England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		21/12/2004

Mr Justice David Richards :

1. HRH Prince Fahd bin Salman al Saud was a prominent figure in the racing and bloodstock world. In the 1980s and 1990s he was acknowledged as one of the leading owners and breeders of high-class thoroughbred horses, achieving a number of notable successes. Prince Fahd was the nephew of King Fahd of Saudi Arabia. His father was governor of Riyadh and he himself held high office in Saudi Arabia.
2. The racing and bloodstock interests of Prince Fahd were organised in Europe through Newgate Stud Company (Newgate UK), an unlimited company formed in 1983 under the Companies Act 1948 to 1981. Newgate Stud Farm Inc was formed in 1985 in Kentucky to conduct his racing and bloodstock activities in the United States. In 1995 it changed its name to Newgate Holdings Inc and formed an operating subsidiary which was also given the name of Newgate Stud Farm Inc. In 2000 the parent and subsidiary were merged under Kentucky law and by a further merger in 2001 Newgate Stud Farm LLC succeeded to all their rights, assets and liabilities. I shall refer to these various Kentucky companies as Newgate US: nothing turns on the legal distinctions between them. Newgate UK and Newgate Stud Farm LLC are the claimants in this action.
3. Until 2000 Newgate UK and Newgate US were owned by Faal Racing Establishment (Faal Racing), an anstalt in Liechtenstein established by Prince Fahd. As I understand it, he was the beneficial owner of the assets held by the anstalt. On 25 July 2000 he established a trust under Jersey law for the benefit of his children, called the Black Type Trust. Ownership of the Newgate companies was transferred from Faal Racing to Allgreen Limited (whose name referred to his racing colours), a company incorporated in the British Virgin Islands and owned by the Trust. Until the death of Prince Fahd on 25 July 2001, at the age of 46, he was the effective controller of the Newgate companies. Sir William Young Bt, a banker, was appointed protector of the Black Type Trust in 2000 or 2001 and was succeeded in October 2002 by Peter Hodson, a solicitor based in Guernsey.
4. Anthony Penfold, the first defendant, has worked in the bloodstock industry since his early twenties. He began working for Prince Fahd in 1983 and was retained on a full-time basis in January 1985. He was the racing and bloodstock manager for the Newgate companies until January 2002. He was the sole director of Newgate UK until 1999 when Steven Lane, his assistant, was appointed to the board. He was also one of two directors of Newgate US, with William Bishop, a lawyer in Kentucky. There was a written contract with Mr Penfold covering the three years to 31 December 1987. A further written contract, for an initial period of two years and thereafter terminable on six months' notice was made with him on 1 January 1991 by the Newgate companies (described as the Owners). Clause 1 provided that Mr Penfold:

"shall, as agent of the Owners, manage their thoroughbred horse breeding and racing activities and their bloodstock interests generally whether in the United Kingdom, Ireland, Australia, the USA or elsewhere".

By clause 2 he was to report to such person as Newgate UK should nominate. At all times until his death this was Prince Fahd, although there was no formal nomination of which I am aware. Clauses 3 and 4 provided for Mr Penfold's remuneration, comprising an annual fee of £37,250, which was increased each year, and a commission on profitable sales of homebred colts or fillies. Clause 4(2) refers to the possibility of commission or other agreements with "any affiliated company or entity of the Owners or with their ultimate beneficial owner." It is clear from the evidence that until about 1995 Mr Penfold was receiving additional remuneration from Faal Racing. He was given express authority by clause 7(1) to make contracts on behalf of either of the Newgate companies in connection with their bloodstock interests but not otherwise. Clause 7(2) provided that he was engaged as an independent contractor, and not as an employee of either company.

5. Consistent with his position as an independent contractor, Mr Penfold was responsible for some of his expenses. He traded as Anthony Penfold Bloodstock until 2000 and bought and sold interests in mares. On 6 April 2000 he merged his interest with those of his wife trading as Mary Ann Clark Bloodstock. The merged business traded as Penfold Bloodstock which was incorporated as Penfold Bloodstock Limited, the second defendant, on 1 August 2002. The agency agreement contained an undertaking by Mr Penfold not to be engaged or interested in any other business, trade or occupation. There is a pleaded allegation of breach of this provision in relation to the dealings with the three horses in issue, but it adds little to the other causes of action and does not require separate consideration in this judgment.
6. Mr Penfold and Mary-Ann Clark were married in December 1996. They had been living together since June or July 1994, when he separated from his first wife. They moved to live with her parents, David and Elizabeth Clark in September 1995 and stayed there for about a year. As all the claims in these proceedings relate to events before their marriage, I will refer to her as Mary-Ann Clark throughout this judgment.
7. Prince Fahd was clearly passionate about racing and bloodstock. He took a keen and close interest in Newgate's operations and was highly knowledgeable about the horses owned by Newgate and generally about racing and bloodstock matters. The success of Prince Fahd's racing and breeding operations were achieved under Mr Penfold's management. It was an impressive record. His horses won eight European Classics and over 90 group and graded stakes races in Europe and the United States. In fourteen out of the sixteen years from 1985 to 2000 Prince Fahd was in the top twelve of the leading English owners table. His most celebrated horse, Generous, won the Derby convincingly in 1991 and went on to win the Irish Derby and the King George VI and Queen Elizabeth Diamond Stakes in the same year. He scored notable success with other horses. Fiji, which was homebred, was champion turf mare in the United States in 1999 and was sold for $3.1 million, the top price for a broodmare in the United States in 2002. Another homebred horse, Ramruma, was champion three-year old filly in Europe in 1999, having won the Oaks and the Irish Oaks that year, and set a new European record for a broodmare at auction when she was sold for 2,100,000 guineas in 2003. She was sold as part of the dispersal of the Newgate bloodstock following Prince Fahd's death. In 2002 Newgate UK's sales at auction totalled 5,343,000 guineas and Newgate US's sales totalled $7,679,500. The auction sales in 2003 were of a similar order, and its entire yearling crop in 2002 was sold by private treaty for a substantial sum, believed by Mr Penfold to be $10 million.
8. There was a close relationship between Prince Fahd and Mr Penfold, and it is clear that Prince Fahd valued and greatly appreciated the work and advice of Mr Penfold which had contributed so much to his success. There was considerable informality in their relationship and Mr Penfold speaks in his evidence of "a close personal friendship which ran in tandem with our working relationship". Without casting doubt on that assessment, but having read a considerable number of Mr Penfold's faxes and letters to Prince Fahd, it is also clear, as would be expected, that the relationship was nonetheless coloured by the fact of Prince Fahd's status both as owner and as a member of the Saudi royal family and by Mr Penfold's role as his racing and bloodstock manager. The evidence also shows that Prince Fahd could be very generous both to those working for him and to others.
9. Although there are many written communications from Mr Penfold to Prince Fahd in evidence, there are none, apart from a friendly message on a photograph, the other way round. Mr Penfold's evidence, which was not challenged and which I readily accept, is that Prince Fahd preferred to talk, not write, and used the telephone a great deal. They spoke on a very regular basis.
10. Mr Penfold's contract with the Newgate companies was terminated without notice, and he was removed as a director of the Newgate companies, on 22 January 2002, some months after Prince Fahd's death. Sir William Young, while protector of the Black Type Trust, had been inquiring into Mr Penfold's remuneration arrangements and Mr Hodson, on his appointment in place of Sir William, had renewed those inquiries. However, the reasons given for the termination of his contract related to other matters which Mr Hodson says came to his attention only a few days earlier. I will have to consider one of those matters, but I am not otherwise concerned in this action with the termination or the grounds for it.
11. The claims made in this action by the Newgate companies concern the sale of three broodmares, Solar Star, River Jig and Crystal Fountain. It is alleged that Solar Star and River Jig were sold to partnerships, in which Mr Penfold had a financial interest either as a partner (either in his own name or in the name of Mary-Ann Clark) or indirectly through the interest of Mary-Ann Clark, and that these interests were neither disclosed to nor approved by Prince Fahd. He was therefore in breach of the self-dealing rule, which prevents a director of company from dealing with the company without the informed consent of the shareholders. In both cases Mary-Ann Clark was named as a partner with the deliberate intention, it is said, of concealing Mr Penfold's interest from Prince Fahd. It is further said that Mr Penfold placed himself in a position of conflict between his duty as a director and manager and his personal interests and that he used information acquired as a director for his own personal gain and to enable himself and his friends and relations to acquire the horses. In the particulars of claim it was alleged that the sales were at prices substantially below both his own valuations and their true market values; at trial the claimants relied on the first point and did not develop a case that Solar Star and River Jig had been sold at an undervalue. For this and other reasons it is said that neither sale represented fair dealing with the Newgate companies.
12. The claim in respect of Crystal Fountain is necessarily rather different. Prince Fahd himself gave Crystal Fountain to David Clark, after Mr Penfold had written to Prince Fahd with an offer by Mr Clark to purchase her for £5,000. It is alleged that Mr Penfold misrepresented the true position to Prince Fahd and concealed material points. Not only was this itself a breach of duty but it foreseeably induced Prince Fahd to make a gift of the horse to Mr Clark. Mr Clark gave an interest in Crystal Fountain to Mary-Ann Clark which, the claimants allege, she held as nominee for Mr Penfold.
13. The broad grounds of Mr Penfold's defence are, first, he denies acquiring any interest in any of the three horses. Secondly, the sales of Solar Star and River Jig were made with the approval of Prince Fahd who had knowledge of all relevant circumstances. Thirdly, neither horse was sold at an undervalue. Fourthly, Mr Penfold denies any misrepresentation or concealment of material facts in relation to Crystal Fountain. Fifthly, the claims are time-barred. The parties agreed that further lines of defence, based on the terms of a compromise agreement made on 29 July 2002 and on section 727 of Companies Act 1985, should not be dealt with at this stage.
14. In reply to the limitation defence, the claimants rely on both parts of section 21(1) of the Limitation Act 1980. They specifically allege dishonesty on the part of Mr Penfold in relation to each of three horses.
15. The scope of the factual enquiry in the case was significantly widened beyond the transactions directly in issue. First, the claimants relied on a number of different transactions and other matters to establish a dishonest pattern of conduct by Mr Penfold as a director and agent of Newgate and to rebut Mr Penfold's case that he at all times acted with integrity. Secondly, in his defence and in the context of a denial that he used Mary-Ann Clark's name to conceal his interest in the three horses directly in issue, Mr Penfold pleaded that Prince Fahd was well aware that from time to time he acquired interests in mares formerly owned by Newgate. The claimants requested further information of this allegation and Mr Penfold gave details of seven other horses in which he or Mary-Ann Clark acquired an interest with the knowledge and approval of Prince Fahd. The claimants challenged his case on each of these further transactions and alleged that he had acted dishonestly in respect of each of them.
16. There was therefore a total of ten horses which were disposed of by Newgate and in which either Mr Penfold or Mary-Ann Clark or David Clark acquired an interest. The acquisitions were profitable only in the cases of Solar Star, River Jig and Crystal Fountain. In all the other cases, the horses were loss-making. In those circumstances Mr Penfold felt that the claimants had acted unfairly in choosing to proceed against him in respect of those three horses; he felt they were cherry-picking. The answer is, of course, that even if their allegations as regards the other seven transactions are well-founded, there was no point in suing in respect of them and the claimants cannot be criticised for proceeding in respect of the three profitable transactions.
17. The major handicap to both the claimants and Mr Penfold in pursuing and defending this action has been the unfortunate death of Prince Fahd in 2001. While this is an obvious disadvantage to the claimants, it is equally a disadvantage to Mr Penfold. It means that he cannot seek to rely on Prince Fahd to prove his case that Prince Fahd knew all the relevant facts and approved the transactions.
18. As regards disclosure and approval, it is accepted on behalf of Mr Penfold that he bears the burden of proving it. Both sides have proceeded on the basis that disclosure should be made to, and approval given by, Prince Fahd. He was not a director or a registered shareholder of either Newgate company. He was however at all relevant times the beneficial owner of the companies and controlled them. No distinction was drawn between Newgate UK and Newgate US as regards the legal duties of directors. There was no evidence of Kentucky or other US law, so the relevant law applicable to Newgate US and its directors and agents is assumed to be the same as English law.
19. The claimants called Mr Hodson and four other witnesses. Mr Hodson had no involvement in any of the transactions concerning the horses and only a limited involvement in one of the other matters relied on against Mr Penfold. Three of the other witnesses were directly involved with Newgate during the relevant period. They were Bernard Smith, who has provided accounting services to Newgate UK and been its secretary since 1987 and also provided accounting services to Faal Racing; Jacqueline Miller, who was Mr Penfold's secretary from July 1993; and Mr Bishop, the other director of Newgate US. The claimants' other witness was Edward Voute, who has been in business as a sales consignor in the bloodstock business since 1984. His clients included Newgate. He was directly involved in the purchase of River Jig, acquiring a 25% interest in her. Apart from Mr Voute's evidence as regards River Jig, the evidence of the claimants' witnesses, though relevant, did not throw much light on the central issues in the case. It was not suggested on behalf of Mr Penfold that their evidence was deliberately untrue, and it was for the most part reliable.
20. Mr Penfold gave evidence and was cross-examined over two days. He was the principal witness in the case. He was consistently challenged on every topic, and both his conduct at the material times and his evidence to the court was for the most part characterised as dishonest. In my judgment it is not possible to make broad generalisations about his evidence. As will appear from my detailed findings, it was in some areas untrue or misleading and in others unreliable. I am not therefore able simply to accept his evidence on any particular issue. However, as will again appear, I have found his evidence to be true on some points and in some areas of substance in the case.
21. Mary-Ann Clark gave evidence and her evidence was also substantially challenged. For the most part, I am satisfied that she gave truthful evidence but again it is not in my judgment possible to generalise about it. I was not able to accept her evidence in all respects.
22. Mr Penfold also called David Clark, Mary-Ann Clark's father. As the claimants acknowledged, he was an honest witness. Evidence was given in relation to River Jig by Hugo Lascelles, a trainer, who was one of the purchasers and was cross-examined on his statement. There is no challenge to the credibility of his evidence. The trainer of two of Solar Star's progeny, Neil Drysdale, provided a witness statement and gave oral evidence by video-link from California. Mr Drysdale was a principal trainer of Newgate's horses in the United States. Luke Lillingston gave a witness statement but was not cross-examined. He and his father Alan Lillingston run a stud farm. Alan Lillingston was one of the purchasers of Solar Star and Luke Lillingston considered joining the partnership but decided against it. Alan Lillingston's son-in-law, Michael Bell, a trainer, was another of the purchasers of Solar Star and provided a witness statement but again was not cross-examined. There were short statements from four other witnesses who were not cross-examined.
23. Each side called an expert witness on issues relating to horse racing and breeding. The claimants' expert was Captain Christopher Coldrey and the defendants' expert was Miss Alexandra Scrope. Following exchange of their reports, they met and agreed a joint report in which there was a considerable degree of common ground, although difference remained on some issues. Both were cross-examined. There was some challenge to the relevance of Captain Coldrey's experience, but I accept that he is in a position to give relevant expert evidence. There was some criticism of incorrect or incomplete details in Miss Scrope's report, but they have no bearing in my judgment on the quality of her evidence.
24. The conduct of Mr Penfold, and the credibility of his evidence, are at the heart of this case. The principal issues are whether he acted honestly in his dealings in relation to the three horses and whether he made full disclosure to Prince Fahd of material facts relating to the sales of Solar Star and River Jig and obtained his approval to those sales. His evidence is that he discussed both sales with Prince Fahd and obtained his approval.

Matters relevant to Mr Penfold's conduct and credibility

25. I will consider first the matters relied on by the claimants to show that in various respects apart from the disposal of horses Mr Penfold has not acted honestly, either with Prince Fahd or in other ways connected with Newgate. Four principal matters were relied on: Mr Penfold's remuneration, the finance provided by Prince Fahd to Mr Penfold for the acquisition of a property called Bugley Stud and its tax implications, a commission arrangement between Mr Penfold and a trainer, and an allegation that Mr Penfold supplied a back-dated agreement to Mr Hodson in an attempt to deceive him.

(i) Mr Penfold's remuneration

26. The only written contract for Mr Penfold's services in evidence is the agreement dated 1 January 1991 made with both Newgate companies. It provided for an annual fee of £37,250 and for commission at a rate of 2.5% on the proceeds of profitable sales of home-bred colts or fillies. It is not disputed by the claimants that there were increases in the fee or that an additional commission on yearling sales was introduced, in each case without any further written agreement. In addition, Mr Penfold was paid a commission of 2.5% on the proceeds of resale of purchased horses. In the context of the general allegation that Mr Penfold used his position to obtain benefits to which he was not entitled, it is said by the claimants that there is no evidence that this commission was ever agreed.
27. I am satisfied that the commission on the profitable resale of purchased horses was agreed by or on behalf of Prince Fahd. Mrs Miller's evidence was that throughout her employment, which started in July 1993, there was an arrangement for commission on yearling sales on an ascending scale and a commission of 2.5% on the proceeds of all other profitable sales. Mr Smith's evidence was that the basis on which Mr Penfold's commission was paid was settled well before his employment was terminated, although it is fair to say that he was not well informed on the details of the commission arrangements. There is in evidence a letter dated September 1997 from Mr Esam Ghazzawi, a director of Faal Racing, which sets out an ascending scale of commissions on yearling sales and continues:

"The provisions of clause 4 of the agreement dated 1 January 1991 between Mr Penfold and this company applies to all other bloodstock sales."

It is established that commission of 2.5% on profitable resales of purchased horses was paid in respect of sales in 2000 and no evidence of a different basis for the commission payments in earlier years has been adduced. Mr Smith's evidence establishes that Mr Ghazzawi was responsible for the financial affairs of Prince Fahd's various interests. He signed all Newgate and Faal Racing cheques until April 1991, when his secretary and Mr Smith were added as co-signatories, but he continued to authorise payments.

28. It is submitted by the claimants that Mr Penfold gave a false description of this commission to Prince Fahd, Mr Hodson and the court. Rather oddly, Mr Penfold's supplemental witness statement stated that he was entitled to "2.5% on all profitable resales, as per the January 1991 Agreement with Newgate". This was odd because it is clear on reading the Agreement that it applies only to the sale of home-bred horses. I formed the impression when Mr Penfold was cross-examined on this that he genuinely believed that there had always been a single commission rate of 2.5% on all profitable sales and resales, apart from yearlings. I do not have the evidence to enable me to make findings as to when commission rates on purchased horses were introduced by Newgate, but Mr Smith and Mrs Miller gave evidence that until about 1995 Mr Penfold's remuneration was split between Newgate and Faal Racing. I do not, however, have documents or other evidence from Faal Racing detailing the remuneration paid by it to Mr Penfold. I am satisfied that Mr Penfold has not misled anyone on the commission payable on profitable resales.
29. In respect of yearling sales, the claimants also submitted that Mr Penfold had, in a relatively minor way, changed the commission scale to his advantage. His original proposal, in a fax to Prince Fahd dated 26 June 1995, was for a scale of 1% on the sales proceeds up to 50,000 guineas, 2% on 51–100,000 guineas and 2.5% over 100,000 guineas The same scale is set out in Mr Ghazzawi's letter dated 8 September 1997. By 2000 Mr Penfold is charging commission at a flat rate of 1.5% on the first 100,000 guineas. Mrs Miller confirmed that the commission rate changed and that commission at the revised rate was paid. Not only does the evidence establish that payments were usually made only with the authority of Prince Fahd or Mr Ghazzawi or others acting for him, but the rate is clearly stated in a schedule sent to Prince Fahd on 4 April 2001. The maximum advantage of the change to Mr Penfold is £250 on a sale at 50,000 guineas. He thought the change may have occurred in error. I am certainly not satisfied that it was the result of any dishonesty on the part of Mr Penfold.
30. Two other points were relied on by the claimants. The first was an allegation that Mr Penfold put his children's nanny on the Newgate payroll. He accepted that he had done so, but from his evidence and more clearly from Mary-Ann Clark's evidence which was not challenged on this point, it appeared that Mary-Ann Clark was paid correspondingly less. In my judgment, this was done to secure a tax benefit. Whether or not it was permissible tax avoidance, it was not designed to defraud Prince Fahd or Newgate.
31. The other point related to Mr Penfold's occupation of Sandley House in Dorset from 1999. Newgate UK moved its operations to Sandley in 1999. Mrs Miller's evidence was that all those working at Sandley, including herself, Mr Penfold and Mr Lane, lived there rent-free. Mr Smith said that this was general practice in the racing industry. It appears that Mr Penfold's own accountant was concerned that it would be a taxable benefit. Accordingly, at his suggestion, an agreement was made providing for him to pay rent, but it was agreed that at least for 2000 he would in effect be reimbursed by a special commission. Again, whatever the tax consequences of this arrangement, it was not designed as a means of defrauding Prince Fahd or Newgate.

