclaim against Mr Nagi alleging that he was in breach of his fiduciary duties to Mrs Virdi and her family in (i) failing to transfer the shares to her and (ii) terminating the tenancy of a good tenant.
13. Mr Nagi's evidence was that he had had no objection to the Virdis' suggestion that they should take over Stablewood, provided that the full purchase price was paid by Mr Virdi and that they fully accounted to each other for monies owed and losses sustained. The Virdis' case was that it was agreed that Mr Nagi should have no beneficial interest in 176 Jersey Road, but he was concerned to be protected from potential tax liabilities if the shares were transferred to Mrs Virdi. The Virdis also contended that Mr Nagi accepted that the amount due to him from Mr Virdi in respect of their dispute about Mr Virdi's management of building works at 16 Walsingham was £23,000.
14. In her judgment, the Recorder preferred the evidence of Mr Nagi to that of Mr and Mrs Virdi. At paragraph 10, she helpfully reduced the ultimate issue before her to a single question:

"Is Mr Nagi the legal and beneficial owner of the shares in Stablewood Properties and the lawful director of Stablewood Properties or is he the legal owner of the shares for Mrs Virdi and her family and not the lawful…director of Stapleford [sic] Properties? If the former, that is the end of the case for the defendant."

15. The Recorder held that the letter was simply an agreement for the transfer of shares upon the settlement of an account between the parties. The settlement of the account had not been agreed (partly but not entirely because of delays by Mr Nagi); there had been no transfer of shares to Mrs Virdi, and Mr Nagi continued to be the sole legal and beneficial owner of Stablewood. She held that "old account" referred to any monies owed by Mr Nagi to the Virdis, and vice-versa. She also found that Mr Nagi remained the sole director of Stablewood
16. The Recorder also found that the entirety of the proceeds of sale of 16 Walsingham belonged to Mr Nagi and accordingly that the Virdis made no contribution to the purchase price of 176 Jersey Road.
17. Having found that Mr Nagi did not hold the shares on trust for Mr and Mrs Virdi, the Recorder upheld the claim by Stablewood and dismissed the counterclaim against Mr Nagi. Costs were awarded against Mr and Mrs Virdi who were ordered to make an interim payment of £20,000. They now appeal.

Grounds of appeal

18. The principal grounds of appeal of Mr and Mrs Virdi may be summarised as follows:

(1) The Recorder should have construed the letter of 19 April 2004 as constituting an acknowledgment of an immediate trust of shares in Stablewood and found that the additional words were no more than a qualification to the right of the beneficiaries of the trust to demand that the shares should be transferred to them or their order;

(2) the Recorder ought not to have dismissed Mrs Virdi's counterclaim against Mr Nagi but ought to have discontinued the possession proceedings;

(3) the Recorder ought to have held that, following his removal by Mrs Virdi, Mr Nagi ought not to have caused himself to be reappointed and registered at Companies House as a director;

(4) the Recorder should not have made order for possession against the Virdis and this court should now set aside the order and reinstate the position that existed before the order was made.

