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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Ultraframe (UK) Ltd v Fielding & Ors [2005] EWHC 1638(4) (Ch) (27 July 2005)
URL: http://www.bailii.org/ew/cases/EWHC/Ch/2005/1638(4).html
Cite as: [2005] EWHC 1638(4) (Ch)
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- Section 320 of the Companies Act 1985 (as amended by the Companies (Fair Dealing by Directors) (Increase in Financial Limits) Order 1990) provides:
- Section 739 (1) defines "non-cash asset" as meaning:
- Section 739 (2) says that a reference to the acquisition of a non-cash asset includes the creation "of an estate or interest in, or a right over, any property". Section 741 (1) defines "director" as including "any person occupying the position of director, by whatever name called". This includes both de jure and de facto directors. Section 320 (3) says that for the purpose of sections 320, 321 and 322 a shadow director is treated as a director. Section 346 defines what is meant by a connected person. A body corporate is "connected with" a director of a company if it is a body corporate with which the director is "associated". A director of a company is "associated" with a body corporate if he (and persons connected with him) is interested in at least twenty per cent of the nominal value of the share capital of that body; or he is entitled to exercise 20 per cent of the voting rights at any general meeting of that body: section 346 (4).
- It is common ground that for this purpose Mr Fielding is connected with Kesterwood, Kesterwood Extrusions, Dearward, Dearward Profiles, BCP and TBG.
- Section 321 contains a number of exceptions to section 320, none of which are relied on. I should, however, mention that the exceptions include an arrangement entered into by a company which is being wound up (unless the winding up is a members' voluntary winding up). Section 322 sets out the consequences of contravening section 320 as follows:
- Six transactions or groups of transaction are alleged to fall within section 320. The first is the grant by Mr and Mrs Fielding to Seaquest of leases at rack rents of certain parts of Burnden Works. The second is the grant of the licence to exploit intellectual property rights granted by Seaquest to BCP. The third is the trading arrangements for the supply of aluminium and uPVC extrusions made between Northstar, Seaquest and companies within the Burnden Group. The fourth is the sale of stock. The fifth is the sale of chattels by Northstar's receiver. Each of these impugned transactions gives rise to difficult questions of law.
- The sixth transaction alleged to fall within section 320 is the charging by BCP and TBG of management charges to Seaquest in return for the provision of services by personnel employed by BCP and TBG. This allegation raises no difficult question of law. It is obviously unsustainable. Seaquest acquired no property or right over property, but only the provision of services. BCP and TBG acquired nothing but cash.
- Mr Snowden accepted that, read literally, the definitions in the Act of what is meant by a "non-cash asset" encompassed the grant of a lease. This is because the definition includes any estate or interest in property; and a lease is plainly an estate in land. He had reservations whether section 320 applied to the grant of leases at all; but in my judgment, it plainly does. If, say, a director grants a long lease to a company at a substantial premium, I can see no policy reason for holding that the literal words of section 320 do not apply to such a transaction. There is, therefore, no doubt in my mind that the leases granted by Mr and Mrs Fielding to Seaquest are "property". This coincides with the assumption underlying the decision of Hodgson J in Niltan Carson Ltd v. Nelson [1988] BCLC 298 which, despite Mr Snowden's submission to the contrary, I consider was correctly decided on this point. But although the leases are non-cash assets, are they non-cash assets of "the requisite value"?
- The "value" in question is the value of the asset acquired by the company. This value must not be less than £2,000 but (subject to that) must exceed £100,000 or 10 per cent of the company's asset value. The company's asset value is a capital sum, as is its called up share capital; and on the face of it so are the figures of £2,000 and £100,000. On this basis, the "value" would mean capital value. The alternative argument, presented by Mr Parker, is that I am not looking at the capital values of the leases. Rather, I am looking at the value of the right to occupy granted by the leases. That value is represented by the rent that Seaquest agreed to pay; or, alternatively, by the rental value of the premises in question, as assessed by experts. On either basis the rent (or the rental value) exceeded the statutory minima. Consequently the grant of the leases fell within section 320.