(ii) Finance for the purchase of Bugley Stud

32. In about April 2000 Mr and Mrs Penfold purchased Bugley Stud, a property on the other side of the road from Sandley House. It was indirectly owned by a trust, of which Prince Fahd was the principal beneficiary. On 17 April 2000 a sum of £450,000 was transferred from a bank account of Prince Fahd to a bank account of Mr and Mrs Penfold in the Isle of Man. There is no suggestion that Prince Fahd did not authorise this payment. In the course of investigating Prince Fahd's estate and preparing an inheritance tax return, solicitors for the personal representatives requested an explanation for the payment from Mr Penfold. In a letter dated 9 October 2002, his solicitors replied, after a meeting with him and on his instructions, that the payment was a gift.
33. Mr Penfold wrote to Prince Fahd on 18 October 2000 with details of yearling sales and his commission on them, in the context of the inquiries then being made by Sir William Young into his remuneration. After referring to the yearling and profitable resales commissions, Mr Penfold continued:

"The reason for mentioning this is to establish the differential between this and the now defunct prize money percentage which was paid up in full and cancelled for future years as part of the Bugley Cottage purchase agreement.

It seems that Sir William was under the impression that all commission arrangements between us were cancelled with the purchase of Bugley, so perhaps you would be kind enough to correct this misunderstanding on his part when you next speak to him. N.B. The unpaid prize money commission account to the end of 1998 already covered well over 50% of the outstanding amount on the Bugley purchase price and assuming similar levels of prize money earnings, would comfortably pass the total sum required to pay off the "vendor financing" by the end of 2002, or at the very latest, 2003."

Mr Penfold was taken to these letters at the start of his cross-examination. It is fair to say that this matter had not featured in the pleadings, witness statements, skeleton arguments or opening statements, and the letter dated 9 October 2002 and related correspondence had not been included in the trial bundles. Mr Penfold confirmed that he had not recently read it. Having confirmed the contents of his letter of 18 October 2000 to Prince Fahd, he was faced with the letter of 9 October 2002. It is clear that the two cannot stand together. Either the payment at least partly paid up and cancelled a prize money commission or it was a gift. Mr Penfold denied a conflict between them and explained:

" the gift which was originally offered by the Prince was a percentage of prize money won by his horses, and the gift then became, it was not paid initially and the amounts due built up over a period of time, and the gift was finally paid to me in this form, so I think it is fair to say that it was a gift which started off, but in a different origin, but became paid in this way."

Mr Penfold was then asked whether he had paid tax on the payment or declared it for tax purposes. After some initial hedging, he accepted that he had consciously not declared it.

34. A little later Mr Penfold was challenged as to whether commissions on prize money were ever agreed. His evidence was that it was a private arrangement offered by Prince Fahd at the Keeneland November sales in 1993 or 1994. A typed schedule of prize money commissions dated 23 October 1998 and prepared on Mr Penfold's instructions showed a net amount of over £197,000 due for the years 1994 to 1997 and for the period to 7 September 1998, with only £21,500 previously paid. Mr Penfold's evidence was that because it was an informal arrangement offered to him by Prince Fahd, he did not feel that he could press for payment. In his discussions with Prince Fahd which led to the payment of £450,000 in April 2000, it was agreed that the arrangement would be cancelled.
35. In closing submissions for the claimants, it was submitted that Mr Penfold manipulated Prince Fahd into putting up the sum of £450,000 as part of his "supposed entitlement to a prize money commission" (elsewhere described as an alleged entitlement) and then pretended to Newgate and the Inland Revenue that the money was a gift. The claimants have tried to prove too much from all this. If there was no agreement for prize money commission, the payment from Prince Fahd was a gift with the result that his solicitors' letter dated 9 October 2002 was correct and there was no income to declare to the Inland Revenue. Equally, it was not a gift if there was a genuine and binding arrangement for a prize money commission. The third alternative which the claimants appear to suggest is that Mr Penfold invented the entitlement in order to manipulate Prince Fahd into making the payment of £450,000.
36. I have no difficulty in rejecting this third alternative. There is nothing in the evidence which would suggest that Prince Fahd was so gullible as to accept that he made the arrangement if he had not in fact done so. No plausible explanation was put forward by the claimants for the preparation of a schedule of commissions by Mr Penfold in October 1998, 18 months before the payment to him of £450,000, if no arrangement existed. Mrs Miller gave evidence that there was at one stage an entitlement to commission on prize money which was cancelled at about the time that Mr Penfold bought Bugley Stud. Mr Penfold told her that the cancellation was tied in with the purchase. I find that a commission on prize money was offered by Prince Fahd in 1993 or 1994 and accepted by Mr Penfold and that as part of Prince Fahd's offer to pay £450,000 to Mr Penfold to help with the purchase of Bugley Stud, Mr Penfold agreed to the payment up and cancellation of the prize commission arrangement.
37. This leaves the non-declaration of the payment to the Inland Revenue and the letter to the personal representatives' solicitors stating it was a gift. Mr Penfold's evidence on this was unsatisfactory. His immediate reaction was to be defensive but under further questioning he accepted that he had decided not to declare it. Even if the offer by Prince Fahd to pay prize money commission was a gift, it appears likely thereafter to have been part of his remuneration, albeit payable by Prince Fahd rather than Newgate or Faal Racing. In his schedule dated 23 October 1998 Mr Penfold treated the commission as money "due".
38. I have not heard submissions on whether the payment should have been declared to the Inland Revenue and it is not an issue for decision in these proceedings. I am however satisfied that Mr Penfold chose not to declare it in circumstances in which he was sensitive about not doing so and appreciated that it at least might require disclosure. I am satisfied that for that reason he at first refused to give any explanation for it in correspondence with the personal representatives' solicitors and then allowed it to be described by his solicitors simply as a gift. For the same reason he gave evasive answers on this subject at the start of his cross-examination.

(iii) Commissions paid by Paul Cole

39. Paul Cole was the principal trainer of Newgate horses in Britain. In the autumn of 1996 at a meeting over dinner with Prince Fahd and Mr Penfold at Whatcombe, his training yard, he complained about the number of promising Newgate horses in training with him which were being sent to the United States to be trained and raced. Prince Fahd agreed to pay Mr Cole a commission of 10% on the US prize money earned by ex-Whatcombe horses. On Mr Penfold's instructions, Mrs Miller tracked the US winnings of these horses and sent the figures to Mr Cole. Mr Cole rendered twice yearly invoices, starting in November 1996, to Newgate US which Mr Penfold passed on to Mr Bishop for payment. In 1999 and 2000 the commissions were charged to and paid by Newgate UK.
40. An arrangement was established between Mr Cole and Mr Penfold, whereby Mr Penfold would invoice Mr Cole and be paid a figure of 25% of the US prize money commission paid to Mr Cole. The first invoice for this payment in evidence is dated 13 May 1997 and is based on Mr Cole's invoice from November 1996. In invoices and other correspondence with Mr Cole, Mr Penfold describes it as his "agreed share". In the period covered by these invoices, November 1996 to November 2000, Mr Cole was paid a total of $173,190 and £27,901. Mr Penfold received payments from Mr Cole equalling 25% of those amounts, i.e. $43,297 and £6,975. The claimants allege that, so far as Mr Penfold was concerned, these payments were kickbacks. In more legal language, they were secret payments dishonestly charged and received by Mr Penfold. I should make clear that no allegations of wrongdoing are made against Mr Cole.
41. Mr Penfold's evidence, as stated in a witness statement, was that Mr Cole offered to pay 25% of his commission to Mr Penfold:

"as acknowledgement of my contribution to the purchase/production of these horses. I sought the Prince's approval first. He replied that it was Paul's money, to do with as he liked. I would not have billed Paul for these monies without first clearing it with the Prince."

When writing to Mr Bishop at Newgate US to request payment of Mr Cole's invoices, Mr Penfold made no mention of his arrangement with Mr Cole. Mr Penfold's evidence was that it did not occur to him to do so, because he had discussed it with Prince Fahd who had agreed that he could receive payments from Mr Cole.

42. In a fax sent on 2 September 1998 Mr Penfold sought confirmation from Prince Fahd that the US prize money agreement with Mr Cole remained in force and, if so, asking for further funds to pay the latest invoice for $47,198. In a follow up fax on 21 September 1998 Mr Penfold again asked Prince Fahd to let him know if the agreement was still in being. In neither fax did Mr Penfold mention his own arrangement with Mr Cole for a 25% share of the commission. His explanation in evidence for not doing so was that Prince Fahd already knew about Mr Penfold's arrangement with Mr Cole and had approved it. But, on that basis, Prince Fahd already knew about the commission arrangement with Mr Cole and had not only agreed it but offered it. Mr Penfold's explanation is entirely unconvincing. As a director of Newgate seeking confirmation of the commission arrangement, he should have mentioned his own arrangement with Mr Cole even if Prince Fahd had earlier agreed it, and I am satisfied that Mr Penfold knew it.
43. I find that Mr Penfold had not obtained Prince Fahd's approval to his arrangement with Mr Cole or disclosed it to him and for that reason did not mention it in his faxes in September 1998.
44. This finding is further supported by the terms of his fax dated 4 April 2001 to Prince Fahd, to which I have already referred when dealing with Mr Penfold's remuneration. Like his fax of 18 October 2000, this was sent against the background of inquiries by Sir William Young. He states that he has "absolutely nothing to hide" and encloses a schedule headed "A. Penfold – Breakdown of Consultancy fees and Commissions for 2000" and schedules for fees and commission paid to Mary-Ann Clark, private stock kept at Newgate Stud, and an analysis of profits arising on the sale of two mares. There is no mention of Mr Penfold's share of the commission paid to Mr Cole, even though two days later on 6 April 2001 Mr Penfold rendered an invoice for £4,699 to Mr Cole. In the fax he described the schedule as "a breakdown of my earnings from Newgate for the year 2000" and in a fax dated 13 November 2001 to Mr Hodson he described it as "a full breakdown of my income – consultancy fees and commissions derived from Newgate". His explanation for the omission of any mention of his payments from Mr Cole was that it was a breakdown of his income directly paid by Newgate. Somewhat inconsistently he also said that it was not a conscious decision to omit them. I am satisfied that it was a conscious decision to omit them, taken because he knew that he had never disclosed them to Prince Fahd or obtained his approval. The same comment applies to his fax dated 18 October 2000 in which he refers to his various commission arrangements and states that "it is only the commissions which enable me to keep my head above water!", without any mention of his arrangement with Mr Cole.

(iv) Allegation of back-dated agreement

45. In 2000 and 2001 Mary-Ann Clark prepared and consigned yearlings to the sales as agent for Newgate. In a fax to Prince Fahd dated 28 July 2000, Mr Penfold had proposed this arrangement, on the basis that she would be paid a commission of 1% on the sales prices of the yearlings prepared and consigned by her. As Mr Penfold explained in the fax, and as both experts confirmed in their evidence, this represented a much lower price than the going market rate of 3.5%. Mary-Ann Clark carried out this work for sales in 2000 and she was paid at the agreed rate of 1%. Mr Penfold set out the commissions paid to Mary-Ann Clark for the 2000 sales in his letter dated 4 April 2001 to Prince Fahd. Mr Penfold told Mr Hodson in a fax dated 13 November 2001 that Prince Fahd had confirmed to him by telephone that the remuneration set out in the fax was correct and that he had verified this to Sir William Young. Mr Hodson accepted in evidence that he never checked with Sir William Young whether this was correct.
46. Mary-Ann Clark performed the same services in 2001. The terms of the arrangement for Newgate's entries to the Houghton and October Yearling Sales in 2001 are set out in a single-page agreement between Newgate and Bugley Stud, Mary-Ann Clark's business name. It is signed by Mr Penfold and Mary-Ann Clark and is dated 24 August 2001 by Mr Penfold under his signature.
47. The claimants allege that this agreement was not created or signed until November 2001 and deliberately back-dated to August in an attempt to deceive them. They say that this was prompted by enquiries as to the remuneration arrangements of Mr Penfold and Mary-Ann Clark made by Mr Hodson in a letter dated 13 November 2001. Faced with this letter, and knowing that they had no evidence of an agreement for the 2001 yearling sales, Mr Penfold and Mary-Ann Clark created the agreement and back-dated it to August, to make it appear that there had been an agreement in place before Mr Hodson became Protector of the Black Type Trust. Mr Penfold and Mary-Ann Clark were cross-examined at some length on this allegation.
48. The allegation is not directed to the terms of the agreement, although in dismissing Mr Penfold the first ground of complaint was that he had made this agreement with his wife without proper authority. For the purposes of this case, it is the allegation of deliberate back-dating and its presentation as a genuine document which is material.
49. The claimants' case is built on the timing of the production to them of the agreement and Mr Penfold's reactions to later allegations of deliberate back-dating. In October 2001 Mr Hodson was appointed as Protector of the Black Type Trust. On 13 November 2001 he wrote to Mr Penfold to say that he had no record of the arrangements agreed with Prince Fahd and requesting copies of the signed agreements covering the terms and benefits of the employment of Mr Penfold and Mary-Ann Clark whether through Penfold Bloodstock or personally. Mr Penfold replied by fax on the same day. He attached his letter of 4 April 2001 to Prince Fahd and its attachments. He said that Prince Fahd had confirmed the remuneration and that it was remiss of him not to have pressed for a formal agreement to be signed at that time. He continued:

"I did, in fact subsequently draw up a contract formalising the details of my consultancy, but Sir William [Young] refused to sign this, stating that he needed the approval of the Trustees in Switzerland (Ian Williamson), and then dragging his feet over obtaining same. I did not pursue the matter"

He enclosed copies of these unsigned agreements in respect of Mary-Ann Clark and himself, which he said represented the contracts between the parties as outlined in his fax to Prince Fahd and subsequent telephone discussion.

50. Mr Hodson's evidence is that Mr Penfold provided him with a copy of the signed Bugley Stud Agreement sometime in November. He could not say when in November it was supplied to him, particularly whether it was before or after 16 November. The claimants' first point was that if it had existed on 13 November 2001, Mr Penfold would have provided it with that letter. That is not in my judgment a safe assumption, especially as Mr Penfold responded very promptly to Mr Hodson's letter. If, as the claimants maintain, the agreement was concocted or signed and back-dated in response to Mr Hodson's letter of 13 November 2001, it is perhaps surprising that it was not done before Mr Penfold sent his response so that it could be enclosed with that response.
51. The claimants' second point arises out of Mr Penfold's response to the letter dismissing him. At a meeting on 16 January 2002 with Steven Lane, Mr Lane told Mr Hodson that he had been asked to sign a blank copy of the Bugley Stud Agreement sometime in September 2001. Mr Hodson assumed from this that the agreement had been deliberately back-dated. I will return to the significance of this information given by Mr Lane. On 22 January 2002 Mr Penfold was dismissed on account of "irregularities" listed in five paragraphs of a letter of the same date. The first paragraph concerned the making of the agreement and added the further point that Newgate had a reasonable belief that Mr Penfold had deliberately back-dated it in November 2001. Mr Penfold responded in a letter dated 13 February 2002 with a point-by-point refutation, but said nothing about the back-dating allegation. The failure to deal with the allegation is relied on by the claimants.
52. Thirdly, the claimants rely on the way Mr Penfold dealt with the back-dating allegation in his supplemental witness in response to Mr Hodson's statement. He said:

"I do not believe I backdated that document but, three years on, cannot pretend actively to remember signing it on that day."

The claimants submitted that Mr Penfold's adamant insistence that it was not backdated, said to be in marked contrast to the above-quoted passage from his witness statement, was "another lie". His oral evidence on this was as follows:

"A. I can't say it was definitely the 24^th August that I signed it, but I have no reason to believe it was backdated. And I am not in the habit of backdating documents.

Q. You know full well you did not sign this document on 24^th August 2001.

A. I cannot say the date it was signed. I have no reason to believe it was not on the 24^th August."

And later:

"Q. The point I am putting to you, and you do not agree as far as I understand it, is that some time after the 13^th November 2001, you then back-dated that document to 14^th [sic] August 2001. That is correct, is it not?

A. It is not correct. I would not have been backdating a document in November to the 14^th August. As I said in my original answer, and I stand by that, is that if that is the date on it, I am sure I signed it around that time and I would have no reason to have back-dated it."

I do not myself see any significant difference between the written and oral evidence of Mr Penfold on this point, and it does not provide a basis for an allegation of dishonest back-dating.

53. Fourthly, both Mr Penfold and Mary-Ann Clark were pressed to explain why it was thought necessary in August 2001 to have a written agreement when the same agreement for yearlings in 2000 had not been reduced to writing. Both explained that yearling preparation was then underway and the matter needed to be resolved. As Prince Fahd had died in July 2001, there had been an important change from the situation in the previous year. It seems to me that this was a cogent reason in August 2001 for a written agreement.
54. Fifthly, the claimants suggested that the existence of an unsigned agreement "as of 12 April 2001" setting out the terms with Mary-Ann Clark meant that there was no need for a separate agreement. Mrs Miller's evidence is that she was instructed to prepare this draft agreement after Prince Fahd's death. Mr Penfold has never suggested that it was prepared in April 2001. His letter of 13 November 2001 to Mr Hodson makes clear that it was prepared later. I have no evidence as to when it was prepared, particularly as to whether it was before or after 24 August 2001. The Bugley Stud Agreement is concerned only with the consignment of named yearlings to two sales and a comparison with the unsigned agreement sheds no light on its authenticity. I should add that the claimants' submission that the unsigned agreement contains a more generous entitlement to commission than the Bugley Stud Agreement is in my view wrong because it involves a misreading of the unsigned agreement, concentrating on clause 4.1 in isolation from the rest of the agreement, particularly clause 1.1. Mary-Ann Clark was clear that she was not entitled to any greater commission than 1% of the sale price of yearlings prepared and consigned by her.
55. Mr Hodson's belief or assumption that the agreement had been dishonestly back-dated was based on information given to him by Mr Lane on 16 January 2002. Mr Lane said that he had been asked to sign a blank copy of the agreement in September 2001 which he had refused to do. Although Mr Lane was, as I was told, in court for at least some of the trial and was assisting the claimants, he was not called to give evidence to substantiate this allegation. Mr Penfold gave evidence that he showed a draft of the agreement to Mr Lane for his confirmation that the terms were the same as for 2000. As Mr Lane was not called, I am not prepared to give his hearsay evidence any weight. However, even if it were true, it sits uneasily with the claimants' case. Their case is that the agreement was signed in November and back-dated to August, to give the impression that it had existed since before Mr Hodson's appointment as protector, which occurred in October. Mr Lane's account is largely inconsistent with that allegation and is entirely inconsistent with their allegation that the agreement was "put together" in November 2001. If it was created in August or, as Mr Lane apparently says, in September, why should it not also have been signed then? Mary-Ann Clark gave evidence that she remembered signing the agreement in the summer when the yearlings were still at the yard.
56. I have been concerned to examine this matter in some detail because the allegation of dishonest back-dating is highly material to the issues of credibility in this case and reflects on the evidence of Mary-Ann Clark as well as Mr Penfold. Looking at the evidence as a whole, I am satisfied that Mr Penfold and Mary-Ann Clark gave truthful evidence that the agreement was signed in August 2002 and was not, as the claimants say, dishonestly back-dated in order to deceive them.

Conclusions on the above matters

57. Having made findings on these matters, I consider now their impact on my assessment of the evidence on the issues in this case. While I have rejected the allegations made by the claimants in a number of respects, I have held them to be well-founded as regards Mr Penfold's share of the commissions paid to Mr Cole. This is clearly a very important matter. It shows that Mr Penfold was prepared to abuse his position in Newgate for his own personal profit, to conceal it from Prince Fahd and to give untruthful evidence to the court. It means that I must approach his evidence on the central issues with great caution, and I must accept that he was capable of profiting at Prince Fahd's expense, despite his many protestations to the contrary. It does not however mean that his evidence on the central issues is false or that in those cases he acted dishonestly.

Valuations

58. Before coming to individual horses, there is a general issue as regards valuations. There are a large number of contemporaneous valuations in evidence, some prepared by Mr Penfold and others by independent parties. There are significant inconsistencies between valuations of individual horses and many of them are significantly higher than the prices for which they were sold.
59. I do not place great faith in these valuations as reliable indicators of market value. The valuation of any unique property is difficult and the evidence in this case indicates that it is particularly difficult with high-class thoroughbred horses. The defendants' expert, Miss Scrope, gave evidence in her report that there is nothing as definitive as a "methodology" in valuing bloodstock; everything depends on the particular horse and the circumstances of its sale. She emphasised how difficult it is to value a horse and how widely legitimate opinion may vary. The claimants' expert, Captain Coldrey, agreed. He also agreed with Miss Scrope's view that:

"The only certain method of valuing a horse is to put it through the sales ring with a minimal or no reserve."