Discussion and Conclusions

19. The principal area of dispute is the meaning of the April letter. Mr Bernard Weatherill QC, for the appellants, concentrates on the fact that the letter is written in the present tense, and submits that this is consistent with the intention that there should be an immediate trust, not, as the Recorder held, a trust arising only upon the settlement of the account between the parties.
20. Mr Weatherill submits that the words added by Mr Nagi were no more than a condition subsequent. In any event, they cannot on his submission be construed as a clog on the beneficiaries' entitlement to direct that the shares be transferred to them. The only effect of the additional wording was to enable Mr Nagi to exercise "a lien of some sort" over the shares entitling him to resist demands that they be transferred (in other words, qualifying the otherwise unqualified right of the beneficiaries to require them to be transferred to themselves or as they should direct) unless or until it should be ascertained on an account being taken, whether or not there was a balance due to or from him to Mrs Virdi or her family. Mr Weatherill submits that the additional wording simply entitled Mr Nagi to a determination as to the amount (if any) owed way or another, and then to have any such sum paid to him, as a precondition of transferring shares.
21. Mr Weatherill contends that the April letter referred only to an account of monies due in respect of Mr Nagi's loss due to Mr Virdi's alleged mismanagement of 16 Walsingham, but the Recorder did not adopt this interpretation (judgment, paragraph 71).
22. Mr Weatherill properly accepts that, even on his interpretation of the April letter, it was not open to Mrs Virdi to remove Mr Nagi and appoint new directors, but he submits that Mr Nagi was bound to fulfil her wishes. Thus, on Mr Weatherill's submissions Mr Nagi should not have commenced possession proceedings and did so to exert pressure on the Virdis, rather than to promote the interests of the company.
23. Mr Philip Rainey QC, for Mr Nagi, focuses on the factual matrix to the April letter and its commercial purpose. As to the factual matrix, he highlights that the Recorder found that none of the Virdis' money had gone into Stablewood. The Recorder also found that the parties intended that all monies due between the parties should be settled, not just a sum of £23,000 which Mr Nagi claims he lost due to Mr Virdi's mismanagement. The commercial purpose of the April letter on Mr Rainey's submission is clear. The Virdis should have the property once they had paid for it. Mr Nagi could hardly be expected to hand over the shares before being paid. Mr Rainey further submits that the use of present tense is not important as the April letter is a homemade document which should be construed making allowance for mistakes. This is especially appropriate when a document was drafted by one party and then amended by the other. The agreement is clearly ungrammatical.
24. Mr Rainey further submits that the tax indemnities must be subject to the trust coming into effect. It is, he submits, noticeable that the April letter refers to no consideration other than Mr Nagi's agreement to hold the shares on trust. This is consistent with the trust arising once the account had been settled. The Virdis contend that Mr Nagi was to have a lien, but the letter does not refer to a lien. In any event, the idea of a simultaneous creation of trust and interest by way of lien, though not impossible, is a difficult one. Moreover, where trust is to be created under a contract for valuable consideration, it only arises when the consideration is paid: see Underhill and Hayton, on The Law of Trusts, 17th ed., para. 7.1(d), page 94.
25. Mr Rainey further submits that even if the appellant's interpretation is correct, it provides no basis for challenging the Recorder's order. If Mr Nagi held a lien, he was not a nominee or bare trustee and thus he could not be required to vote in accordance with the wishes of Mrs Virdi. As holder of a lien he holds the voting discretion. Palmer's Company Law, paragraph 6.612, states that a transferor is not a bare trustee, unless otherwise agreed. Therefore the appellants are not right to say that the lien only entitles Mr Nagi to have the amount due ascertained. Moreover, the Recorder rejected the idea that Mr Nagi was in breach of duty to co-operate.
26. Mr Rainey submits that the possession order should not be set aside even if the appellant's construction is preferred. Mr Nagi has a lien and because the Virdis were in occupation there is no income to pay the mortgage. Mr Nagi could therefore sell to protect his security interest. Mr Nagi is not acting in breach of his duties as a director. The Recorder was correct to hold that the purported removal of him as a director by Mrs Virdi was ineffective.
27. I now turn to my conclusions. This was not an easy trial and the Recorder's judgment analyses the issues with great clarity. However, while there may be little difference in the overall result, I do not consider that the Recorder reached the right conclusion on the interpretation of April letter. In my judgment, it created an immediate trust subject to a right of security given to Mr Nagi, and did not merely create a trust upon the future event of the accounts between the parties being cleared.