- The essential question, therefore, is how to characterise the asset acquired by the company. Is it the lease; or is it the right to possession granted by the lease? First, on the face of it, the comparators are all capital sums, especially the company's net asset value, and its called up share capital. In any comparison one would expect to compare like with like. That would indicate that one is looking for a capital value on the other side of the comparison. Second, a non-cash asset is described in terms of property or an interest in property. The property interest created by a lease is the lease itself. Third, a lease may be granted for an indeterminate period (e.g. an annual tenancy). If one is required to assess the aggregate of the rental payments that will fall due during the term of the lease, the practical problems will be acute. If, on the other hand, one is expected to undertake a discounted cash flow or a capitalisation of the rent at an appropriate rate, there would seem to be a lot of room for argument about value, which is unlikely to have been Parliament's intention. And if a lease is granted for a long fixed term at a modest rent, an assessment of the aggregate rental payments which will fall due during the term might bring the transaction within the scope of section 320. Since the purpose of the section is to deal with "substantial" property transactions, this would be surprising. Fourth, Hodgson J held in Niltan Carson Ltd v. Nelson [1988] BCLC 298 that the periodic rent would appear in the company's accounts as a debit item and could not, therefore, represent its value for the purposes of the section. Fifth, contracts with directors require the director's interest to be disclosed either under the articles or under section 317 of the Companies Act or both; and consequently there is some control over a company entering into rack rent leases with a director.
- I conclude, therefore, that the asset is properly characterised as the lease rather than the periodic value of the right to occupy; that the relevant value is its capital value.
- Burnden submit that the licence to exploit the intellectual property rights is not a "non-cash asset" within the meaning of the statutory definition. They say that in order to qualify as a non-cash asset, the asset in question must be "property" or an interest in "property". They also submit that a licence is not "property" for the purposes of liability for knowing receipt of trust property. A licence is not property: it is merely permissive. They rely on Lord Diplock's well-known statement in Allen & Hanbury's v. Generics [1986] RPC 203 at 246:
- Similarly Pumfrey J said in Dendron v. The Regents of the University of California [2004] FSR 43, para 23:
- I do not think that it is quite as simple as that. The question is not whether a licence to exploit intellectual property rights is "property" in the abstract. The question is whether it is "property or an interest in property" within the meaning of section 320 of the Companies Act 1985. Some kinds of licence may be "property" for some purposes. For example:
- Moreover, there are licences and licences. Take a simple case of permission to exploit an asset. If I give you permission to drive my car, that permission is a licence which will prevent your use of my car from amounting to conversion. But it will not entitle you to give permission to anyone else to drive my car. Here, by contrast, the licence granted by Seaquest to BCP is relied on as having given BCP the ability to grant a sub-licence to Burnden. In the case of a simple licence to enter upon land, the licence is not binding on a successor in title to the licensor. Here, by contrast, statute provides that a licence granted by the owner of design right binds his successors in title (except a purchaser for value in good faith and without notice of the licence): Copyright Designs and Patents Act 1988 s. 222 (3) ("the 1988 Act").
- It might also be thought to be counter-intuitive to conclude that a licence for which BCP was willing to agree to pay £500,000 is not a "non-cash asset".
- Mr Speck took me on a tour d'horizon of various kinds of intellectual property rights: patents, trade marks, registered designs, copyright and design right. He pointed out (among other things) that accountancy practice required the value of licences to exploit intellectual property rights to be shown as assets in a company balance sheet. While fully appreciating the last point, I think that I must resist the temptation to make pronouncements about intellectual property rights generally. My task is to examine more closely design right and the nature of a licence to exploit design right.
- Design right. Design right is a creature of statute. Section 213 of the 1998 Act states that:
- There is no doubt, then, that design right itself is a proprietary right. Section 222 amplifies the nature of the right and what can be done with it:
- Section 225 defines an "exclusive licence" as meaning:
- Section 234 gives an exclusive licensee the same rights and remedies, except against the design right owner, in respect of matters occurring after the grant of the licence as if the licence had been an assignment. These rights and remedies are concurrent with those of the design right owner. The remedies in question are listed in section 229 (2), and include all such relief as is available in respect of the infringement of any other property right. The statutory scheme is very similar to that which governs copyright.