River Jig was sold at auction. The claimants' submit that by himself making a bid for River Jig, Mr Penfold distorted the auction as a reliable guide to market value, but as will appear when I consider that horse I do not accept the submission.

60. The claimants led no evidence to establish their pleaded case that Solar Star and River Jig were sold at an undervalue and that Crystal Fountain was worth more than the value of £5,000 which Mr Penfold put on it when he wrote to Prince Fahd to put forward Mr Clark's offer. The report of Captain Coldrey did not consider their values. In contrast, Miss Scrope's report did address this issue. As regards Solar Star, her report states:

"I would find it difficult to value this mare, as she stood in 1994 for more than $50,000."

In their joint report, Captain Coldrey agreed, although he added as a rider to a later paragraph that it was difficult to give a proper valuation ten years on and having never seen her.

61. As regards River Jig, Miss Scrope's evidence, with which Captain Coldrey agreed, was that the reserve of 25,000 guineas put on her was perfectly reasonable. Captain Coldrey agreed with her description of River Jig as seemingly failing mare. They agreed that she could be worth considerably less after a further twelve months and that she and her foal would have cost a further £1520,000 to support over that time. As River Jig was sold at auction, Miss Scrope considers that the auction price established her market value and that therefore the sale was not at an undervalue. In the joint report, Captain Coldrey agreed with the relevant paragraphs of Miss Scrope's report, adding only that the many valuations of River Jig had been substantially higher than 20,000 guineas.
62. Miss Scrope's evidence was that the maximum value of Crystal Fountain in mid-January 1996, assuming that she was to breed again, was £5,000. In their joint report, Captain Coldrey agreed.
63. On the basis of this evidence and the result of the auction of River Jig, the sales of Solar Star and River Jig were not at undervalue, unless either Mr Penfold had confidential information indicating a higher value or the purchasers, including himself or Mary-Ann Clark, were prepared to pay a higher price. I consider these points when dealing individually with Solar Star and River Jig.
64. By way of illustration of the unreliability of Mr Penfold's valuations reference can be made to his sale forecasts for the eleven Newgate horses entered for the same sale as River Jig. Nine of them were forecast by him to make a total of 535,000 guineas and in fact sold for a total of 219,000 guineas. In each case the forecast was way off the sale price. Only two horses did better than he expected. They were estimated at 100,000 and 150,000 guineas and sold for 120,000 and 230,000 guineas respectively.
65. The significant disparity between Mr Penfold's valuation and independent valuations also indicate that the valuations were themselves of very limited value. For example, Gold Flair and Fur Hat were valued as at 31 December 1994 by Mr Penfold at $50,000 and $200,000 respectively but as at 3 February 1995 by Mr Lascelles at $23,250 and $77,500 respectively. River Jig was valued at 31 December 1994 by Mr Penfold at $175,000 but as at 24 January 1995 by Nicoma Bloodstock in the United States at $65,000.
66. Mr Penfold's explanations of the valuations were contradictory. In his defence, which he signed as being true, it was said that the valuations were prepared primarily for the purpose of balancing inter-company transfers between Newgate UK and Newgate US. It was denied that they were intended to reflect the true market values of the horses and it was said that they were prepared "purely as a paper exercise". In his witness statement he suggested that "high-end" valuations "might" have been given, in part, to cancel out horse transfers between the companies as closely as possible and to obtain secured lending. He added that:

"There is a huge scope for legitimate difference in valuations of the same horse, and the fact that valuations might have been sent with this consideration in mind did not stop them from being perfectly valid."

67. In cross-examination, he emphasised (and I accept) that valuation is extremely difficult and no more than one person's opinion, but he was clear that he did not trim his valuations for the purpose of exaggerating the horses' values and they were his best attempts to put a value on them, albeit he was reluctant to do so. Specifically the question of inter-company transfers did not influence his decision. After he was taken to the passages of his defence he confirmed that the valuations were not deliberately inflated but were possibly at the higher end of an acceptable range. They were fair and proper valuations in which he believed at the time.
68. Mr Penfold's evidence shows that the explanation given in his defence was misleading. While the valuations were, I think it fair to conclude, towards the high end of an acceptable range, the denial in the defence that they were not intended to reflect market value and were just a paper exercise is unsustainable.
69. Nonetheless they remain, as I have held, of little use in assessing market value. I accept the claimants' submission, so far as it goes, that the valuations are relevant to considering whether Mr Penfold thought that he or Mary-Ann Clark were getting a bargain when Solar Star or River Jig were sold and are to that extent relevant to an assessment of his conduct at that time.

Other Horses

70. As I have already mentioned, both sides relied on dealings with seven other horses in which interests were acquired from Newgate by Mr Penfold or Mary-Ann Clark. Mr Penfold relies on them to show that Prince Fahd was well aware that he or Mary-Ann Clark from time to time acquired shares in mares formerly owned by Newgate and approved of them doing so. The claimants contend that these acquisitions were made without the knowledge or approval of Prince Fahd and are part of a pattern of conduct which includes also the three transactions in issue in the case.
71. The total of ten mares in question and their approximate dates of disposal by Newgate, with the three transactions in issue in these proceedings shown in bold, are as follows:

7.07.94	Star Mystery
1.12.94	Solar Star
1.12.94	Last Detail
31.03.95	Gold Flair
6.12.95	River Jig
6.12.95	Hotel Street
18.01.96	Crystal Fountain
15.11.97	Oleana
1.12.97	Fur Hat
20.07.00	White Silk

72. As to disclosure to Prince Fahd, it is stated in the further information of the defence that the passage of time makes it impossible for Mr Penfold to identify with precision the dates on which he disclosed to Prince Fahd that he and/or Mary-Ann Clark were proposing to acquire interests in mares owned by Newgate or had acquired interests in mares formerly owned by Newgate, but "all such disclosures took place shortly before the purchase of the mare in question", and were made orally, usually by telephone. Mr Penfold could not recall whether any oral disclosures were confirmed in writing but, if there were any written confirmations, they would be in the claimants' possession. None has been produced in evidence. His written evidence was that he personally purchased a share in Oleana, Fur Hat and White Silk, and that Prince Fahd knew and approved of his purchases.
73. In his written evidence Mr Penfold made the point that the investments in the seven horses not directly in issue ranged from averagely successful to disastrous. Leaving aside Star Mystery, the total loss on the horses amounted to £162,000. While the claim related to the three successful investments, the total picture showed, he said, that his conduct was not opportunistic self-enrichment or based on inside information.
74. I will consider the sales each of these seven horses in turn.

(i) Star Mystery

75. Star Mystery was a gelding sold at auction by Newgate UK in July 1994 for 2,400 guineas. The successful bid was by Michael Swinburne as agent for Henry Candy, who had trained Star Mystery for Newgate, and either Mr Penfold or Mary-Ann Clark. Mr Penfold's case is that Mary-Ann Clark was the buyer with Mr Candy, while the claimants say that it was Mr Penfold.
76. Mary-Ann Clark's evidence in her witness statement was that she bought him at the July sales with Mr Candy, with a view to selling him at Doncaster in 1995 as a jumper. She exhibited her cashbook which showed that after her bloodstock business was formally set up with a VAT registration she paid her half of the purchase price to Mr Penfold. She had not paid for him at the time of purchase because she was not registered for VAT. In examination-in-chief, she explained how she had seen him at the July sales and decided with Mr Candy to buy it him. The purchase had been funded by Mr Penfold because he was registered for VAT. In cross-examination, she said that the share had been bought in Mr Penfold's name. He provided the purchase money, and he paid and reclaimed the VAT. He had not lent the purchase money to her because she would then have been the buyer of the horse and would not have been able to reclaim the VAT. He invoiced her for the share, and she paid him, in January 1995 when she was registered for VAT.
77. I accept this evidence of Mary-Ann Clark. In particular, I accept that it was intended that the half-share in Star Mystery should be hers. However, the legal consequence of the way the purchase was organised for VAT purposes was that Mr Penfold bought the share as principal and in January 1995 sold it to Mary-Ann Clark. I am satisfied from the evidence relating to payment of its keep and other expenses that she then became the beneficial owner of Star Mystery.
78. The claimants attacked Mr Penfold's evidence. In the further information of his defence it was said that Mary-Ann Clark had purchased the 50% share in July 1994. In his cross-examination he at first denied that he had owned any share in Star Mystery. He later remembered that Michael Swinburn had bid for the horse and that he may have paid for Mary-Ann Clark's share while she was setting up her business. He was hazy about whether a half-share in the horse was made over to his account by Tattersalls but when shown his invoice dated 25 January 1995 to Mary-Ann Clark, he accepted that he had bought the share. I regard this evidence as muddled, rather than an attempt to mislead the court. I accept that he was genuinely hazy about the details and that the underlying idea had been for this to be Mary-Ann Clark's horse. Her evidence as to why she was interested in the horse and his evidence that he had no interest in acquiring a share in a gelding rang true. The claimants contended that a letter dated 12 December 1994 from Mr Bishop to Mr Penfold warning him, in the context of the purchase of Solar Star, of the strict laws relating to sales between a corporation and one of its directors led Mr Penfold to transfer his share in Star Mystery to Mary-Ann Clark. I do not accept this contention. Not only is this inconsistent with my findings as to the intentions of Mr Penfold and Mary-Ann Clark, but I do not accept that Mr Penfold understood from Mr Bishop's letter that similar rules applied to purchases by a director from English companies. In a letter to Alan Lillingston and Mr Bell on 21 December 1994, Mr Penfold referred to the fact of "some difficulty in a director of a US corporation acquiring a share in an asset of that corporation". I am not satisfied that Mr Penfold drew any wider lesson than that.
79. Mr Penfold was also asked about Prince Fahd's knowledge of the acquisition. There was a marked shift in his evidence on this. When first asked in cross-examination, he said that he had not discussed it with Prince Fahd. He was asked to consider the matter over the midday break and came back saying that he did not recall a discussion. A short while later he said that Prince Fahd was fully aware that he had purchased the 50% share and that it was in his name from July 1994 to January 1995. In re-examination, he was asked why he said that. He replied "Because I told him" and, when asked whether he had any specific recollection of it, he replied that he couldn't recall exactly when he told Prince Fahd but he thought it was very soon after the purchase. I reject these later changes in his evidence. In my judgment, the true position was that he had no recollection of discussing it with Prince Fahd, and probably in fact never did so. His later, contradictory evidence was, I consider, an attempt to improve his position.
80. A case of active concealment from Prince Fahd is not, however, made out. In opening, Mr Trace laid some emphasis on a fax dated 28 July 1994 to Prince Fahd reporting on the sales of the Newgate horses. Four horses sold at auction are included with prices but without naming purchasers. It was said that this showed Mr Penfold's dishonesty from the start. However, Mrs Miller's evidence was that either she or Steven Lane, not Mr Penfold, would have prepared and sent the fax and that the standard practice was to send Prince Fahd a list of sales at auction without naming purchasers.

(ii) Last Detail

81. Last Detail was sold at auction at the Tattersalls December Sales in 1994 for 11,000 guineas. Charles Mason was the successful bidder. Mary-Ann Clark's evidence was that Mr Mason had talked to Mr Penfold, as the seller's agent, about the horse before the sale. Mr Mason and Mary-Ann Clark's sister were going into partnership to purchase the horse and after the sale they offered a quarter-share to Mary-Ann Clark, which she accepted.
82. The claimants submitted that Mr Penfold, rather than Mary-Ann Clark, was initially the owner of the quarter-share, on two principal grounds. The first relates to the way it was funded. Mary-Ann Clark paid for the share out of a sum of £6,000 introduced as the first contribution to her business. The claimants suggested that the sum of £6,000 was provided by Mr Penfold, but I accept Mary-Ann Clark's evidence that she provided it out of the sale proceeds of some stock market investments. Secondly, they rely on Mr Penfold's fax dated 24 January 1995 to an insurance broker requesting a reissue of the insurance certificate for Last Detail and Solar Star in the name of "Mary-Ann V Clark (Bloodstock)". It cannot be inferred, as the claimants contend, that the earlier certificate was in Mr Penfold's name. There is an earlier certificate, dated 19 December 1994, in the name of "Miss Mary-Ann Clark".
83. I find that Mr Penfold was not an initial purchaser nor had any interest in Last Detail. I also find that Mr Penfold discussed with Mary-Ann Clark the proposal that she should take an interest in Last Detail and recommended it, although there is no evidence that he gave her confidential information about her and it is clear that Newgate had already decided for good reasons to sell Last Detail.
84. I do not accept Mr Penfold's evidence in re-examination that he told Prince Fahd in a telephone call after the sale that Mary-Ann Clark had an interest in the horse. In cross-examination his evidence was that he had not discussed it with Prince Fahd or at any rate had no recollection of doing so. I am satisfied that he has indeed no recollection of telling Prince Fahd that she had bought the horse and probably did not do so.

(iii) Gold Flair

85. Gold Flair, a nine-year old broodmare, was sold in foal for £25,000 on or about 31 March 1995. On 31 March 1995 Mr Penfold faxed a sales update to Prince Fahd which included a report that Gold Flair had been sold privately to Tony Carter. Mr Carter was a friend of Mr Clark. In the further information of the defence, it was stated that the sale by Newgate was to a partnership comprising Mr Carter, Mr Clark and Mary-Ann Clark as equal partners. In his witness statement, Mr Penfold stated that although the fax mentions only Mr Carter as the purchaser, the intention was that Mr Carter, Mr Clark and Mary-Ann Clark would each take a one-third share. He explains that the practice is not to set out all members of a partnership in correspondence but to refer to one only, usually the largest stakeholder or, where the shares are equal, to the one nominated as managing partner. He believes that Mr Carter's name was put forward to encourage him to become a major investor but it transpired that he did not wish to be named as a partner at all. His share was put in Mr Clark's name. He says that there was no intention to conceal the involvement of Mary-Ann Clark or Mr Clark from Prince Fahd and that he advised Prince Fahd of their involvement in a telephone conversation before the sale was concluded.
86. Mr Penfold was challenged on this account in cross-examination and it was put to him, and submitted to me, that the fax to Prince Fahd was dishonest, in particular because it deliberately concealed the interest of Mary-Ann Clark and Mr Clark. Mr Penfold agreed that the fax was not "fully correct". He said that his understanding at the time was that Mr Carter was to be the principal partner but this was a misconception on his part. He also accepted that he did not discuss the sale of Gold Flair with Prince Fahd until after the sale, when they were together at Newmarket on Guineas Day (6 May 1995) and he introduced Mr Carter and Mr Clark as the Gold Flair team.
87. The fax was said to be misleading in other respects. Although he refers to Mr Lascelles' valuation of £15,000 in February 1995, he does not mention that (i) he had himself valued her at $50,000 as at 31 December 1994, (ii) the Lascelles valuation was on the basis that she was barren, (iii) at the time of the sale she was in foal and (iv) the price included the nomination fee which would be Newgate's responsibility to pay but, it is fair to point out, no part of the price would be repayable if she was not in foal in October. Mr Penfold said that he referred to Mr Lascelles' valuation because it was independent, and he said elsewhere in his evidence, but not in this context, that all valuations were sent to Prince Fahd. He said that Prince Fahd would have known that she was in foal and that the nomination fee would be Newgate's responsibility because she had been covered while in its ownership; he also said in re-examination that he would not normally give that amount of detail in a sales report to Prince Fahd.
88. Mary-Ann Clark had not dealt with Gold Flair in her witness statement, but in examination-in-chief she gave a different account of her participation in Gold Flair which differed from Mr Penfold's evidence. She said that it was only after the purchase price had been paid that she became aware that her father was taking a share. She then requested a share. In cross-examination she said that her decision to buy a share was made after Mr Penfold's fax of 31 March 1995, which she had not previously seen. She also said that, having checked her father's cash books, the cheque for the purchase price sent to Newgate was in fact sent by Mr Clark, rather than Mr Carter, and that Mr Carter had provided a cheque for the full amount to Mr Clark. Mr Penfold sent a letter dated 12 April 1995 to Mr Carter, thanking him for his cheque. In writing this, Mr Penfold would not have known that it in fact came from Mr Clark, because Mrs Miller dealt directly with incoming cheques. When challenged, she said "I can give you proof through my father's cash books that the initial 25,000 was paid to him and he paid out Tony's share initially on the whole horse on behalf of Tony Carter."
89. Mary-Ann Clark records the payment of £9,791.66 (including VAT) for her share on 10 April 1995 in her cashbook, and her bank statement shows the cheque cleared on 12 April. It was put to her that the funds to pay for her share had been provided by Mr Penfold or Prince Fahd, which she denied. Her cashbook showed on 10 April 1995 a receipt of £10,000 described as "PFS loan". "PFS" stands for Prince Fahd Salman. In examination-in-chief, she said that the sum of £10,000 comprised £2,500 spending money given, not lent, to her by Prince Fahd when they were on holiday with him in Gstaad and the rest as coming from money given to her by her godmother. Why then describe it as "PFS loan"? Her answer was that it was a loan from her to her business, derived in part from funds provided by Prince Fahd. In closing, the claimants submitted that Prince Fahd provided the money.
90. I regard this episode regarding Gold Flair as important, because of its impact on both the conduct of Mr Penfold at the time and the quality of his evidence in this case. It vividly illustrates the difficulty of a satisfactory resolution of serious factual disputes on issues which are not the subject of any claim. Not all the relevant witnesses addressed it in their statements and some of Mary-Ann Clark's evidence could have been tested against more disclosure of her records and disclosure of relevant parts of Mr Clark's records. In particular, her evidence that Mr Carter provided a cheque for the full amount of the price to Mr Clark is, if correct, corroboration of her evidence that he was initially the sole purchaser. The relevant records were neither volunteered nor sought, which they would have been if there had been a claim as regards Gold Flair.
91. The central issue here is whether Mary-Ann Clark's evidence is accepted. Either way it is unhelpful to Mr Penfold. If I reject her evidence, it follows that his letter of 31 March 1995 to Prince Fahd gave a misleading account of the sale. If I accept her evidence, his earlier evidence that he spoke to Prince Fahd and told him about the involvement of Mary-Ann Clark and David Clark could not be correct. As to the latter, he of course accepted in cross-examination that he had not spoken to Prince Fahd about Gold Flair until a month later.
92. In my judgment, Mary-Ann Clark was giving a truthful account of the circumstances in which she acquired her interest in this horse. In reaching that conclusion, I have taken into account and carefully considered that she did not in her witness statement take issue with Mr Penfold's pleaded case or his evidence in his first witness statement. Likewise, I have considered what I regard as her inability to give a coherent explanation for describing the credit entry of £10,000 on 10 April 1995 in her cashbook as "PFS loan".
93. This casts a revealing light on Mr Penfold's evidence. When giving both his written and his oral evidence, he believed that Mary-Ann Clark had been involved from the start as a purchaser. He gave convoluted and unconvincing explanations as to why he mentioned only Mr Carter as a purchaser in the letter. He gave written evidence that he had told Prince Fahd of the involvement of Mary-Ann Clark and Mr Clark before the sale was concluded. I am satisfied that he had no recollection of any such conversation. In his oral evidence, he said that the only conversation which he could in fact remember was the one on Guineas Day a month later.
94. It follows that the fax to Prince Fahd did not conceal any involvement of Mary-Ann Clark. It did not however mention Mr Clark's involvement, as it should have done in view of Mr Penfold's close connection with Mr Clark. I found unconvincing his explanations for not mentioning Mr Clark and I find that he took a deliberate decision to conceal Mr Clark's involvement. He should have given the facts relevant to Mr Lascelles' valuation and, if his view as to value differed, he should have said so, but I am not satisfied that there was any deliberate concealment involved in this.