28. In my judgment, the factual matrix does not support the Recorder's interpretation. The correspondence in the appeal bundle shows that Mr Virdi instructed Mr Nagi to instruct the solicitors acting on the purchase of 176 Jersey Road that the contract for the acquisition of the property would be assigned by Mrs Virdi to Stablewood, and that she was to be repaid her deposit. The initiative for the acquisition came from the Virdis, which is what one would expect given that the property was next door to their own house. Mr Nagi was faced with a request to acknowledge that the shares in Stablewood would be held on trust for the Virdis. That gave him a limited window of opportunity in which to negotiate terms for his own protection, but it was only a limited opportunity because the basis of the transaction was clearly set by the Virdis. It is therefore an improbable conclusion that he obtained the agreement of the Virdis that he should have shares beneficially until the accounts were settled. It is also of some relevance that (as I have explained above) Mr Nagi had previously agreed to undertake an immediate trust for the benefit of Mr and Mrs Virdi's minor son, Anand.
29. Importantly, the language of the April letter does not support the Recorder's interpretation. The vital words "subject [to] old account being cleared as approved by company accountant" appear at the end of the sentence containing the declaration of trust, which makes it less likely that the words were intended to be a condition precedent. The key textual point is, however, that made by Mr Weatherill: the letter is expressed in the present tense, which is consistent with an immediate trust. Moreover, the undertaking in the final paragraph to indemnify against tax liabilities is immediate, which is a strong indication that the trust was to take effect immediately. The undertaking to indemnify against tax liabilities on the transfer of shares was necessarily dependent on a future event and so the fact that it speaks to the future does not provide much assistance in determining the true intentions of the parties. The word "cleared" supports the idea that the final words created a security interest: it does not seem to me to matter whether it is called a lien or something else.
30. The substance of the transaction is clearly to create a security interest, and since the language points in that direction, that in my judgment is the effect it should be held to have, and that means that the trust is immediately created.
31. The Recorder attached weight to the fact that the consideration clause did not provide any separate consideration for a transfer to the beneficiaries, but it is difficult to see why it should. The promise to give an immediate security interest is good consideration for the declaration of trust. The parties may have had their own reasons for not stipulating a timetable for an account. Mr Rainey took comfort from the fact that the consideration clause did not use the word "trust". However, the effect of the consideration clause is to make it clear that the undertakings were given in consideration of Mr Nagi's agreement to continue holding the shares on trust and, so, in my judgment, there is little in this point.
32. Mr Rainey also submits that it is difficult to envisage the simultaneous creation of a security interest and a trust. I do not accept this point, since it is in general open to the parties to make a contract in such terms as they wish. Underhill on Trusts, (cited above) does not, as submitted, support this submission. Underhill is dealing with a situation where the parties did not intend to create a trust until after the happening of some event. That does not mean that the parties cannot intend something different.
33. As I have said, the immediate trust is subject to a security interest in Mr Nagi's favour. The "account" referred to in the April letter is unlimited and accordingly I agree with the Recorder that it extends to any monies owed by Mr Nagi to the Virdis or vice-versa. Mr Rainey submits that a transferor is not in any event a bare trustee. Palmer's Company Law at paragraph 6.612 is dealing with contracts of sale and the obligations of the transferor pending registration of the transfer. That passage throws some light on Mr Nagi's rights before accounts have been settled and the amount due has been paid. It appears from the Recorder's judgment that, while the Virdis may be able to point to items of indebtedness to be set off against the amount due from them to Mr Nagi, it is likely that the balance of account will be in his favour when accounts are taken. However, nothing turns on this.
34. What effect does this conclusion have on the possession order? As holder of security over the beneficial interest in the shares, in my judgment, Mr Nagi was entitled to exercise the voting rights attached to the shares in his own interests as the holder of a security interest (Musselwhite C.H. v Musselwhite & Sons Ltd [1962] Ch 964). In addition, he was entitled to take steps to protect his security if his security was in jeopardy. As it happens, he has been paying the interest due to NBS. But he is not bound to continue doing so. If the property is not income-generating, there will be no income out of which to pay the interest, and accordingly Stablewood is likely to go into default. NBS would then be in a position to realise its charge over the property, and the shares in Stablewood would lose their value. In these circumstances, Mr Nagi is entitled to seek an order for possession in order to be able to execute repairs to the property so that it can be let, and to arrange its letting accordingly.
35. Mr Weatherill submits that Mr Nagi should in the exercise of his powers as a director give effect to the wishes of the Virdis. There are circumstances in which what would otherwise be a breach of duty by a director can be ratified by all those entitled to its shares, but here the rights of the beneficial owners of the shares are displaced by those of Mr Nagi as holder of a security interest, and in addition there are other beneficiaries apart from the Virdis, because the trust extends to their family. It is unnecessary to decide whether sufficient consent was obtained from all the beneficiaries of the trust, bearing in mind that Anand is a minor and that there may be other beneficiaries within the term "family" as used in the April letter. Mr Nagi is not so obliged to give effect to the wishes of the beneficiaries in preference to his own interest as the holder of a security interest in any event. Moreover, under the terms of the April letter, his rights as the holder of a security interest will continue until it is shown that no sum secured thereby is, or can become, due to him.