(iv) Hotel Street

95. Hotel Street was privately sold by Newgate for £9,000 during the Tattersalls December Sales in 1995. Mr Penfold's case in the further information of his defence is that it was bought by a partnership comprising Mary-Ann Clark (30%), Mr Clark (25%), and Mr Lascelles, Mr Voute and Nicholas Wingfield-Digby (15% each). At a later date, which he believed but was not sure was in 1999, the latter three partners gave up their shares and it was thereafter owned Mr Clark (50%), Mary-Ann Clark and Mr Penfold (25% each). In fact that change occurred in 1998 but nothing turns on it. As regard the sale by Newgate, it is stated in the further information that it was agreed between Prince Fahd and Mr Penfold over a cup of coffee at Tattersalls. She had not reached her reserve and Mr Penfold says that he offered to buy her at the reserve price which Prince Fahd accepted there and then, wishing him luck with her.
96. Mr Penfold gave oral evidence of the purchase. She was unsold in the auction at 8,900 guineas, the reserve being 9,000 guineas. Mr Penfold did not think the bid at 8,900 guineas was a live bid or that there was any genuine bidder. The price of £9,000 which he agreed was the reserve less Tattersall's commission. Contrary to the claimants' submission it was also more than a bid of 8,900 guineas less commission.
97. Mary-Ann Clark gave evidence in examination in chief of the circumstances of the purchase. Hotel Street was not regarded as promising after a skull injury and two barren years. When at the auction she was unsold, Mary-Ann Clark suggested that they try to put together a partnership to buy her. She thought that there was still hope for her, particularly if Mr Wingfield-Digby, a leading broodmare vet, were to be a partner. She also gave evidence that she was with Mr Penfold when he discussed and agreed the purchase with Prince Fahd. The claimants made the reasonable criticism that none of this featured in her statement or Mr Penfold's. Nevertheless, I accept her evidence.
98. By the time of the conversation with Prince Fahd there would have been little, if any, opportunity to organise a partnership and Mr Penfold himself said in evidence as regards the share taken in Mary-Ann Clark's name: "It was either going to myself or Mary-Ann Clark and in this instance it was Mary-Ann". It was not suggested in the further information of the defence, and Mr Penfold did not suggest in evidence, that he told Prince Fahd that he was buying on behalf of anyone except himself.
99. Mary-Ann Clark's cashbook shows payment of £9,000 plus VAT to Newgate on 24 December 1995, with receipts from Mr Clark, Mr Voute, Mr Lascelles and Mr Wingfield-Digby between 19 and 27 December 1995 for their shares. The purchase of her share in Hotel Street, as with her share in River Jig, was funded by the receipt of £17,000 described in her cashbook as "Loan PFS". I later consider the evidence on that entry, which shows that it comprised £10,000 lent by Mr Penfold out of a gift to him from Prince Fahd and £7,000 from Mary-Ann Clark's own resources including a gift to her of £4,000 from Prince Fahd. I also later find that by 14 December 1995 Mary-Ann Clark had become the real owner of a share in River Jig and for similar reasons I find that she became one of the real purchasers of Hotel Street. It cost her £2,250 and she repaid Mr Penfold out of the sale proceeds of River Jig. The evidence shows that she paid her share of the mare's keep and expenses, although Mr Penfold undertook the role of bloodstock manager with this horse as with others. Only in 1998 did Mr Penfold become a part-owner of the horse and I accept Mary-Ann Clark's account of the detailed circumstances in which this occurred.
100. I accept that the sale of Hotel Street was agreed at a meeting with Prince Fahd. Mr Penfold was not then acting on behalf of a partnership, although it was intended that it should be owned by a partnership. It is clear that this was not disclosed to Prince Fahd who believed that Mr Penfold was buying the horse. Mr Lascelles valued Hotel Street at $77,500 as at 3 February 1995 and Mr Penfold had valued her, barren to Cadeaux Genereux, at £30,000 as at 22 May 1995. There is however nothing to suggest that, despite her failure to sell at 9,000 guineas at auction in December 1995, she was in fact worth any more than £9,000. Mr Penfold did not mention the earlier valuations to Prince Fahd but I am satisfied that this involved no deliberate concealment.

(v) Oleana

101. Oleana was a four-year old filly entered for the Keeneland November Sales in 1997. In a fax sent in January 1997 to Coolmore Stud Mr Penfold said that her trainer, Mr Drysdale, considered her to be Stakes-class. In evidence Mr Drysdale said that he had misjudged her: she was definitely not Stakes-class and won only two races out of 14 starts. In July 1997 Mr Penfold sent Prince Fahd a list of proposed sales by Newgate US in order to reduce its bank borrowings, which included Oleana, estimated by him to sell in the range of $80–125,000. The aim was to sell fillies and mares "which do not come up to the very highest standards". She was then out of training, after a ligament injury. She was entered for the sale on 15 November 1997. On the day before, Mr Penfold faxed Prince Fahd to say that while there was plenty of interest in Elaysha also selling on 15 November and that he thought the reserve should be $120,000–150,000, he suggested a reserve of $25–30,000 for Oleana. He stated that both horses should reach these reserves without too much difficulty.
102. Mr Penfold's evidence was that it was only after sending this fax that he discovered that there was very little interest in Oleana. His evidence, and that of Mr Drysdale, was that he rang Mr Drysdale from the sales and they agreed that they and Mr Applebaum, a client of Mr Drysdale, would bid for her. Mr Drysdale was with Mr Applebaum when he received Mr Penfold's call. Mr Drysdale's evidence was that they agreed to bid up to $30,000, with "a kick" i.e. an extra $1–3,000 if necessary. Mr Penfold said that he could not remember the kick and thought the limit was about $30,000. Luke Lillingston did the bidding for them and the mare was knocked down to his bid of $27,000.
103. Following the sale Mr Penfold rang Mr Drysdale to give him the result. Mr Drysdale thought that Mr Penfold reported the price as $37,000. On 26 November 1997 Mr Penfold sent a fax to Mr Drysdale to confirm the price as $27,000 and added: "Anyway, what a nice surprise to discover she was $10,000 cheaper than you thought". In my judgment it is a proper inference that no clear ceiling had been agreed and that $37,000 was within the range of Mr Penfold's discretion.
104. Although in the further information of Mr Penfold's defence it was stated that disclosures of all purchasers were made to Prince Fahd shortly before each purchase, he was more circumspect in his witness statement, saying only Prince Fahd "knew (and approved) of my purchase of Oleana and all other horses I went on to purchase from Newgate". In cross-examination, he accepted that he could not and did not speak to Prince Fahd before the sale. But his evidence was that he spoke to Prince Fahd on the day of the sale or the next day and told him of the result of the sale and that he was one of the purchasers of Oleana. I am satisfied that Mr Penfold has no recollection of telling Prince Fahd of his involvement at that time and there is no other evidence that he did so. He gave evidence that the reason for organising a syndicate to bid for Oleana was to save him the embarrassment of having to tell Prince Fahd that she had not made even the apparently modest reserve of $25,000. I do not accept this evidence. In my judgment, the true reason was that he thought she would be a good buy if, as he had been told, there was little interest in her.
105. I am however satisfied that Mr Penfold took no active steps to conceal his ownership of Oleana from Prince Fahd. The claimants relied on Mrs Miller's written evidence that she remembered an occasion when Prince Fahd was due to visit Sandley and Mr Penfold made "a seemingly flippant remark" that he ought to tell the groom to make sure Oleana was out of the way. She agreed, however, in cross-examination that Oleana was never moved or hidden and she knew no reason why Mr Penfold would not tell Prince Fahd about Oleana. Oleana was included in a list of "my stock kept at Newgate, as per our verbal agreement when you visited the stud at the end of 1999", sent by Mr Penfold to Prince Fahd on 4 April 2001. Mr Drysdale gave evidence in re-examination, which I accept, that Prince Fahd knew when Oleana was beaten into third place by one of his own horses, also in training with Mr Drysdale, that she was owned by Messers Drysdale, Penfold and Applebaum and enjoyed the fact that he had beaten them.

(vi) Fur Hat

106. Fur Hat was sold as a 14-year old by Newgate UK at the Tattersalls December Sales in 1997 for 22,500 guineas to a partnership comprising Mr Penfold, Mary-Ann Clark and David Clark, who held half his share for Tony Carter.
107. The claimants allege that Mr Penfold had wished to buy her when he was recommending her sale in 1995 and again when he was suggesting it in February 1997. I am satisfied that there is no basis for this allegation.
108. There is no evidence as to the circumstances of the purchase in December 1997. Mr Penfold could not remember who bid for the horse but his initial reaction was that he probably did, evidence on which the claimants rely. As with Oleana, Mr Penfold's evidence as to the timing of the disclosure to Prince Fahd of his involvement in the purchase differed from his pleaded case. Instead of prior disclosure, his evidence was that "The Prince was made aware – as always, I made him fully aware after I had purchased the mare, that evening." I am not satisfied that Mr Penfold has any recollection of telling Prince Fahd.

(vii) White Silk

109. White Silk was sold, as a one-year old filly, for $27,000 at auction at the Fasig-Tipton July Yearling Sales in 2000 by Newgate US to a partnership comprising Mr Penfold trading as Penfold Bloodstock (25%), David Clark (25%) and four other individuals each with 12.5% including Steven Lane, who was then working for Newgate UK, and Fergus Galvin, who was then stud manager of the Newgate Stud Farm in Kentucky.
110. I have no evidence of who bid for White Silk in the ring or how her purchase was publicly recorded or what publicity was given to the purchasers, but I have Mr Penfold's unchallenged evidence that he signed the ticket. Mr Penfold's oral evidence was that he spoke to Prince Fahd by telephone immediately after signing the ticket and told him of her sale to the partnership and gave him the names of the partners. As with the other horses, his written evidence had been that Prince Fahd knew and approved of the purchase and in the further information of the defence it was stated that he had made oral disclosure shortly before the purchase. I am satisfied that he has no recollection of telling Prince Fahd and there is no other evidence that he did so.

Conclusions on the other horses

111. I have in large part rejected the wholesale attack on Mr Penfold's honesty in relation to these horses. However, I am satisfied that contrary to some of his evidence, he has no recollection of disclosing the interests of Mary-Ann Clark or himself in any of them. There is no evidence that he did so and certainly no basis for finding that he did so before the acquisition, except in the case of the purchase of Hotel Street which he negotiated directly with Prince Fahd.
112. I am not satisfied that he deliberately concealed his or Mary-Ann Clark's interest, in the sense that he knew that he ought to make disclosure, in most of the cases. Quite reasonably Mr Trace for the claimants laid emphasis on Mr Bishop's fax of 12 December 1994 in which he alerted Mr Penfold to the strict rules on dealings between a corporation and a director. However, from Mr Penfold's faxes of 21 December 1994 to Mr Bell and Alan Lillingston, it does appear that he understood it to be a US rule. I am not therefore prepared to find that he knew that there was a similar rule applicable to English companies, although he should without question have checked. Of the subsequent horses, Gold Flair (in which he had no interest of his own), Hotel Street (whose purchase he negotiated directly with Prince Fahd) and Fur Hat were bought from Newgate UK. However, Oleana and White Silk were bought from Newgate US and I do not accept Mr Penfold's evidence that he had forgotten that Mr Bishop required him to obtain written consent from Prince Fahd to his purchase of them. I find that he knew that he should obtain consent and chose not to do so.
113. I have also found that when writing to Prince Fahd to inform him of the sale of Gold Flair, he deliberately chose not to mention David Clark's interest, although he knew that it rendered the letter misleading.
114. I turn now to the transactions involving the three broodmares which are directly in issue.

Solar Star

115. Solar Star was a broodmare owned by Newgate US. She was sold in December 1994 for $60,000. Mr Penfold's evidence is that she was sold as part of the effort to raise funds for the substantial debts falling due for payment in December 1994. She was not one of the Newgate mares entered in the Tattersalls December sales, which ran from 29 November to 1 December 1994. He and Prince Fahd spoke regularly by telephone during the sales. In light of disappointing prices for the mares which had been entered in the sales, they discussed the possibility of selling other mares by private sale. Solar Star and Over Your Shoulder were identified as possible candidates.
116. Mr Penfold regarded Alan Lillingston as a potential purchaser. He had bred Solar Star's dam which Newgate had bought from him and, Mr Penfold says, he had expressed an interest in getting back into the family. Mr Penfold therefore approached Alan Lillingston who, Mr Penfold thinks, suggested a price of $60,000. Mr Penfold's evidence is that he discussed this with Prince Fahd, telling him that a price of $60,000 was "on the low side". Prince Fahd told him to sell the horse to Alan Lillingston at that price.
117. I will come back to the need to raise funds in a little more detail, but I accept Mr Penfold's evidence as summarised above. Alan Lillingston did not give evidence, but his son Luke and his son-in-law Michael Bell did and Mr Penfold's account is consistent with their evidence. I have no reason to doubt that Mr Penfold was speaking very regularly to Prince Fahd during the sales and no reason to doubt that he discussed a possible sale to Alan Lillingston and was given authority to proceed with it. In his defence and further information, Mr Penfold placed these discussions after the December sales or possibly on the last day, whereas it is now clear that they took place during the first or second day of the broodmare sales. Given the time since these events and the fact that Mr Penfold did not have disclosure of Newgate's documents when the defence was prepared, I do not find that sort of discrepancy surprising.
118. Either before or after getting Prince Fahd's authority to proceed, Mr Penfold was told by Alan Lillingston that he did not want to buy more than a half share. Mr Penfold set about finding a purchaser or purchasers of the other half share. Michael Bell had trained Solar Star, so he was also an obvious person to approach. He was prepared to take a 25% share. Mr Penfold thought that Luke Lillingston might take the remaining 25% and this possibility was passed on to Luke Lillingston by his father. One evening during the sales, Mr Penfold, Alan Lillingston, Luke Lillingston and Michael Bell met in one of the Tattersalls conference rooms. Mary-Ann Clark gave evidence that she and Mrs Bell were also present but spent most of the time talking together and did not participate in the discussion. The evidence of Mr Bell and Luke Lillingston is that others, such as Mary-Ann Clark and Mrs Bell may have been there, but they do not specifically recall them. Mary-Ann Clark was not able to give any significant evidence about the meeting.
119. The outcome of the discussion was that Alan Lillingston and Mr Bell confirmed that they would respectively buy a 50% and 25% share in Solar Star at a total price for the horse of $60,000, but Luke Lillingston considered the price too high and decided not to buy a share. It was unclear by the end of the meeting as to who would buy the remaining 25% share.
120. The account of the meeting set out above is based on the evidence of Mr Bell and Luke Lillingston, who were not cross-examined on their statements, as well as on Mr Penfold's evidence.
121. On 1 December 1994, Jacky Miller, Mr Penfold's assistant, sent a fax on his instructions to Mill Ridge Farm in Kentucky where Solar Star was then kept, stating that she had been sold subject to veterinary examination to Alan Lillingston. This was probably the day after the evening meeting at Tattersalls.
122. Mr Penfold's evidence is that his own personal involvement in the deal arose because it was necessary to find an additional purchaser to save the deal. I accept this evidence. He spoke to his future father-in-law, David Clark, who agreed to take a 12.5% share which for his own personal reasons he wished to have put in the name of his wife Elizabeth. Mr Penfold decided to take the remaining 12.5% share himself.
123. These arrangements were crystallised by 6 December 1994 at the latest. On that date, Mr Penfold sent a fax to Mr Bishop, at Newgate US, telling him that Solar Star had been sold for $60,000 to a partnership comprising Mount Coote Estates (Alan Lillingston's business) (50%), MLW Bell Racing Limited (25%), Mrs E Clark (12.5%) and himself (12.5%). It asked Mr Bishop to draw up a bill of sale.
124. On the previous day Mr Penfold sent a fax to Seth Hancock, a breeder and trainer in the United States, about three nominations, including the following:

"When I enquired about a season to BOUNDARY, you pointed out that the horse was full, as you believed you had underpriced him, but stated that you would be glad to find a season for one of our good mares. The situation is slightly changed in that I (and two partners) have recently acquired from Newgate the mare which I had in mind. She is SOLAR STAR Bay (1989) by LEAR FAN-LAJNA, by BE MY GUEST, tested in foal to DIESIS, l.s.d. February 26^th, 1994. I am transmitting SOLAR STAR's pedigree details. She is a good allowance winner at 2 in England – the race she won at Newmarket has since been elevated to Black Type status. SOLAR STAR has an excellent first foal, a bay filly by IRISH RIVER, which Prince Fahd is retaining."

The reference to "I (and two partners)" could suggest that David and Elizabeth Clark were not yet involved or that they would hold their share for Mr Penfold. Neither suggestion would in my view be correct. It is probable that David Clark had by 5 December 1994 agreed to take a 12.5% share and I accept his evidence, as well as Mr Penfold's, that he did so on his own behalf.

125. On 12 December 1994, Mr Bishop replied to Mr Penfold's fax of 6 December, enclosing a draft bill of sale for Solar Star and stating:

" in view of the fact that you are one of the purchasers, I think you may consider getting some sort of letter authorizing the sale from Prince Fahd. The laws related to sales between a corporation and one of its directors are strict."

Mr Penfold responded by fax on 13 December 1994, stating:

"In order to avoid the problems with regard to directors acquiring assets, please can you please record my share in the name of Miss M.A.V. Clark."

One of the issues which arises is whether Mary-Ann Clark was a nominee for Mr Penfold. Both of them deny this allegation to which I will return. At this stage it is worth noting that although the language of this fax might suggest she was to be no more than a nominee, Mr Bishop who gave evidence for the claimants was clear that he understood that Mary-Ann Clark, not Mr Penfold, would be the true owner of the share.

126. Mr Bishop prepared a revised bill of sale, which Mr Penfold circulated to Alan Lillingston and Mr Bell for signature on 21 December 1994 under cover of identical faxes in which he stated:

"You will note that I have put my share in the name of Mary-Ann and her mother as it appears that there is some difficulty in a director of a US Corporation acquiring a share in an asset of that corporation."

This would suggest that until this letter Alan Lillingston and Mr Bell had not known of Mr or Mrs Clark's involvement, but it is clear from Mr Penfold's fax of 6 December 1994 that their involvement pre-dated the legal issue raised by Mr Bishop.

127. The principal issues which arise from this sequence of events are:

i. did Mr Penfold inform Prince Fahd of his involvement as a purchaser and obtain his consent;

ii. if not, did Mr Penfold dishonestly conceal his involvement from Prince Fahd;

iii. did Mary-Ann Clark take her interest as nominee for Mr Penfold;

128. Before dealing with those issues, I will consider the financial background against which the sale of Solar Star took place. There is no doubt that Prince Fahd sanctioned very high levels of expenditure during 1994 and there were corresponding cash flow pressures. For example, on 3 August 1994 Mr Penfold wrote to Prince Fahd about the urgent need for $3 million by the end of August, and a need for some $12.2 million in the year to 31 July 1995 assuming no further purchases of yearlings or broodmares in 1994. On 8 September 1994 Mr Penfold wrote to Prince Fahd, expressing his concern about the policy of repeated late payments and on 17 October 1994 he reported that over $4.1 million was required in October, including overdue accounts of $1.43 million. Similar reports were sent on 1 November, 22 November and 23 November (which showed over $1 million due in respect of July accounts.)
129. The pressing need for cash is clear and in that context I find it likely that Prince Fahd and Mr Penfold would have discussed sales as one means of boosting cash resources. Mr Penfold was cross-examined on the basis that a sale at $60,000 was a drop in the ocean. That is in one sense true, but the sales of Solar Star and Over Your Shoulder raised over $250,000 and that was a useful contribution. Mr Penfold went further and specifically tied those sales to a particular payment of $500,000 due on 31 December 1994. Newgate US had bought three mares and a filly from Foxfield Thoroughbreds Inc in April 1994 for $1.5 million, payable in three equal instalments. The last two were payable on 31 August and 31 December 1994. Under the terms of the sale, Foxfield had the right to re-possess the horses in the event of non-payment within ten days after service of a notice of default and Foxfield's reputation was such that it was considered very likely that it would exercise those rights in the event of any delay in payment. Mr Penfold had drawn this risk to Prince Fahd's attention in his fax of 3 August 1994. Following a request from Prince Fahd, Mr Penfold re-sent on 2 December 1994 a list of payments to be made in November 1994 (over $4.6 million) and December 1994 ($1.029 million), including the sum due to Foxfield in December.
130. It appears from a fax sent on 6 December 1994 by Mrs Miller to Mr Bernard Smith that between 2 and 6 December Prince Fahd and Mr Penfold had met and had discussed the financial position. She reported that:

"Unfortunately, Prince Fahd has decided to hold back on the Foxfield payment for Inc, Dennis Coe's November payment and The Newmarket Box rental for next year. He says that he will have funding in place to meet these shortly."

Mr Smith had no responsibility for Newgate US's payments, but Mrs Miller must have got this information from Mr Penfold and I see no reason why it should not accurately summarise what Prince Fahd had told Mr Penfold. It is consistent with a fax from Mr Penfold to Mr Bishop dated 9 December 1994 in which he stated:

"I understand that Bernard Smith is transferring $717,000 today to Bank One, credit Newgate Stud Farm Inc. These funds should enable you to bring the overdue accounts up to date as per the attached schedule.

I am assured that the funds to cover the final payment on the Foxfield mares ($508,333) will be transferred to Bank One before the end of the month."

On 14 December 1994 Mr Penfold sent a fax to Prince Fahd specifically on the subject of the instalment due to Foxfield in which he stressed the need to meet the deadline for the final payment of $508,333 including interest. He said that the money should be in Newgate US's account before Christmas and suggested that "the funds should be transferred during the early part of next week". If, as Mr Penfold says, the proceeds of sale of Solar Star and Over Your Shoulder were earmarked for use in paying this instalment, the funds to be transferred would not be $508,333 but about half that amount. There is however no hint of this in the fax.

131. Mr Penfold laid stress on a fax he sent on 21 December 1994 to Mr Bishop in which he acknowledged receipt of the amended bill of sale for Solar Star and said that he would arrange for payment as soon as possible. He requested a bill of sale for Over Your Shoulder and continued:

"I would be grateful if you could fax this to me as soon as possible as we are anxious to get the payment through before 31^st December in order to use the funds as a contribution towards the final Foxfield payment."

In a fax sent to Mr Bishop on 28 December 1994, Mr Penfold sought confirmation of receipt of the proceeds of sale of Solar Star, apart from Mary-Ann Clark's share and added a post-script:

"The Foxfield's funds are being sent direct from Saudi Arabia."

132. In his witness statement Mr Penfold stated that the decision to sell Solar Star and Over Your Shoulder was made with specific regard to the Foxfield liability. His oral evidence was initially less clear-cut and later contradicted his witness statement. At first he said that the need to meet the Foxfield payment was "contributory" to the decision to sell "but in the Prince's mind it was one of the financial pressures that he had at that time, and the cashflow was seriously stretched". The documents dating from December 1994 to which I have referred were put to Mr Penfold and when it was put to him that it was not true that Solar Star was sold to meet the Foxfield payment, he replied:

"It is true in part, in that it was part of a contingency plan [if] these funds didn't come through."

He expanded on that to indicate that in his mind it may have been a contingency plan.

133. I am satisfied that the decision to sell Solar Star was not "with specific regard to the Foxfield liability" and in that respect I reject Mr Penfold's evidence. I am however satisfied that the decisions to sell Solar Star and Over Your Shoulder were taken by Prince Fahd and Mr Penfold in the context of the general financial position of Newgate at that time and the need to raise cash.
134. I turn now to the issue of whether Mr Penfold informed Prince Fahd of his involvement as a purchaser of Solar Star. There would have been the opportunity to do so, because in early December 1994 they were regularly in contact by telephone and, as I have mentioned, they met between 2 and 6 December. However, until his evidence in cross-examination, Mr Penfold had not asserted that he had told Prince Fahd that he was to be a purchaser. His defence pleads that he told Prince Fahd that Mary-Ann Clark was a purchaser but it is not pleaded that he told Prince Fahd that at the earlier stage he was to be the purchaser. Nor was any evidence to that effect in his witness statement. However, in cross-examination Mr Penfold gave evidence that he told Prince Fahd as soon as Luke Lillingston withdrew. I cannot accept this evidence. As Mr Trace submitted, this is so central an issue, potentially providing a complete answer to the claim, that it is very telling that it is nowhere stated in the defence or witness statements. If Mr Penfold could genuinely remember that he had told the Prince it would have appeared at least in his witness statement.
135. It is pleaded in the defence and in the further information of the defence, that Mr Penfold informed Prince Fahd in a telephone conversation that Mary-Ann Clark was one of the purchasers along with the names of the other partners. This pleading was not however supported by any written or oral evidence from Mr Penfold.
136. The next issue is whether prior to purchase Mr Penfold deliberately concealed his involvement as a purchaser from Prince Fahd, knowing that he should disclose it but choosing not to do so. I am satisfied that he did not deliberately conceal his interest as a purchaser. While it is true that he could easily have disclosed it and did not do so, I regard his fax dated 6 December 1994 to Mr Bishop as inconsistent with a finding of dishonest concealment. If he was anxious that Prince Fahd should not know of his involvement, why would he openly inform Mr Bishop that he was a purchaser and ask to be named as a purchaser? If Mr Penfold had intended to conceal his interest from Prince Fahd, he would not have told Newgate US's lawyer and administrator but would have put forward a nominee name. His explanation to Alan Lillingston and Mr Bell for the substitution of Mary-Ann Clark as purchaser indicates that the existence of any restriction on the sale of Solar Star to him had come as news to him.
137. The claimants rely on the fact that when Mr Bishop suggested he should obtain the written authority of Prince Fahd, he did not attempt to do so. The suggestion is that it shows that he knew that Prince Fahd would not have agreed. Mr Penfold's explanation in his witness statement is that trying to get anything in writing out of Prince Fahd was like getting blood out of a stone. I find nothing implausible in that. It is borne out by the documents in this case. The claimants were able to point to only two documents signed by Prince Fahd. Both were of a quite different scale of importance from a consent to an investment of $12,500. If it were the case that Prince Fahd was generally willing to sign documents, they were in a position to put documents forward to demonstrate it. I accept Mr Penfold's evidence that it was very difficult to get Prince Fahd to sign documents and that he did not try to do so for that reason, and not because he knew that Prince Fahd would not have approved the purchase.
138. If the substitution of Mary-Ann Clark was on the basis that she would be his nominee, that would involve dishonesty at that stage on Mr Penfold's part. He was by then aware from Mr Bishop's letter of the requirements of US law applicable to him as a director of Newgate US and would have realised that using Mary-Ann Clark as a nominee would be a concealment of the true position and an evasion of the US requirements.
139. It is the claimants' case that Mary-Ann Clark was merely a nominee for Mr Penfold. They rely on a number of matters to support this contention. First, they submit that he made the decision to put the share in her name without consulting her. They point to the absence of any statement in his witness statement that he did discuss it with Mary-Ann Clark. They also point to the contradictions between his evidence and hers. His pleaded case and his oral evidence was that he originally was to purchase the 12.5% share. I have found this to be the case. Her evidence, both in her witness statement and in her oral evidence, was that she expressed her interest in acquiring the share almost immediately after she knew that Luke Lillingston was not going to be a buyer. She comments she has never "totally understood the correspondence showing Anthony as a potential syndicate member." She was clear in her written and oral evidence that she bought her share in her own right and not on behalf of Mr Penfold. Mr Penfold commented in his witness statement that there may have been a misunderstanding between them because he thought he would take the 12.5% share and only refrained from doing so on the basis of Mr Bishop's advice. The confusion is increased by the preceding paragraph of his witness statement in which he seems to suggest that he "would effectively have been a "nominee" for her". I am still uncertain what this was intended to mean, but it is quite clearly not the case and Mr Penfold did not support it in his oral evidence.
140. I cannot infer from these contradictions that the share was put in Mary-Ann Clark's name without any discussion with her. She is clear in her evidence that she knew that she was buying a share in Solar Star and it is clear that until Mr Bishop's letter Mr Penfold was himself buying the share. I regard it as improbable that there was no discussion between them. I find that they did discuss that she would be the named buyer.
141. Secondly, the claimants rely on the fact that Mr Penfold provided to Mary-Ann Clark the funds needed to pay the purchase price on an interest-free basis. The facts are that Mr Penfold transferred $8,000 to her on 16 January 1995 which she used to pay the purchase price of $7,500 on 19 January 1995. In March 1995 she repaid $8,000 to Mr Penfold. She explained in evidence that she repaid it after selling some stock market investments. They were both rightly criticised by Mr Trace in cross-examination for stating in their witness statements that "no purchase monies came from me" (Mr Penfold) and giving details of the payment of the price from her account without also disclosing the loan. However, the basic facts of the loan and its repayment are unchallenged and it tends to support the case that Mary-Ann Clark was the true owner of the share in her name, rather than that she was a nominee. If she was a nominee, she would not have repaid the loan.
142. Thirdly, the claimants relied on a series of letters which showed, it was submitted, that Mr Penfold made the decisions in relation to the horse and regarded Mary-Ann Clark's shares as his own. While it is clear that Mr Penfold dealt with the other partners and insurers in relation to Solar Star, the correspondence does not support the contention that he regarded her share as his own. Several of the letters make the point that she is the owner of the share. For example, a fax to the insurance broker on 24 January 1995 asks that the insurance certificate for Solar Star and Last Detail be re-issued "in the name of Mary-Ann V. Clark (Bloodstock) as the shares in these two mares are actually owned by Mary-Ann". It appears that the earlier certificate, dated 19 December 1994, was simply in the name of "Miss Mary-Ann Clark" and it was at this time that Mary-Ann Clark established her business. On 3 February 1995 he faxed a request "on behalf of Mary-Ann and her mother" for insurance cover for Solar Star's colt. A letter dated 16 April 1996 from Margaux Farm in Kentucky was written to both Mr Penfold and Mary-Ann Clark. The claimants laid particular emphasis on a fax dated 18 August 1997 from Mr Penfold to Alan Lillingston, copied to Mr Bell and Mr and Mrs D. Clark. This concerns Solar Star's filly and Mr Penfold writes:

"The other aspect which occurs to me is that

a) We could agree a reserve price, at which we could all retain her

and/or

b) If you value her more highly than we do, you would still have the option to buy out our 25% share and resell her on your own and Michael's behalf in the Houghton?"

143. This, it was submitted, was the plainest possible recognition of Mr Penfold's interest. However, it must be read in the context of earlier correspondence with Alan Lillingston. Writing on 9 July 1996 (the letter wrongly states 1995), Mr Penfold stated:

"I fully appreciate that you and Michael, as owners of 75% of Solar Star, have a controlling interest, but I would like to put on record that having discussed the matter with Mary-Ann and her father, who own the remaining 25% of Solar Star, we feel strongly that shipping her back from America represents an unwarranted expense."

As an experienced and expert bloodstock manager, it would not be surprising if Mr Penfold were taking decisions on behalf of Mary-Ann Clark and her father, just as he of course did for Prince Fahd. While taking such decisions would equally be consistent with his ownership of the share in Solar Star, the correspondence as a whole in my judgment supports the case that Mary-Ann Clark was the true owner of the share in her name.

144. That case is also strongly supported by the detailed evidence of the payment of expenses in relation to Solar Star. It establishes that it was Mary-Ann Clark who paid 12.5% of those expenses and received 12.5% of all receipts. Where she was billed, and paid, for 25% of the expenses, she invoiced her father for 12.5% and was paid that proportion by him. The amounts involved are material and, if she were a nominee, they would be the responsibility of Mr Penfold.
145. I am satisfied that when Mary-Ann Clark was substituted for Mr Penfold as the purchaser of a 12.5% share in Solar Star, she acquired and held that share for her own account and not on behalf of Mr Penfold.
146. My overall conclusions on the facts relating to the sale of Solar Star are:

i. The decision to sell Solar Star at a price of $60,000 was made by Prince Fahd before Mr Penfold's involvement as a purchaser.

ii. Mr Penfold was one of the purchasers, as was Mr Clark, each taking a 12.5% share.

iii. Mr Penfold did not inform Prince Fahd that he and Mr Clark were among the purchasers.

iv. This did not involve dishonest concealment prior to the purchase or a deliberate decision not to inform Prince Fahd, knowing that he should do so.

v. Mary-Ann Clark became a purchaser and owner of Mr Penfold's 12.5% share on her own account, and not as nominee for Mr Penfold.

vi. Mr Penfold did not inform Prince Fahd that Mary-Ann Clark had taken over his share.

River Jig

147. The undisputed facts concerning River Jig are that she was entered for sale by Newgate in the Tattersalls December Sales in 1995. She was in foal to Catrail. On 6 December 1995, at the sales, Mr Penfold successfully bid for her at a price of 26,000 guineas. The auctioneer opened the bidding at 40,000 guineas but dropped it immediately to 15,000 guineas. It then took the auctioneer a long time to get a bid at the reserve of 25,000 guineas. He then announced that she was on the market. Within a short time Mr Penfold made a bid at 26,000 guineas. The auctioneer tried for some time to get a further bid, but there was none and it was sold to Mr Penfold. He was published in the Racing Post on the following day as the buyer.
148. Mr Penfold's bid was made on behalf of a partnership which included Hugo Lascelles and Ted Voute. Each of them took a 25% share. Ownership of the remaining 50% is in dispute. The claimants allege that Mr Penfold owned it initially, and on 13 December 1995 caused a 30% share to be put in Mary-Ann Clark's name as his nominee, with the balance of 20% going into the name of and being owned by Mr Clark. Mr Penfold pleads in his defence that he bid on behalf of a partnership comprising Mr Lascelles, Mr Voute, Mr Clark and Mary-Ann Clark. He denies that he had any beneficial interest in it.
149. On 13 December 1995 Mr Penfold wrote to Tattersalls directing them that the purchase of River Jig "made at the December sales in the name of Anthony Penfold Bloodstock" should be made over to Mary-Ann Clark. The price of 26,000 guineas was paid on 31 December 1995.
150. On 12 December 1995 Prince Fahd gave a sum of money to Mr Penfold, who sent a letter of thanks dated 15 December 1994 in his own handwriting. In the letter he says that it was timely and welcome for, among other reasons, "allowing me to make a small investment in a couple of old friends (River Jig and Hotel Street)."
151. One of River Jig's progeny, Dance Parade, made a successful racecourse debut in May 1996, following which Prince Fahd requested that River Jig (then in foal to Lycius) be sold back to Newgate. It appears to be common ground that Prince Fahd knew that Mr Penfold or Mary-Ann Clark were part owners of her. A re-purchase was agreed at a total price of £75,000, plus the stud fee of IR£7,000 for the nomination to Lycius. This amount was paid as to £40,000 by cheque and the balance was paid in cash by Prince Fahd, which I find was done on Mr Penfold's suggestion as a means of evading tax. The Catrail foal, a filly, was later sold by the partnership to Newgate for 80,000 guineas.
152. There is a good deal which is in dispute, in addition to the identity of the partners in the River Jig Partnership. Mr Penfold's evidence is that he would usually discuss the appropriate reserve for a horse with Prince Fahd shortly before it was due to go in the ring. This is not itself challenged. Prince Fahd was at Newmarket on 5 December 1995 but not on the following day. Either on the evening of 5 December or the following morning by telephone Mr Penfold discussed a reserve with Prince Fahd. He says that he advised a reserve of 40,000 guineas but was overruled by Prince Fahd who set a reserve of 25,000 guineas. Mr Penfold's evidence is that he then said words to the effect of "at that price, I might buy her myself", to which Prince Fahd replied "Fine, go ahead". The claimants deny that this exchange occurred.
153. Mr Penfold says that immediately after he made the successful bid, he rang Prince Fahd and told him of the result. Mr Penfold's evidence is that Prince Fahd knew that he had made the bid and that Mary-Ann Clark was to be one of the owners.
154. The issues of fact which arise are:

i. the circumstances in which the River Jig Partnership came together and the identity of its members;

ii. did Mr Penfold and Prince Fahd have the exchange about the possibility of Mr Penfold bidding for River Jig;

iii. what was the maximum price which the River Jig Partnership was prepared to pay for River Jig;

iv. did Mr Penfold have confidential information about River Jig's two progeny, Dance Parade and Ocean Queen, which could affect the market value of River Jig;

v. was River Jig sold at an undervalue;

vi. did Mr Penfold act dishonestly in relation to the purchase of River Jig by concealing from Prince Fahd either that he might be a bidder or material information about his bidding intentions and about River Jig and its progeny.

155. Evidence was given by Mr Voute and Mr Lascelles, as well as by Mr Penfold, Mary-Ann Clark and Mr Clark. Mr Penfold, Mr Voute and Mr Lascelles knew each other well and would regularly discuss horses coming up at forthcoming sales. The catalogue for the 1995 December Sales came out in October 1995 and they discussed some of the entries at least once and perhaps more in the weeks before the Sales. Either Mr Penfold or Mr Lascelles told Mr Voute that there might be an opportunity to buy some Newgate horses. Mr Penfold does not think he discussed River Jig with Mr Voute until the day of the sale, but he did discuss it at an earlier stage with Mr Lascelles when going through the catalogue. They regarded her as a possible purchase if she was not expensive. As to the formation of the partnership, Mr Voute was unclear as to whether Mr Penfold or Mary-Ann Clark would be the partner. He does not remember any discussion, but at the start he probably assumed it would be Mr Penfold. However, he later believed that she was the partner. Mr Lascelles said that before the sale, the only people he talked to about River Jig were Mr Penfold and Mr Voute. He recollected that at some stage, but he could not say whether it was before or after the purchase, Mr Penfold emphasised that he was not buying for himself but for Mary-Ann Clark and Mr Clark.
156. Mr Penfold's defence pleads that the purchase of River Jig was made on behalf of the partnership comprising Mary-Ann Clark, Mr Clark, Mr Lascelles and Mr Voute, that the members of the partnership had discussed the possible purchase before the sale and that in his call to Prince Fahd after the sale Mr Penfold had told him that she had been purchased by the partnership. As to the letter dated 15 December 1995 to Prince Fahd, in which Mr Penfold had referred to the small investment which he had been able to make in River Jig and Hotel Street, it was pleaded that at the time of the letter Mr Penfold was considering using the money given to him by Prince Fahd to buy a share in the River Jig Partnership. When it was put to him in cross-examination that this was inconsistent with his evidence that he was bidding on behalf of Mary-Ann Clark, he replied:

"I may have considered it for myself, but the fact of the matter was it is always likely to be Mary-Ann would have the share and it was Mary-Ann who had the share and paid for the share."

When it was put to him that his statement in the letter was untrue, he said:

"I don't know, it may well have crossed my mind. I can't recall exactly the sequence of thought that led to the final composition of the partnership. I mean, ten years ago, whether I initially contemplated taking a share myself – but I cannot be absolutely certain, but in the event it was Mary-Ann who took the shares and not me."