36. Mr Weatherill submits that Mr Nagi was acting to promote his own personal position in the dispute with the Virdis and not his interest as the holder of security over the shares. That allegation is simply not made good on the evidence. Mr Nagi's evidence at the trial was simply that he was taking action because he had discovered that Mrs Virdi had purported to let the property in her own name and was taking all the rents. The tenants have now been removed, but Stablewood needs to have possession in order to repair the property and relet it. Mrs Virdi is not the only beneficiary and she was receiving the rents and not accounting for them to Stablewood.
37. I conclude that in all the circumstances Mr Nagi had power to cause Stablewood to bring the possession proceedings to protect his security, and that the Recorder was right to make an immediate order, without a stay pending the taking of an account. If the Virdis wish to stop the process of possession, they must provide satisfactory substitute security.
38. I turn to the Recorder's order dismissing the Part 20 claim. The Recorder made no error on the claim advanced at trial. But, in this court, the Virdis have accepted that Mr Nagi has some interest over the shares in Stablewood until the accounts between the parties are cleared. Mr Weatherill's preferred solution was that that interest was only a right to hold on to the shares but he had to concede that the court would be able to order a sale. There is also no answer to Mr Rainey's point that the Recorder made a clear finding that "old account" meant something like "whole account" (my words) and encompassed all monies due between the parties. In those circumstances, I would be willing to grant Mrs Virdi permission to amend paragraph (1) of the prayer for relief in her Part 20 claim to claim a declaration in the terms of this judgment, should my Lords agree with it, and to make a further claim for an account and payment of the monies found due. If, indeed, Mrs Virdi does not seek that permission, I would, nonetheless, direct an account to be taken between the Virdi's and Mr Nagi in order to bring the matters in dispute between the parties to an end. I would further direct that the appellants should take out a summons for a case management conference for directions for that account in the Central London County Court. I should make it clear that the account would be on the basis of the findings of fact that the Recorder has already made and on the basis of her finding on credibility with respect to those findings. Otherwise, the Part 20 claim should remain dismissed.
39. Finally I will address Mr Weatherill's submission that Mr Nagi could not advance his own interests as the holder of security over the shares in Stablewood over the interests of the beneficiaries of the trust created by the April letter. He submits that Mr Nagi wrongly gave preference to his own interests as a security holder. But, in truth, his security interest and the trust were created simultaneously. The trust property was therefore the equity of redemption in the shares. The beneficiaries can be in no better position in relation to Mr Nagi as a security holder than holders of an equity of redemption in relation to their mortgagee. Likewise, in relation to Mr Nagi's position as a director, neither Mr Nagi in his capacity as the holder of security nor the beneficiaries in their capacity as beneficially entitled to an equity of redemption in the shares in Stablewood, is in any better position than an ordinary registered shareholder. I have explained above that there are some circumstances in which shareholders can ratify a breach of duty by a director and likewise there are some circumstances in which a breach of duty can be directed. However, in this case, the duty of a director of Stablewood (in the absence of other evidence) was to ensure that Stablewood received rent from the property and that it did not allow the NBS mortgage to go into default. The interests of the beneficiaries, as such, were the same. On this basis, there was no conflict of interest and duty between Mr Nagi's position as the holder of security and his duty as a director and as a trustee or between his duty as a director and his duty as a trustee. Accordingly, I reject the submission that anything turns in this case on the fact that Mr Nagi had obligations in three directions to fulfil.
40. I would accordingly allow this appeal to the limited extent indicated above.

Lord Justice Carnwath:

41. I agree.

Lord Justice Stanley Burnton:

42. I agree that on its true construction the letter of 19 April 2004 created an immediate trust of the shares in Stablewood, but subject to Mr Nagi's security interest. In the circumstances to which Arden LJ has referred, Mr Nagi was entitled to take possession proceedings, in the interests of Stablewood and in his own interests by reason of his security. His security would be ineffective if, in the circumstances that have occurred, he could not protect the principal, and probably the only, asset of the company, even though this was in conflict with the interests of the Virdis. I agree, therefore, that the possession order must stand.
43. I also agree that the account between the parties should be taken by the Court, in order to bring the dispute between the Virdis and Mr Nagi to an end. I therefore agree with the order proposed by Arden LJ in that regard also.