157. Mr Penfold gave an inconsistent explanation for the letter, in his second witness statement and elsewhere in cross-examination, saying that it was a "white lie" because he thought it would be churlish to say that he had lent some of the money to Mary-Ann Clark to enable her to take a share in River Jig.
158. Mary-Ann Clark's evidence in her first witness statement was that she bought River Jig in partnership with her father, Mr Lascelles and Mr Voute and that "we had all discussed our interest in purchasing River Jig together prior to the auction". In her oral evidence she said that her father was not present and the discussion was with Mr Lascelles, Mr Voute and Mr Penfold. Her recollection, she states, was that before the bidding they had discussed a price range, but she could not remember a limit. In response to Mr Voute's statement, she said in a second statement that she was at the sale, but not standing with Mr Penfold, Mr Lascelles and Mr Voute. She said that she had been involved, albeit in a very general way, in the discussions before the purchase. As I have mentioned, Mr Lascelles' evidence was that he had discussions only with Mr Penfold and Mr Voute. In her oral evidence, Mary-Ann Clark said that she did not discuss price with Mr Lascelles and Mr Voute, only with Mr Penfold, but left it to him to decide how to bid and, in the light of the size of any successful bid, she would decide how big a share to take.
159. In his evidence, Mr Clark agreed that he knew nothing about River Jig until after the auction, and had not discussed it with Mary-Ann Clark, Mr Lascelles or Mr Voute. He recollected that Mr Penfold had offered him a share, within 24 hours, he thought, of the sale. Once payments had to be made he assumed that Mary-Ann Clark was also a partner, because he was making payments to her.
160. In my judgment, it is clear from the totality of this evidence that at the time of the purchase, Mr Penfold was bidding on behalf of Mr Lascelles, Mr Voute and himself. He may well have had it in mind to involve Mr Clark and Mary-Ann Clark as part owners and he may well have discussed with her before the sale the possibility that she would take a share. But I am satisfied that at the time of the sale there was no partnership which included Mary-Ann Clark or Mr Clark.
161. Within a few days, Mr Clark had taken a 20% interest in his own name on behalf of himself and an otherwise unconnected third party in equal shares and a 30% share was taken in Mary-Ann Clark's name. As with Solar Star, the claimants have maintained that she held this share as nominee for Mr Penfold. The evidence is of a similar character to that relating to Solar Star, and for much the same reasons I conclude that Mary-Ann Clark took her share in her own right and not as a nominee for Mr Penfold. The cost of a 30% share was £8,190, plus VAT of £1,433.25. In their first witness statements Mr Penfold and Mary-Ann Clark said that she paid the full purchase price for River Jig to Tattersalls before receiving her contributions from the other partners. It in fact appears from the records in evidence that she received the contributions before paying Tattersalls, but the significant point appearing in the records is that she received a loan of £17,000 on 14 December 1995, from which she funded the payment of the shares taken in her name in three horses, River Jig, Al Shaqrah and Hotel Street. The first two were bought at auction and the third was a private treaty purchase from Newgate. The cost of the shares in the three horses taken in Mary-Ann Clark's name was £14,904 with VAT of £2,611, making a total of £17,515.
162. In their supplemental statements, Mr Penfold and Mary-Ann Clark explained that he had lent an unspecified sum to her to enable her to pay for her shares in the horses, without selling stock market investments when the market was low. This came from the cash gift made by Prince Fahd to Mr Penfold on 12 December 1995. It was, she said, repaid out of the cash sum of £10,500 received by her on the sale of River Jig and this was not challenged. Mr Penfold, but not Mary-Ann Clark, was challenged in cross-examination as to why he had not disclosed the loan in his first witness statement. I consider the lack of any reference to the loan in his first statement created a misleading impression, although Mr Penfold would not accept it. Mary-Ann Clark also gave oral evidence-in-chief that £10,000 out of the £17,000 came from Mr Penfold and the balance comprised a gift to her of about £4,000 from Prince Fahd and £3,000 of her own funds. This was not challenged but the fact remains that at least a material part of the payment for her shares in River Jig and Hotel Street was funded by a loan from Mr Penfold.
163. As with Solar Star, the claimants rely on Mr Penfold's involvement in the business of the River Jig partnership to show that he had an interest in the horse. In particular they rely on the circumstances of River Jig's resale to Prince Fahd in May 1996, following the good performances of Ocean Queen and Dance Parade. The claimants had pleaded that Mr Penfold was responsible for negotiating and agreeing the repurchase on behalf of the River Jig Partnership. Mr Penfold denied this in his defence and alleged that his involvement in the resale was on behalf of Newgate. In his first witness statement, he said that Prince Fahd had contacted him in May 1996 to negotiate River Jig's return to Newgate. In cross-examination, he said that he acted on behalf of Mary-Ann Clark in the resale. In her cross-examination, Mary-Ann Clark said that she had no involvement with the resale but left it to the other partners to decide. She understood that it was discussed by Prince Fahd, Mr Penfold and Mr Lascelles. When Mr Penfold told her that Prince Fahd wanted to buy the horse back she agreed. Mr Voute's evidence was similar. He was not at the meeting when the re-sale was discussed, but he agreed to it when asked.
164. While Mr Penfold's involvement in the resale is consistent with his ownership of an interest in River Jig, the evidence also establishes that Mary-Ann paid for her share of the keep and other costs of River Jig throughout the time that the partnership owned the horse. On 14 March 1996 Mrs Miller, on Mr Penfold's instructions, wrote to a veterinary hospital to say that while a 50% share in a horse called Alik belonged to Mr Penfold, Al Shaqrah and River Jig were owned by MV Clark Bloodstock who should be invoiced for charges. It is to be noted that there was no reason for Mr Penfold to use Mary-Ann Clark as a nominee in respect of Al Shaqrah. Mrs Miller's evidence was that she knew that Mary-Ann Clark, and not Mr Penfold, was a partner in the River Jig Partnership.
165. On all the evidence, I conclude that from 13 December 1994 at the latest, when Mr Penfold told Tattersalls that the purchase of River Jig should be made over to Mary-Ann Clark, she and not Mr Penfold was the owner of a 30% share.
166. As regards the conversation which Mr Penfold had with Prince Fahd before the sale, the claimants' case is that it was a fiction. They submit that it is inherently improbable that Prince Fahd would have insisted on lowering the reserve from the level of 40,000 guineas recommended by his manager to 25,000 guineas. They submit that it was Mr Penfold who set a low reserve, with the intention of enabling him to buy River Jig. They also say that the exchange about Mr Penfold bidding at 25,000 guineas is incredible, because the decision to bid had already been made.
167. I do not accept the claimants' case on this. The unchallenged evidence of Mr Penfold was that reserves were fixed by Prince Fahd in consultation with Mr Penfold shortly before a sale. The claimants' case would mean that there never was a conversation between them about the appropriate reserve. Alternatively, if there was a conversation and a figure of 40,000 guineas was fixed, Prince Fahd would know that it had sold for a much lower figure. Mr Penfold also gave evidence in cross-examination, which was not challenged, that Prince Fahd would often go lower than the figure recommended by him.
168. On the evidence before the court, there must have been a discussion between Prince Fahd and Mr Penfold to fix the reserve. I accept Mr Penfold's evidence that he had a conversation with him either late on 5 December or before the sale on 6 December 1995 and that the reserve of 25,000 guineas was fixed in the way he described. I also accept that there was an exchange between them in which Mr Penfold said that he might bid at the level of 25,000 guineas and Prince Fahd said words to the effect "Fine, go ahead". However, this was not an entirely spontaneous reaction. Not only had Mr Penfold discussed this mare amongst others with Mr Lascelles and Mr Voute in a general way in the weeks leading up to the Sales, but Mr Lascelles gave evidence that they had discussed it more specifically and that he had gone to see her about two days before the sale. I find that serious consideration had been given by Mr Penfold and Mr Lascelles to bidding for River Jig before Mr Penfold discussed the reserve with Prince Fahd.
169. It is relevant to this issue that Mr Penfold was entirely open with the world at large about his bidding and the purchase. He personally did the bidding and he was named in the Racing Post as the buyer. He rang Mrs Miller shortly after the sale of River Jig to say that he had bought River Jig. He plainly was not concerned that Prince Fahd would find out that he was the successful bidder. It is therefore entirely plausible that he would have had this exchange with Prince Fahd.
170. These findings dispose also of the allegation that Mr Penfold deliberately and dishonestly concealed his interest in the purchase of River Jig. Even if I had found that his conversation with Prince Fahd did not take place, the very public act of bidding at the sale in the knowledge that he would be published in the Racing Post as the buyer, together with the reference to a small investment in River Jig in his letter dated 15 December 1995 are inconsistent with any dishonest concealment of his own involvement. When Prince Fahd decided in May 1996 that he wanted to re-purchase River Jig, he knew of Mr Penfold's connection to the new owners and reached a deal at a meeting with Mr Lascelles and Mr Penfold.
171. However, I reject Mr Penfold's evidence that he rang Prince Fahd immediately after the successful bid and told him that he had been the successful bidder at $26,000 and that Mary-Ann Clark was one of the purchasers. Mary-Ann Clark was not by then one of the purchasers. I do not accept that Mr Penfold has any recollection of this conversation, and this evidence represents an attempt to improve his defence.
172. As to a maximum price that the partnership were prepared to bid for River Jig, Mr Voute's written evidence was that they would certainly have discussed the price they were willing to pay, although he could not remember the details of the discussions. In cross-examination, he said that he could not remember whether they had fixed a maximum price and he could not now say if he would have been prepared to go beyond 26,000 guineas. Mr Lascelles' evidence was that they did not discuss a price or budget. He explained that he was standing by Mr Penfold and if the bidding got to a price which he thought was too high he would say so. When asked whether he would have gone higher than 26,000 guineas, he replied "I think we would have gone higher but how much higher, I can't say. Yes, I think we would have gone higher, a little higher." But he did not think that he would have agreed to go as high as 40,000 guineas. Mr Penfold's evidence was that they set no figure, but River Jig would have been out of his range at 40,000 guineas. When it was suggested to him that if the bidding had gone up to 30,000 guineas, they would have bid at that price, he replied "I can't say that" and when pressed, he replied:

"I do not believe – I do not believe that we had discussed a limit that we would go to. This is something that would have been decided in running, you know. Mr Lascelles and Mr Voute were both there as you saw on the video. There was the potential to discuss whether to go on and whether to stop at the time. I don't believe anyone had committed to a figure. I certainly would have thought twice about 40,000, I must say."

173. Mr Penfold thought that River Jig was worth at least 40,000 guineas which is why he recommended a reserve at that level, and he expected her to sell for more than his successful bid of 26,000 guineas. While the evidence establishes that it is unlikely that he would have felt able to bid as much as 40,000 guineas, or would have been allowed to do so at least by Mr Lascelles, I am satisfied that they would have been willing to bid at a higher price than 26,000 guineas if necessary. It is telling that none of Mr Penfold, Mr Lascelles and Mr Voute was prepared to say that they would not have gone beyond 26,000 guineas. I consider it highly likely that prices had been discussed in advance, but I accept that no firm figure had been agreed in advance and the final decision would be made as the bidding progressed.
174. Mr Penfold does not suggest that he ever told Prince Fahd that he would be prepared to go higher than 26,000 guineas.
175. The question of whether River Jig was sold at her true market value is closely connected with the issues as to whether the fact of a bid by Mr Penfold deterred other bidders and therefore distorted the market, and whether Mr Penfold had confidential information about her progeny which was not known to the market nor disclosed to Prince Fahd.
176. The claimants allege Mr Penfold's conduct immediately before and during the sale was designed by him to deter other bidders, or would or might have that effect, as he should have appreciated. The pleaded allegation was that he personally bid in circumstances where it would have appeared to those present at the auction that the vendor's representative was bidding for its own horse, leading those present to believe either that Newgate was buying in the horse or trying to bid up the price. In either event this would or might deter potential purchasers from bidding.
177. I am satisfied that Mr Penfold's bid did not in fact have any impact on the bidding or on the price she fetched. It is obvious from Tattersalls video of the auction that the auctioneer was having great difficulty in getting any bids at all, before Mr Penfold showed his hand. I regard it as unlikely that an interested buyer would not have tried a bid to see if he could get the horse. The experts were agreed that it is not uncommon for a seller or his agent to bid for his own horse. I heard no evidence from the underbidder that he was deterred from making a further bid by Mr Penfold's bid, even assuming that he saw Mr Penfold bid and knew who he was; the video shows that the underbidder was looking down when Mr Penfold made his bid. I heard no evidence to suggest that anyone else had any interest in bidding for River Jig. I accept the experts' evidence that an owner or his representative bidding for his horse can have deterrent effect on other bidders, but I equally accept their evidence that it will often not have that effect, particularly if the seller or his agent has made only one bid.
178. The question remains whether Mr Penfold's bidding was a deliberate ploy by him to deter other bidders. The claimants make the fair point that it would have been easy for Mr Voute or Mr Lascelles, both of whom were standing by Mr Penfold, to do the bidding. However, if it was a deliberate ploy, it would almost certainly have involved some collusion on the part of the three of them, and Mr Voute, one of the claimants' witnesses, denied that they agreed it as a deliberate tactic or that there was any later discussion that they had managed to pull a fast one on the market.
179. There is an additional factor. The video shows Mr Penfold holding his mobile phone to his ear during the bid. Mrs Miller gave evidence in her statement that she remembers a call coming through from Mr Penfold on one of the afternoons during the Sales, and that a short while later he called and told her that he had bought River Jig. She could not remember the time of the call and she did not know whether it was during the bidding for River Jig. But she said that it was odd because Mr Penfold never rang when Newgate was selling horses. Mr Penfold could not remember who he was calling or why. The claimants' allegation put to Mr Penfold was that he was trying to make it appear that he was taking instructions from Prince Fahd.
180. The probability on the evidence is that Mr Penfold's call during the bidding was the call to Mrs Miller which she remembers. However, if it was intended to give the impression that he was calling Prince Fahd, it would be part of the deliberate tactic of choosing Mr Penfold as bidder. As I have said, the strong probability is that this tactic would have been discussed with Mr Voute and Mr Lascelles but Mr Voute's evidence is that it was not discussed. Whatever the purpose of Mr Penfold's call, and if it was innocent it would be surprising if he could now remember it, I reject the allegation that Mr Penfold was bidding or making a call as a deterrent to other bidders and I am satisfied that those actions had no impact on the auction.
181. As a separate aspect of Mr Penfold's conduct at the sale, there was also an unpleaded allegation that he either took steps to put off, or failed properly to encourage, a potential bidder, Amanda Skiffington. This allegation arose out of Mr Voute's statement, in which he said that Mr Penfold said to him and Mr Lascelles words to the effect that Miss Skiffington "would not be a problem for us". He understood that to mean that any interest on her part was lukewarm. Mr Penfold denied making any such statement. He remembered that Miss Skiffington was one of the few people to pull River Jig out of the pre-sale walking ring and to question him about her, minutes before the sale. They discussed River Jig's first three foals "and that was it". Mr Penfold's unchallenged evidence is that she is one of the best and most respected bloodstock agents. He did not think it appropriate to give her a full sales pitch, which I regard as understandable. However, it was only when pressed as to why he did not mention her more recent progeny, Ocean Queen and Dance Parade, that he gave evidence that he had, but I do not accept that evidence in light of his earlier answers. Miss Skiffington was not herself called to give evidence of this conversation with Mr Penfold and its impact on her as regards her interest in River Jig. I am not satisfied that Mr Penfold deliberately tried to put her off or that she was put off by their conversation.
182. I turn to the question of confidential information about River Jig's two most recent foals. At the time of her sale, she had produced five foals. The first two had been very disappointing. The third, Western Reel, had performed rather better, although she had not proved to be a champion. The record of these three foals was well known to the market in December 1995 and would have been well known to Prince Fahd. Her two most recent foals had not raced. Ocean Queen was foaled on 26 February 1993 and since April or May 1995 had been in training with Neil Drysdale in California. Dance Parade was foaled on 8 March 1994 and had been with Paul Cole since about October 1995. Both were subsequently successful horses. Out of six starts in 1996, Ocean Queen won four races, including two Black Type races. In 1996–98 out of thirteen starts Dance Parade won seven races, including five Black Type.
183. The claimants' pleaded case was that before the December Sales in 1995 Mr Penfold had been informed by Mr Drysdale and Mr Cole that Ocean Queen and Dance Parade were outstanding prospects and likely to be highly successful racehorses, and that Mr Penfold would have been aware that this would be likely to enhance River Jig's value. This was confidential information possessed by him as a director of Newgate which he had used in bidding for River Jig. In his defence, Mr Penfold denied that he had any confidential or other information in relation to the prospects of either horse.
184. As put in their closing submissions, the claimants' case was that Mr Penfold knew that Ocean Queen and Dance Parade had outstanding conformation and were exciting prospects, and that, if they fulfilled their potential, River Jig's value would be enhanced. The issues which arise are what was Mr Penfold's knowledge and assessment of these horses in December 1994, what did he tell Prince Fahd and what effect would such knowledge and assessment have had on the market value of River Jig or on a decision to sell her.
185. Mr Penfold described both horses as "outstanding" in a fax dated 21 October 1994 to Prince Fahd, at a time when Ocean Queen was 20 months old and Dance Parade was seven months old. His evidence, which I accept and was not challenged, is that he was referring to their conformation.
186. As to Mr Penfold's knowledge of their prospects, the most significant evidence was given by Mr Voute who said in his witness statement that Mr Penfold had reported before the sale that Dance Parade was very nice and Ocean Queen was said by Mr Drysdale to have potential. This evidence was not challenged by Mr Penfold in his supplemental witness statement, which was in part a specific response to Mr Voute's statement, or in cross-examination. Mr Lascelles said in cross-examination that he did not discuss Ocean Queen with Mr Penfold and Mr Voute because, as the progeny of Zilzal, he had no interest in her. He agreed that they discussed Dance Parade but his evidence was contradictory as to whether Mr Penfold said she was very nice.
187. Mr Penfold agreed that he was having regular conversations with Mr Drysdale but when asked whether, by the end of 1994, he would have known Ocean Queen's potential, he denied it. He said that Mr Drysdale had told him that she had buck shins and was big and backwards, but was otherwise healthy, and that he hoped she would come into her own on grass, although he gave no indication of her likely class or level of ability. This was largely in keeping with the tenor of Mr Drysdale's oral evidence which for convenience he had already given by video-link. He agreed that Mr Drysdale had said that he hoped she would do well the following year, although he tried to downplay it as something said by Mr Drysdale of all his two-year olds. Mr Drysdale had not said that she would be a star or a very high class horse.
188. In his evidence Mr Drysdale was emphatic that he was not able to assess Ocean Queen because she was leggy and backward. He disagreed with the opinion of Captain Coldrey that by December 1995 Mr Drysdale would have been able to make a very good assessment of her potential, because he was not in a position to go fast with her and he had only been able to do slow work. Mr Drysdale would not accept that he had told Mr Penfold that she had good prospects and, while not denying that he said that she had potential, suggested that he had said no more than that she warranted staying in training and would be ready to run in the spring.
189. While there are criticisms to be made of the ways in which Mr Penfold and Mr Drysdale gave some of their evidence on Ocean Queen, the evidence does not go further than Mr Voute's statement that in December 1995 she was considered to have potential. I can see no reason why Mr Penfold should have passed on to Mr Voute less than Mr Drysdale had told him. There was debate among the experts as to what "potential" meant, and what sort of view a trainer in Mr Drysdale's position could have formed. In the end, I did not find this of much help. The best guidance I had was from Mr Voute himself when he said:

"A. I would not have [been] interested in a broodmare had I thought one of the horses wasn't trainable and the other one was crooked; so I think there was enough positive to invest.

Q. Sufficient positive to limit your downside?

A. Absolutely."

That evidence is also the best guide to his understanding of Mr Penfold's remark that Dance Parade was very nice. As I have said, Mr Penfold did not dispute the remark and in his oral evidence he said that all he knew about her was that she was a very correct filly. She had been with Paul Cole for only six weeks. Paul Cole was not called as a witness and no allegation as to what he may have told Mr Penfold was put to Mr Penfold.

190. I am satisfied that Mr Voute's evidence as to what he was told by Mr Penfold as regards Ocean Queen and Dance Parade is accurate and that Mr Penfold's knowledge went no further than his remarks to Mr Voute. I reject the claimants' case that he knew that they were outstanding or exciting or likely to be highly successful racehorses.
191. The evidence does not support a finding that Mr Penfold's knowledge would have had a material impact on River Jig's value or Prince Fahd's decision to sell her.
192. The claimants laid some stress on valuations at various dates of Ocean Queen and Dance Parade. Ocean Queen was valued at $160,000 at the age of three months, at $200,000 in December/January 1995 and at $150,000 as at 1 December 1995. Dance Parade was valued at $170,000 as at 31 December 1994, $150,000 as at 24 January 1995 and at £140,000 as at 1 December 1995. She had been entered in the Keeneland Sales in September 1995 with a reserve of $250,000 and had been unsold at $235,000. Mr Penfold's evidence was that there were no live bids for her. I find it impossible to deduce anything from these valuations as to the effect of these two horses on River Jig's value in December 1995. Mr Penfold gave evidence that valuations were passed on to Prince Fahd. It seems likely that he would be sent them but I doubt if he paid much attention to them.
193. As to what Prince Fahd was told about these horses, Mr Penfold said that he did not discuss Dance Parade with him, although he would know from the much earlier fax that he had outstanding conformation. He said that he would have passed on what Mr Drysdale told him about Ocean Queen. Unless he had conceived over a lengthy period a plan to acquire River Jig at an undervalue, which I am satisfied is not established by the evidence, the probability is that he did pass on Mr Drysdale's comments on the horses in training with him.
194. Accordingly, so far as concerns Ocean Queen and Dance Parade, I am satisfied that Mr Penfold was not using, or abusing, confidential or price-sensitive information to acquire River Jig.
195. Finally, as to any alleged dishonesty on the part of Mr Penfold, the two matters which he did not disclose to Prince Fahd were that it was a partnership, rather than Mr Penfold alone, who might bid for River Jig and that they would be prepared to pay more than 26,000 guineas. For reasons which I shall give later, he should have disclosed in full the fact of the intended partnership and their bidding intentions. I am not, however, satisfied that Mr Penfold acted dishonestly or consciously in breach of duty in not discussing these matters.
196. The overall conclusions on the facts relating to the sale of River Jig are:

i. The partnership which purchased River Jig at auction on 6 December 1995 comprised Mr Penfold, Mr Voute and Mr Lascelles.

ii. Mr Penfold and Prince Fahd discussed the reserve to be put on her, which Prince Fahd fixed at 25,000 guineas. Mr Penfold said that at that price he might bid, and Prince Fahd replied, "Fine, go ahead". Mr Penfold did not then or later disclose the existence of the partnership or the fact that they were prepared to pay more than 26,000 guineas.

iii. The partnership was prepared to pay over 26,000 guineas and probably a price approaching 40,000 guineas.

iv. Mr Penfold's bidding did not deter any bidders, and was not intended to do so.

v. Mr Penfold did not have confidential information about River Jig's progeny which was not known to Prince Fahd or which would have affected the market value of River Jig.

vi. The price of 26,000 guineas represented River Jig's market value, subject to the fact that Mr Penfold and his partners were willing to pay more.

vii. Mr Penfold did not act dishonestly in not informing Prince Fahd of the existence of the partnership or their bidding intentions.

Crystal Fountain

197. Crystal Fountain was a 19-year old broodmare owned by Newgate UK when Prince Fahd gave her to Mr Clark in January 1996. She came from an illustrious family, but had failed as a racehorse, coming last in her only race. She had been sold at auction in 1986 as a broodmare for 380,000 guineas. Mr Penfold bought her for Newgate in 1990 for 19,000 guineas. By January 1996 she had produced nine living foals of which six had won minor races but none had shown any class. However, her 1986 daughter, Crystal Spray, had produced two high class racehorses. She was sold, in foal to Saddler's Wells, for 500,000 guineas to Sir Andrew and Lady Lloyd Webber at the Tattersalls December Sales in 1995. It was a sale which attracted a great deal of attention. At the same sale, Crystal Fountain's 1992 daughter, Aqua Rigia, was sold for 23,000 guineas.
198. Mr Lascelles valued Crystal Fountain, barren to Magic Ring, at £6,000 as at 3 February 1995 and she had been valued by Mr Penfold as at 21 December 1994 at £3,000. She was provisionally earmarked for auction at the December 1995 sales, but Mr Penfold was concerned that in light of her age and poor state of health this would reflect badly on Newgate. In a letter dated 4 September 1995, Mr Lane advised that Crystal Fountain and New Generation, another elderly mare, were not to be sold at auction and thereafter they appeared in a stocklist as mares "to be retired".
199. In her report, Miss Scrope explained the importance of culling the lower levels of stock from the enterprise of an owner-breeder. They cost the same to keep as good ones but their prospects are poor, although with a high quality operation such as Newgate an apparently poor mare may unexpectedly do well. Mr Coldrey agreed with this evidence, as well as with Miss Scrope's evidence on not selling older horses at auction:

"It is common practice for owner-breeders to give a horse which is old or which no longer suits their purposes to a "good home" or even to have it humanely destroyed rather than allow it to leave a good home for the uncertain future such an animal can face at the bottom end of the market. It would not be well regarded within breeding circles for a quality establishment such as Newgate to send an old and virtually valueless animal with inherent problems to a public sale."

200. Mr Penfold told Mr Clark that Newgate might be selling Crystal Fountain and told him something about her condition. He mentioned the stock she came from, and it was a family with which Mr Clark was familiar. They frequently talked about horses and she came up, probably only once, in the course of their conversations. Mr Clark decided to make an offer of £5,000 and asked Mr Penfold to pass it on to Prince Fahd. The suggested price was very much Mr Clark's own figure and it was not the subject of much, if any, discussion with Mr Penfold. This is the effect of Mr Clark's evidence, which I accept.
201. Mr Penfold wrote to Prince Fahd about New Generation and Crystal Fountain in a fax dated 12 January 1996. He reported that although New Generation had been barren to her 1995 covering, she had been declared a normal risk after extensive veterinary tests and he recommended giving her one final chance in 1996. About Crystal Fountain, he wrote:

"This mare is now 19 years old and as you will recall, was not entered for December Sales with her future welfare in mind. At her age and with her feet giving increasing cause for concern, it was felt that she should not be allowed to fall into the wrong hands.

Bearing in mind that CHELLITA (the same age, dam of a champion 2-y-o filly and in foal to top class sire, DARSHAAN) realised only 10,000 guineas at December Sales, I value CRYSTAL FOUNTAIN, in foal to DILUM, at around half that figure. N.B. We gave 19,000 gns for her in December 1990 when she was only 13, and have had four foals from her since.

David Clark, Mary-Ann's father, has asked me to pass on a firm offer of £5,000 for CRYSTAL FOUNTAIN. He would guarantee her a permanent home here at Mountains and undertake never to resell her. Please let me know if you wish to accept this offer (I am "piggy in the middle" in this matter and leave the decision entirely up to you!)

If you prefer to keep CRYSTAL FOUNTAIN we can make a decision as to whether or not she can be bred once more in 1996, following foaling."

In his own handwriting he added a postscript:

"This is the perennial problem of what to do with old mares when they approach the end of their reproductive years. Even if you have your own Stud Farm, it is obviously not practical to collect paddocks full of pensioned-off mares. It is generally kinder to put them down, or give them to a good home, rather than throw them to the wolves at the sales."

Within a very few days Prince Fahd rang Mr Clark in the evening at his house. Mr Clark remembers the occasion well and his evidence was not challenged. Mr Clark had met Prince Fahd only once before. Prince Fahd told him that he did not want Mr Clark to purchase the horse, but instead he wished to give her to Mr Clark in appreciation for all he had done for Mr Penfold, including putting him up after he and his first wife had separated.

202. Mr Clark sent a hand-written letter dated 19 January 1996 in which he expressed thanks for the "extremely generous gift" and his feeling of being completely overwhelmed by it. He added:

"I will look after her in her twilight years and hope one day you will see one of her offspring do your kindness justice."

Mr Clark gave a half-share in Crystal Fountain to Mary-Ann Clark. I accept his evidence that it never crossed his mind to do so until Prince Fahd made a gift of the horse to him and he never discussed the possibility of doing so with Mr Penfold. It was only because Prince Fahd had given the horse to him that he thought of giving a half-share to Mary-Ann Clark and did so. Nor did he regard it as property which she would hold jointly with Mr Penfold. He gave it to her and there was no intention to give it to Mr Penfold. I am satisfied from the extensive evidence of payments for her keep and expenses that Mary-Ann Clark beneficially owned the half-share given to her.

203. The claimants assert that the disposal of Crystal Fountain was procured by Mr Penfold in circumstances amounting to a breach of duty on his part and that he acted dishonestly. It is not suggested that Prince Fahd did not make his own decision to give the horse to Mr Clark, but it is alleged that by passing on information to Mr Clark which led to his offer of £5,000 Mr Penfold made improper use of confidential information and that in his fax of 12 January 1996 Mr Penfold falsely misrepresented the position to Prince Fahd and suppressed material facts.
204. In my judgment, the claim in respect of Crystal Fountain is not made out on the facts. By telling Mr Clark that Newgate was considering disposing of Crystal Fountain, he was not disclosing confidential information. There was nothing confidential about it. If Newgate was to find a home for her without consigning her to the sales, it would have to discuss it with one or more people who might be prepared to take her. Her pedigree was public knowledge and I can see no breach of confidence in telling Mr Clark that she had bad feet, a fact which would be revealed on an inspection.
205. Turning to Mr Penfold's fax of 12 January 1996, a number of criticisms are made. First, it did not mention Crystal Spray's sale for 500,000 guineas at the December Sales a month earlier. I have no doubt that Prince Fahd was aware of it, particularly as Newgate owned her dam. It was a notable event, being a sale at a very high price to well-known purchasers. It was the highest price paid for a broodmare at those sales since 1990 and Crystal Spray was in foal to Saddler's Wells which was then the world's most expensive and successful stallion. Mr Penfold's unchallenged evidence was that he had discussed this sale with Prince Fahd more than once and it would be very surprising if they had not done so. Its impact on the value of Crystal Fountain was negligible. As Captain Coldrey put it, her value was not much enhanced by Crystal Spray's high price. Both experts agree that she was not worth more than £5,000 in January 1996, assuming she would continue to breed. If she was no longer to breed, she was a liability and had no value. She was in foal to Dilum, a stallion at the other end of the spectrum from Saddler's Wells and for which a fee of about £2,000 had been paid. As already mentioned, another of her progeny, Aqua Rigia, had been sold at the same sale for only 23,000 guineas.
206. Secondly, Mr Penfold's fax did not mention the success on the racecourse of the two daughters of Crystal Spray. Solar Crystal had won a Group 3 race and been placed in Groups 1 and 2 races, while State Crystal as a two-year old had won a Group 3 race in 1995. These successes contributed to the very high price paid for Crystal Spray in December 1995. Mr Penfold gave evidence, which I accept, that Prince Fahd took a keen interest in the sale of Crystal Spray and discussed it and the success of her progeny with Mr Penfold. In any case, in view of the high-profile sale of Crystal Spray. I think it probable that Prince Fahd would have known of her successful progeny. The critical point was that Crystal Spray had sold for a very high price because she was seen as a good prospect as a broodmare, especially when in foal to Saddler's Wells.
207. Thirdly, it is said that the fax gives the clear impression that Crystal Fountain would no longer be used for breeding. In my judgment, it does not do so. It states that Mr Clark will give her a permanent home and will not resell her. It does not say that he will not use her for breeding and it would be very odd to offer £5,000 if she was not going to be bred. The fax states in terms that if Prince Fahd decided to keep her "we can make a decision as to whether or not she can be bred once more in 1996, following foaling". It is hard to see why Mr Clark should be in any different position. There is nothing in the handwritten postscript, which refers to the problem of old mares when they "approach" the end of their reproductive years, to give the impression that she will not be bred. When Mr Clark wrote to thank Prince Fahd he referred to the extremely generous gift and the hope that "one day you will see one of her offspring do your kindness justice". Anyone reading this letter, and knowing as the Prince did that none of her offspring to date had performed particularly well on the racecourse, would understand that Mr Clark intended to breed her. There was no protest from Prince Fahd then or later.
208. Fourthly, it is said that the fax did not express any view as to the prospects of Crystal Fountain being able to breed again. In fact, it is expressly stated that a decision as to further breeding could be made after foaling in February 1996. This pre-supposes that she might be able to breed again. However, the prospects were uncertain at best. Captain Coldrey agreed with Miss Scrope's evidence that:

"At age 19 with one dead foal, one barren year, one aborted foal, nine living foals of racing age of which six were minor winners and three had failed to win but none had shown better than strictly limited ability, in foal to an inexpensive and unpopular stallion and with her feet and front limb conformation deteriorating, her days of opportunity would certainly have appeared to be behind her Mares of this age in this condition tend to be liabilities rather than assets as they require a great deal of care and attention, feeding and veterinary attention to nurse them through their pregnancies. If deemed unsaleable at auction, a mare in this condition I would regard at best as a gamble."

Mr Penfold's unconnected advice to Prince Fahd in a fax over a year later on retaining an older mare which is a proven producer "on the principle of not killing the goose which lays the golden egg" had little application to Crystal Fountain in January 1996. Captain Coldrey's opinion is that "it was sensible at that time to be satisfied with finding a good home for the old mare".

209. Fifthly, it is alleged that the fax clearly steered Prince Fahd towards acceptance of the offer, and it is suggested that the postscript indicated that there was no option. I agree that the postscript is a steer towards acceptance of the offer, but the letter as a whole clearly leaves Prince Fahd with the real option of retaining Crystal Fountain.
210. Sixthly, the fax failed to point out that Crystal Fountain could be retained until she foaled on February 1996 or that the disposal of Crystal Fountain could be on terms that her foal be returned to Newgate, thereby in either case retaining a connection with the family. There was no reason in January 1996 to suppose that her foal would transpire to be a success. Both experts agree that the maximum value of £5,000 which they put on Crystal Fountain takes into account that she was in foal and that the foal might be good or bad. Captain Coldrey agreed that the more likely outcome was that her foal would be a liability rather than an asset. His view was that by offering £5,000 for her, Mr Clark was taking a gamble. Captain Coldrey nevertheless considers that he would have advised retention, while the opposite view is taken by Miss Scrope. Her evidence was that Crystal Fountain appeared to be a spent force, Dilum was one of the worst stallions that she had been put to, and the costs of raising the foal would not have appeared to warrant its retention. Both experts agree that advice to retain or not to retain the foal would have been valid. I am satisfied that Mr Penfold did not deliberately or dishonestly conceal the possibility of retaining the foal. I am also satisfied that Prince Fahd would have known of that possibility without needing to be told about it and I consider it very unlikely that he would have acted any differently if it had been put to him. A mare of the same age, Chellita, had been sold for 10,000 guineas by Newgate at the Tattersalls December Sales in 1995, when she was in foal to a stallion that stood for 20,000 guineas.
211. There is a further overall charge against Mr Penfold that, in seeking to put forward Mr Clark's offer in a favourable light, he foresaw and intended that Prince Fahd would give the horse to Mr Clark and that he in turn would give a half-share to Mary-Ann Clark as a mark of gratitude. It is in my judgment a highly improbable theory with no evidence to support it.
212. As with the other horses, it is the claimants' case that Mary-Ann Clark held her interest in Crystal Fountain as nominee for Mr Penfold. I have already held that Mr Clark intended the half-share to be a gift to Mary-Ann Clark alone. As with the other horses, there is a large body of evidence to support the conclusion that she owned her half-share solely for her own account. The evidence establishes that Mary-Ann Clark and Mr Clark paid every expense incurred in connection with Crystal Fountain in proportion to their shares. The same is true of her 1996 foal, Pink Cristal, until March 1997 when Mary-Ann Clark sold half of her share to Mr Penfold. Thereafter the expenses of Pink Cristal were paid by the three of them in proportion to their shares. As with the other horses, Mr Penfold undertook activities such as arranging nominations which were very much within his personal expertise. It was natural for someone in his position, living with Mary-Ann Clark in a long-term relationship, to be involved in this way and I am satisfied that it does not show that he was the sole or joint owner of the half-share in Mary-Ann Clark's name.
213. One of the nominations was to Slip Anchor in February 1996. Mr Penfold arranged for the nomination owned by Newgate to be sold to Mr Clark and Mary-Ann Clark for £6,500. This is pleaded as a breach of fiduciary duty by Mr Penfold and/or as giving rise to a liability to account to Newgate for profits received by him in consequence of the sale of the nomination.
214. It is not clear from the claimants' closing submissions whether the claim is maintained. It is mentioned only in passing as Mr Penfold "further abusing his position" and is not developed. In my judgment, it involved no abuse by Mr Penfold of his position. The evidence establishes that the price paid to Newgate for the nomination was not an undervalue. Slip Anchor was no longer fashionable and Mr Clark would have had no difficulty in buying a nomination directly from the syndicate. Newgate had a share in the syndicate but had no use for its annual nomination. It had difficulty each year in selling the nomination and without the sale of the 1996 nomination to Mr Clark it would probably have remained unsold.
215. The reason for the claim in respect of Crystal Fountain lies in events after Prince Fahd gave her to Mr Clark. Pink Cristal, her foal born in February 1996, proved to be a very high class filly. She won a stakes race at Ascot as a two-year old and was sold as a six-year old at the Tattersalls December Sales in 2002 for 720,000 guineas. Crystal Fountain's 1994 foal, Crystal Hearted, was sold in 1995 for 8,500 guineas but proved after January 1996 to be her best racing progeny. He won a Group 2 and a Group 3 race and was placed in a Group 2 race. Her 1997 foal to Slip Anchor, Ice Crystal, was sold in 1998 for 18,000 guineas. Her last foal, Crystal Flute, was retained. Crystal Flute's 2002 foal was sold in October 2003 for 180,000 guineas.
216. None of this could have been foreseen at the time of Crystal Fountain's disposal, as all the relevant witnesses agreed. The experts are agreed, as regards producing a foal of Pink Cristal's quality, that "no-one could have predicted this remarkable outcome".
217. The claim with respect to Crystal Fountain is based on the benefit of hindsight. In my judgment it is not a well-founded claim on the facts and it therefore fails.

The law and its application to this case

218. The parties are agreed that as a director and as an agent under the 1991 agreement owing fiduciary duties to the Newgate companies, Mr Penfold was subject to the self-dealing rule. The effect is that any transaction between either company and Mr Penfold will be set aside on the application of the company unless he can show that he obtained the informed consent of the company. The parties are agreed that on the facts of this case Mr Penfold required the informed consent of Prince Fahd. The rule is strictly applied, so that a transaction is liable to be set aside, even if it was very beneficial to the company.
219. The rule and its rationale have been restated countless times by courts in the United Kingdom and in other common law jurisdictions. Although the House of Lords decided Aberdeen Railway Co v Blaikie Bros 1 Macq 461 as long ago as 1854, the speech of Lord Cranworth LC remains one of the clearest and most direct statements of the rule and the reason for it. It helps that the facts were very straightforward. The Aberdeen Railway Company needed a large quantity of iron chairs (rail sockets) and entered into a contract for their supply over an 18-month period with Blaikie Bros a partnership. Thomas Blaikie was the managing partner of Blaikie Bros and a director and the chairman of the Aberdeen Railway Company. The contract was partly performed but, having taken delivery of about two-thirds of the iron chairs, the Aberdeen Railway Company refused to accept any more. In an action to enforce the contract or for damages for breach, the railway company successfully defended on the grounds that Mr Blaikie's self-dealing rendered the contract voidable at its suit. Lord Cranworth stated the general principle in a well-known passage:

"This, therefore, brings us to the general question, whether a Director of a Railway Company is or is not precluded from dealing on behalf of the Company with himself, or with a firm in which he is a partner.

The Directors are a body to whom is delegated the duty of managing the general affairs of the Company.

A corporate body can only act by agents, and it is of course the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect.

So strictly is this principle adhered to, that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into."

220. He applied the principle to the facts of the case in terms which any director can understand and which shows reasoning as relevant now as it was in the mid-19^th century:

"Mr Blaikie was not only a Director, but (if that was necessary) the Chairman of the Directors. In that character it was his bounden duty to make the best bargains he could for the benefit of the Company.

While he filled that character, namely, on the 6^th of February, 1846, he entered into a contract on behalf of the Company with his own firm, for the purchase of a large quantity of iron chairs at a certain stipulated price. His duty to the Company imposed on him the obligation of obtaining these chairs at the lowest possible price.

His personal interest would lead him in an entirely opposite direction, would induce him to fix the price as high as possible. This is the very evil against which the rule in question is directed, and I here see nothing whatever to prevent its application.

I observe that Lord Fullerton seemed to doubt whether the rule would apply where the party whose act or contract is called in question is only one of a body of Directors, not a sole trustee or manager.

But, with all deference, this appears to me to make no difference. It was Mr Blaikie's duty to give his co-Directors, and through them to the Company, the full benefit of all the knowledge and skill which he could bring to bear on the subject. He was bound to assist them in getting the articles contracted for at the cheapest possible rate. As far as related to the advice he should give them, he put his interest in conflict with his duty, and whether he was the sole Director or only one of many, can make no difference in principle.

The same observation applies to the fact that he was not the sole person contracting with the Company; he was one of the firm of Blaikie Brothers, with whom the contract was made, and so interested in driving as hard a bargain with the Company as he could induce them to make."

221. The facts of Aberdeen Railway Co v Blaikie Bros are particularly relevant to the present case, because Mr Blaikie, like Mr Penfold, was not the sole contracting party with the company, but a member of a partnership. This made no difference to the application of the rule.
222. Also of relevance was the reliance of Lord Cranworth on the earlier decision of the House of Lords in The York Buildings Co v Mackenzie 3 Paton 378. In that case the defendant was the "common agent" for the sale of the assets of an insolvent partnership and purchased some of the assets at a judicial auction. The purchase was voidable, even though it was made at a sale by auction. It was submitted for Mr Penfold that the self-dealing rule should not apply to purchases at public auction, because there is no negotiation involved and there is no danger of the fiduciary being able to favour himself. Mr Penfold would have no control over the price, once Prince Fahd had set the reserve, and the horse would be sold to the highest bidder. Even leaving aside the fact that Mr Penfold had a central role to play in setting the reserve, to which his partnership's bidding intentions were directly relevant, I am firmly of the view that the self-dealing rule does and should apply to purchases at auction. The authorities establish that it does apply. It also ought to apply, because the inherent conflict in the fiduciary's position remains and there are many ways in which both the seller's agent and a bidder can influence the outcome of an auction both before the sale and during the bidding.
223. Other authorities show that the self-dealing rule applies even if the fiduciary duty acts in the purchase only as an agent for others: see Ex parte Bennett 10 Ves 381, Ex parte Moore (1881) 30 WR 123. This is consistent with the application of the rule to those cases where the fiduciary has conflicting duties to each of the contracting parties: see Transvaal Lands Co v New Belgium (Transvaal) Land and Development Co [1914] 2 Ch 488.
224. Mr Penfold was a member of the partnerships which purchased Solar Star and River Jig. At the time of both purchases he was acting on his own account, but the principle mentioned in the preceding paragraph would mean that the transactions were subject to the self-dealing rule even if he had purchased as agent for Mary-Ann Clark. It would also apply simply because he was the bidder acting for the purchasing syndicate at the auction of River Jig.
225. The self-dealing rule therefore applies in the case of these transactions, unless Mr Penfold can establish that he obtained the prior informed consent of Prince Fahd. I have found that he did not disclose to Prince Fahd his interest in the proposed purchase of Solar Star and therefore did not obtain his consent to that transaction.
226. Mr Penfold did obtain Prince Fahd's consent to bid for River Jig, but such consent must be obtained after full disclosure of all material facts: see Bristol and West Building Society v Mothew [1998] 1 Ch 1 at 18 per Millett LJ, Gwembe Valley Development Co Ltd v Koshy [2004] 1 BCLC 131 (CA) at 151 (para 65). All that Mr Penfold disclosed to Prince Fahd was that at a price of 25,000 guineas, he might bid for River Jig. He did not disclose that he and his partners would be prepared to go significantly higher than that price, by a sum close to a further 15,000 guineas, or that he would be buying with partners, so making it more likely that they could afford to go higher than 25,000 guineas.
227. In my judgment this was clearly inadequate disclosure by Mr Penfold. I agree with Mr Trace in his submission that Mr Penfold was in an untenable position at the auction of River Jig. As a director and the agent of Newgate UK it was his duty to maximise the price achieved for River Jig, but as bidder his interest and duty was to pay the lowest amount possible within the limits to which he and his partners were prepared to go. The circle could have been squared by disclosing to Prince Fahd the existence of the partnership and the limit to which it was prepared to go, and seeking his consent to bid within that range without having to go to the top of it. In my view, although it does not arise for decision on the facts, the consent of Prince Fahd to this course would have been sufficient to displace the self-dealing rule even if the horse was sold at less than the maximum which the partners were prepared to pay. The authorities focus principally on the need for informed consent to displace the self-dealing rule, but some state that it must also satisfy a fair dealing test. Insofar as there is any need to demonstrate in addition that it is a fair dealing, a purchase on these terms with the fully informed consent of a principal able to make his own decisions seems to me to be fair. He will have specifically agreed to the only feature which would otherwise make the dealing unfair, namely a lower price than the purchasers were willing to pay. However, in this case, Mr Penfold did not make full disclosure and Prince Fahd's consent was not an informed consent.
228. The result is therefore that the self-dealing rule applies to the sale of Solar Star and of River Jig to the partnerships of which Mr Penfold was a member.
229. Submissions were made on the applicability of the self-dealing or other equitable rules to sales to Mary-Ann Clark or Mr Clark. This would have been of central importance if I had found that Mary-Ann Clark was one of the purchasers of the horses. This would particularly be the case with Solar Star, because in the case of River Jig Mr Penfold undertook the bidding at the auction and therefore the self-dealing rule in any event applied. As I have found that she was not an original party to the contracts but was later substituted as a purchaser, the self-dealing rule applies by virtue of Mr Penfold's initial participation as a purchaser. It is however relevant in the case of Solar Star because Mr Clark was one of the original purchasers, having, like Mr Penfold, a 12.5% stake.
230. Mr Trace rightly submitted that the self-dealing rule is a particular application of the general principle that a fiduciary must not place himself where his personal interests, or duties to other persons, are liable to conflict with his fiduciary duties to his beneficiary. The self-dealing rule, used in its strictest sense, means that a trustee cannot contract with himself. But the objection to self-dealing does not rest simply on a conveyancing point that a person cannot transfer property to himself or that a power of sale requires for its exercise a separate buyer and seller. It is primarily based on the fundamental objection to a conflict of duty and interest. In the context of directors, the self-dealing rule in the strictest sense does not arise. A director does not himself hold any title to the company's assets, so that if he causes a sale of property or payment of money to be made to himself, there will be two separate parties to the transaction, the company and the director. In the company context, therefore, self-dealing will mean either a transaction between the company and the director, whether acting as principal or agent, and the general principle will extend to any transaction in which he has an interest or a conflicting fiduciary duty. In all such cases he must disclose his interest and obtain the informed consent of the company, subject to provisions in the articles of association of the company.
231. The question arises as to what is meant by a director's interest. Leaving aside the cases of a competing fiduciary duty, none of the statements of principle or authorities to which I was referred define it in terms other than a personal financial interest, direct or indirect, of the director. So in the well-known passage in Lord Herschell's speech in Bray v Ford [1896] AC 44 at 51, he said that:

"It is an inflexible rule of a Court of Equity that a person in a fiduciary position, such as the respondent's in not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict."

232. See also for example the passage from the judgment of Deane J in the High Court of Australia in Chan v Zacharia (1984) 154 CLR 178 at 198 cited by Morritt LJ in Don King Productions Inc V Warren [2001] 1 BCLC 607 at 629, where he says:

"The variations between more precise formulations of the principle governing the liability to account are largely the result of the fact that what is conveniently regarded as the one "fundamental rule" embodies two themes. The first is that which appropriates for the benefit of the person to whom the fiduciary duty is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or a significant possibility of such conflict: the objective is to preclude the fiduciary from being swayed by considerations of personal interest."

233. In arguing the case that the self-dealing rule would apply to a sale to Mary-Ann Clark, Mr Trace submitted that it applies to a dealing by a fiduciary with his or her husband or wife or a person with whom the fiduciary is living as husband or wife, provided that their circumstances including their financial affairs make it appropriate to do so. Stated in this way, it would result in a distinction between a sale by Newgate to Mary-Ann Clark and a sale to Mr Clark.
234. The applicability of the self-dealing rule to transactions involving the wives of fiduciaries has been decided or considered in a number of authorities, most of which are not English. A clear view was taken by the Court of Session nearly 90 years ago in Burrell v Burrell's Trustees [1915] SC 333 that the strict rule did not automatically apply to a dealing with a fiduciary's wife. The wives were wealthy members of the Burrell shipping family who in each case were, as Lord Dundas put it, "capable business women accustomed to manage their own ample means", who bought shares from the family trust of which their husbands were trustees, out of their own means and on their own initiative. Only if the strict rule applied, would the court set aside the purchase. They held that neither authority nor principle required its application. The case does not turn on any difference between English and Scots law, because the other ground for the decision of the House of Lords in Aberdeen Railway Co v Blaikie Bros, an appeal from Scotland, was that the self-dealing rule applied in Scotland.
235. Some doubt has been cast on this decision by judges at first instance in New Zealand (Robertson v Robertson [1924] NZLR 552) and Australia (Tanti v Carlson [1948] VLR 401). In the latter case, however, the court followed and applied the decision in Burrell v Burrell's Trustees, as had an earlier first instance decision in Australia (In re Douglas [1928] 29 SR (NSW) 48).
236. The issue was a very long way from the facts in Tito v Waddell (No 2) [1977] Ch 106 but at p. 240 Sir Robert Megarry V-C used the case of a trustee's wife to illustrate the principle that equity applies its doctrines to the substance, not the form, of transactions. In discussing the self-dealing rule he said at p. 240:

"But of course equity looks beneath the surface, and applies its doctrines to cases where, although in form a trustee has not sold to himself, in substance he has. Again one must regard the realities. If the question is asked: "Will a sale of trust property by the trustee to his wife be set aside?", nobody can answer it without being told more; for the question is asked in a conceptual form, and manifestly there are wives and wives. In one case the trustee may have sold privately to his wife with whom he was living in perfect amity; in another the property may have been knocked down at auction to the trustee's wife from whom he has been living separate and in enmity for a dozen years."

Mr Trace also relied on Liles v Terry [1895] QB 679 which involved a gift by a client to her solicitor's wife, but it was based on undue influence to which different considerations apply.

237. In my judgment the decision of the Court of Session in Burrell v Burrell's Trustees represents the law in England as well as Scotland. Not only would it be undesirable if the law on a subject of common application differed in the two jurisdictions, and not only has it been applied in Australia, but it is in my view right in principle. A wife who sells or gives an asset to her husband, or vice versa, is not dealing with herself. Spouses and domestic partners are not nominees for each other, and social changes since 1915 would suggest that if that was true then, it is certainly true now. Further, there could be no basis for restricting the self-dealing rule to husband and wives. On principle it would have to apply also to same-sex couples and probably also to others who live together in a close relationship on a long-term basis, such as for example adult children and their parents or other family members.
238. Mr Trace did not support an automatic application of the self-dealing rule to transactions with a husband or wife or those living as such, but he submitted that where it could be shown that the domestic circumstances were such that the fiduciary might be said to benefit, as where for example they shared living expenses, the strict self-dealing rule applied. The effect would be that the self-dealing rule would strictly apply to the vast majority of married couples and others living together in a long-term relationship.
239. In my judgment, this is not a proper basis for the application of the rule. First, it is not the basis of the decision in Burrell v Burrell's Trustees or in either of the Australian cases which followed it. Nor does it come out of the passage cited above from Tito v Waddell (No 2), which might indeed cast an even wider net. Secondly, it would create difficult and, I think, unacceptable distinctions between different couples depending on their financial circumstances. It would also require an investigation into those financial circumstances which would not otherwise be necessary. Thirdly, there could be no grounds for restricting it to couples living together. Logically it would have to apply in any case where an element of common financial interest could be discerned.
240. What is however true is that in any such relationship there exists the potential for the exercise of fiduciary duties to be influenced by personal considerations. If a director causes his company to enter into a transaction with a close relation, or a spouse or other partner, there is a significant risk that the director will be compromised by a desire to favour the other party. The problem is recognised in the authorities. In Burrell v Burrell's Trustees, Lord Mackenzie said at pp 338-339:

"The category under which it apparently falls is the category which is referred to by Lord Justice Cottenham in Ferraby v Hodson in terms to which every Court must subscribe: "Trustees expose themselves to great peril in allowing their own relatives to intervene in any matter connected with the execution of the trust; for the suspicion which that circumstance is calculated to excite, where there is any other fact to confirm it, is one which it would require a very strong case to remove." Therefore I venture to remark that in all cases of this class the Court will seek to be certain, by vigilant scrutiny, of the true nature of such a transaction; because one can readily see that the close relationship between husband and wife may, unless the nature of the transaction is explained, give rise to the not unnatural inference that the husband was truly the party intervening in the case, and that not without benefit to himself."

241. In Tanti v Carlson, it was said that:

"The matrimonial relationship then becomes merely a ground of suspicion, and it becomes necessary to consider whether that suspicion has been dispelled in the present case."

In the earlier Australian case of In re Douglas it was put as follows:

"the Court of Equity would presume that the contract was for the benefit of the trustee, and evidence would be required to displace this presumption."

242. In my view, the resolution of this issue lies in putting on the fiduciary the burden of showing, in a case where the fiduciary does not have a personal interest in the transaction but where on the facts there exists a real risk of conflict between duty and personal loyalties, that the transaction was demonstratably in the best interests of the company or others to whom he owes his duties. This assumes that the beneficiaries have not given their informed consent. It is an application of the fair dealing rule, rather than the self-dealing rule. In Ex parte Forder (1881) 25 Sol. Journ. 720, a question arose as to the validity of a sale which had been made by a trustee in bankruptcy of part of the property of the bankrupt. The sale was made to two buyers, one of whom was the trustee's under-age son. The contract was not binding on the son by reasons of his minority, and the sale was also at an undervalue. While deciding the case largely on those grounds, the Court of Appeal took a broader view. Lord Selbourne LC said:

"Many authorities had laid down emphatically, not only with regard to trustees generally, but with regard to assignees in bankruptcy in particular, that they could not exercise the power of sale given to them for the benefit of the creditors directly or indirectly for the benefit of themselves or of anyone so connected with them as to stand in a position more advantageous than an ordinary purchaser."

Having referred to the fact of the sale being to the trustee's son, who was still a minor and so not bound by the contract, he continued:

"How under such circumstances the bankrupt's estate will be bound by the contract it was impossible to conceive. At any rate, the circumstances threw on the trustee the burden of showing that it was a proper contract."

243. The rules relating to the exercise of a mortgagee's power of sale are commonly cited in this context, and I was referred to the leading English case, Farrar v Farrars Limited (1888) 40 Ch D 395. The rules are different, principally because a mortgagee exercises a personal right primarily in his own interests as a mortgagee. Nonetheless, the self-dealing rule applies in that a mortgagee cannot exercise the power to sell to himself or to a nominee or to a company of which he is the sole director and shareholder. Unlike a fiduciary, he can sell to a company in which he has a significant interest but the onus lies on him to justify the terms of sale: this was the decision in Farrar v Farrars Limited and see also Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349.
244. On this basis, if the sales had been made directly to Mary-Ann Clark as principal and not as nominee for Mr Penfold, they would not have been automatically voidable by reason of the self-dealing rule, but the onus would have been on Mr Penfold to demonstrate that they represented fair dealing with Newgate's assets, And, as Mr Trace succinctly put it, fairness is not equated with the lowest non-negligent valuation.
245. The issue is whether the onus shifts to Mr Penfold to justify the sale of the share in Solar Star to Mr Clark. Their connection at that time was that Mr Clark was the father of Mary-Ann Clark with whom Mr Penfold had been living for six months. They were not at that stage living at Mr and Mrs Clark's house, as they did for a year or so from September 1995. There is no evidence of any common financial interest at that time. In these circumstances, in my judgment their relationship was not one which gives rise to such a conflict as to impose on Mr Penfold the legal onus of demonstrating that it was a fair dealing.
246. As an alternative to prior disclosure and approval, Mr Penfold relies on ratification, that is subsequent disclosure and approval. In relation to River Jig, Mr Penfold never disclosed to Prince Fahd that his partnership would have been prepared to bid more than 26,000 guineas, and therefore a defence of ratification fails on this ground alone without the need to consider other factors. As regards Solar Star, there is no evidence, other than Mr Penfold's evidence of conversations with Prince Fahd at around the time of the sale which I have rejected, that Prince Fahd ever knew that Mr Penfold had been one of its original purchasers. The defence of ratification as regards Solar Star therefore fails on this ground. Moreover, ratification requires knowledge of legal rights and there is no suggestion that Prince Fahd knew that the Newgate companies were entitled to take proceedings in respect of these sales.
247. Mr Penfold relies on limitation as a defence to all claims against him. It is common ground that the claims against him arising from his position as a director of the Newgate companies are subject to section 21 of the Limitation Act 1980. Those claims are therefore subject to a six-year period of limitation, which in the case of each impugned transaction has expired, unless they fall within section 21(1) or unless the limitation period has been postponed under section 32.
248. The claimants rely on both paragraphs of section 21(1) which provides:

"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 or 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."

It is clear that, as the self-dealing rule applies to the acquisition by Mr Penfold of interests in Solar Star and River Jig, section 21(1)(b) will apply to some of the relief sought against him: see JJ Harrison (Properties) Ltd v Harrison [2002] 1 BCLC 162 at 180–181. It was agreed by both parties for good reasons that submissions on remedies, if they arose, should be made after I gave this judgment. I will deal at that stage with the precise extent to which section 21(1)(b) applies to the remedies sought by the claimants.

249. It may remain relevant to consider sections 21(1)(a) and 32. Fraud and fraudulent breach of trust for the purposes of section 21(1)(a) is limited to cases involving dishonesty, which here:

"connotes at the minimum an intention on the part of the trustee to pursue a particular course of action, either knowing that it is contrary to the interests of the beneficiaries or being recklessly indifferent whether it is contrary to their interests or not."

This was the test approved by the Court of Appeal in Armitage v Nurse [1998] Ch 241 at 251, 260 per Millett LJ and in the later case of Gwembe Valley Development Co Ltd v Koshy [2004] 1 BCLC 131 at 170 (para 131). It would, in my judgment, include a deliberate concealment of a material interest which he knew should be disclosed.

250. I have found that in not disclosing to Prince Fahd that he was to be a member of the partnership purchasing Solar Star prior to its purchase, Mr Penfold was not acting in a way which he knew to be contrary to Newgate's interests or involved a deliberate concealment of information which he knew should be disclosed. Likewise in relation to River Jig, I have found that he did not deliberately conceal from Prince Fahd the existence of the partnership or the maximum price to which they might be prepared to bid, knowing that he should disclose those facts.
251. He was not in my judgment guilty of fraud or a fraudulent breach of trust in these instances, within the meaning of section 21(1)(a).
252. I turn therefore to section 32. So far as relevant, section 32(1) and 32(2) provide:

"(1) Subject to subsections (3) and (4A) below, where in the case of any action for which a period of limitation is prescribed by this Act, either –

(a) the action is based upon the fraud of the defendant; or

(b) any fact relevant to the plaintiff's right of action has been deliberately concealed from him by the defendant; or

(c) the action is for relief from the consequences of a mistake;

the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.

(2) For the purposes of subsection (1) above, deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time amounts to deliberate concealment of the facts involved in that breach of duty."

253. Section 32(1)(a) adds nothing to section 21(1)(a) and section 32 (1)(c) is obviously not in point. Deliberate concealment within section 32(1)(b) would involve a deliberate concealment from Prince Fahd, who has for the purposes of disclosure been identified with the Newgate companies. In the case of Solar Star, the relevant facts would be that Mr Penfold entered into the contract as a purchaser and had not disclosed it to Prince Fahd prior to the making of the contract. When advised by Mr Bishop that the laws relating to sales between a corporation and a director were strict and that he should consider getting a letter from Prince Fahd authorising the transaction, he chose not to disclose his interest to Prince Fahd but instead arranged for Mary-Ann Clark to be substituted as purchaser in his place. In the light of that letter, Mr Penfold knew that, as he had already made a contract to buy Solar Star, he was under a duty of disclosure to Prince Fahd. In those circumstances, in my judgment, he deliberately concealed from Prince Fahd the fact he was a party to the contract and that it had not earlier been disclosed to Prince Fahd.
254. The Court of Appeal has considered the meaning of deliberate concealment in this provision in Williams v Fanshaw Porter Hazelhurst [2004] PNLR 544. It concerned a solicitor's failure to report to his client important developments in the litigation which he was conducting for her. The developments were facts relevant to her cause of action for negligence against the solicitor and the issue was whether he had deliberately concealed them from her. There was some difference in the judgments as to whether this required knowledge on the solicitor's part of his client's possible claim against him although on the facts it was not necessary to resolve it. The majority (Park J, who gave the first judgment, and Brooke LJ) considered that it was sufficient that, as her solicitor, he was under a continuing duty to inform the claimant and he deliberately chose not to do so. At pp 552–553 (para 14 (ii) and (iv), Park J said:

"ii) Although the concealed fact must have been relevant to the right of action, the paragraph does not say, and in my judgment does not require, that the defendant must have known that the fact was relevant to the right of action. In most cases where s.32(1)(b) applies the defendant probably will have known that the fact or facts which he concealed were relevant, but that is not essential. All that is essential is that the fact must actually have been relevant, whether the defendant knew that or not. The paragraph does of course require that the fact was one which the defendant knew, because otherwise he could not have concealed it. But it is not necessary in addition that the defendant knew that the fact was relevant to the claimant's right of action.

iv) The requirement is that the fact must be 'deliberately concealed'. It is, I think, plain that, for concealment to be deliberate, the defendant must have considered whether to inform the claimant of the fact and decided not to. I would go further and accept that the fact which he decides not to disclose either must be one which it was his duty to disclose, or must at least be one which he would ordinarily have disclosed in the normal course of his relationship with the claimant, but in the case of which he consciously decided to depart from what he would normally have done and to keep quiet about it."

Mance LJ, without deciding the point, identified the two approaches and some of the justifications for each. In circumstances where, as here, the defendant consciously decides not to disclose a fact in breach of a continuing duty of disclosure which is related to the original wrongdoing and in circumstances where the defendant realises that the fact suppressed relates to the original wrongdoing, his judgment indicates that there would be deliberate concealment even on the narrower approach: see p 560 (para 37).

255. The effect is that the period of limitation for claims arising from the non-disclosure of Mr Penfold's interest as one of the initial purchasers of Solar Star did not begin to run until it was discovered or could with reasonable diligence have been discovered. Until less than six years before the issue of proceedings, Prince Fahd was for these purposes Newgate US and he neither discovered it nor could have done so with reasonable diligence. The limitation defence therefore fails on this ground as regards Solar Star.
256. The position is different with River Jig. It cannot in my judgment be said that Mr Penfold deliberately concealed the fact that he had not informed Prince Fahd of the purchasing partnership or their willingness to bid higher than 26,000 guineas. There was nothing comparable to Mr Bishop's letter to alert him to his duty to do so and he never deliberately chose not to disclose those matters. Section 32(1)(b) does not therefore have the effect of extending this limitation period unless section 32(2) applies. That sub-section requires a "deliberate commission of a breach of duty". Following the decision of the House of Lords in Cave v Robinson Jarvis & Rolf [2003] 1 AC 384, this requires "a defendant not merely to have intended to do an act which constituted a breach of duty, but also to realise that the act involved a breach of duty" (per Mance LJ in Williams v Fanshaw Porter Hazelhurst (supra) at 558 (para 31)). I have found that Mr Penfold did not know that he was under a duty to make this disclosure and therefore section 32(2) does not apply. Accordingly, applicable limitation periods as regards the sale of River Jig are not postponed by section 32 and, except to the extent that section 21(1)(b) applies, the limitation defence succeeds as regards the sale of River Jig.

Conclusion

257. The overall result is that subject to the outstanding matters the claimants succeed in their claims based on self-dealing in respect of the sales of Solar Star and River Jig. The claim in respect of the Solar Star sale is not time-barred but the claim in respect of River Jig is time-barred except to the extent that it comes within section 21(1)(b) of the Limitation Act 1980. The claims for fraudulent breach of duty by Mr Penfold in respect of the sales of both mares fail.
258. The claims in respect of the sale of Crystal Fountain fail in their entirety.
259. I will hear further submissions on the defence based on the compromise agreement and the claim for relief under section 727 of the Companies Act 1985 if and to the extent that the defendants pursue them. Subject to those issues, I will hear submissions on the remedies sought by the claimants and the applicability of section 21(1)(b) of the Limitation Act 1980 to the detail of those remedies.