- The statutory scheme allows for a partial assignment. An assignment may be partial in one or both of two senses: it may be partial in terms of duration (i.e. it may last only for part of the period during which design right subsists). In this way it resembles a sub-lease created out of a lease. It may be partial in the sense that it assigns only some of the rights which belong to the design right owner. This right has no exact parallel in real property (although there can be an assignment as regards part only of the land comprised in a lease). Thus an assignment may do as much as (and more) than can be achieved in the law of real property by the grant of a sub-lease. The statute does not explicitly allow the charging or mortgaging of design right. In practice this is usually done by an assignment of the intellectual property rights coupled with an obligation to reassign on repayment. No doubt the law would regard the chargor as retaining an equity of redemption in the intellectual property rights until repayment.
- The statutory scheme also envisages the grant of licences. These may be either exclusive or non-exclusive. Either kind of licence will bind successors in title of the licensor, except a purchaser in good faith for valuable consideration without notice. This formulation is very similar to the extent of an equitable proprietary interest.
- In addition to the statements I have quoted emphasising the non-proprietary character of licences, Mr Purvis, who presented this part of the Burnden Defendants' case, also showed me a number of other similar statements made by exceptionally distinguished judges. These included CBS United Kingdom Ltd v. Charmdale Record Distributors Ltd [1981] Ch 91 (Browne-Wilkinson J); Sport Internationaal Bussum BV v. Inter-Footwear Ltd [1984] 1 WLR 776, 789 (Oliver LJ); Crittal Windows Ltd v. Stormseal (UPVC) Window Systems Ltd [1991] RPC 265 (Scott J) and Northern & Shell plc v. Conde Nast & National Magazines Distributors Ltd [1995] RPC 117 (Jacob J). Without exception these statements support the proposition that a licence, even an exclusive licence, does not create a proprietary interest. I have found the most persuasive analysis that of Browne-Wilkinson J who said in Charmdale (discussing an exclusive licensee of copyright):
- In addition it is clear that the world of intellectual property operates commercially on the basis that there is a clear distinction between an assignment (proprietary) and a licence (non-proprietary): see the discussion in Copinger and Skone James on Copyright (15th ed) para 5-201. Where countless transactions have taken place on the basis of settled law, there is a strong presumption against altering the settled understanding. If that understanding is to be changed, it must be changed by a higher court than this one.
- However, that is not the end of the argument. Accepting that a licence, even an exclusive licence, is not itself property or an interest in property, an asset can still qualify for the purposes of section 320 if it is the creation of "a right over property". There is no doubt that intellectual property rights themselves are property, because the statutes that create them say that they are. The statutory definition of an exclusive licence (which I have quoted) defines it as authorising the licensee "to exercise a right" which would otherwise be exercisable by the design right owner. Why is this not a right over property? In my judgment it is. Since the same (or almost the same) economic effects can be created by the grant of an exclusive licence as can be created by an assignment, the policy of section 320 would be subverted if its restrictions could be evaded by different formalities giving effect to the same economic reality. Accordingly, I conclude that an exclusive licence to exploit design right is a "non-cash asset" for the purposes of section 320. Whether it counts as trust property for the purposes of "knowing receipt" is a different question, to which I will return.
- In Re MC Bacon Ltd [1990] BCLC 324, 339 Millett J said in relation to section 238 (4) of the Insolvency Act 1986 (transaction at an undervalue):
- In my judgment the same considerations apply to section 320. The company parts with nothing of value when it grants a debenture; and the consideration it receives is incapable of being valued in money or money's worth, and cannot therefore be a non-cash asset of the requisite value. Mr Parker agreed with this. However, his argument is that the Northstar debenture is said to be part of a wider arrangement consisting of the supply of aluminium under trading arrangements, and that if the wider arrangement is vitiated because of non-compliance with section 320, then the debentures should be set aside, as amounting to "a transaction entered into in pursuance of the arrangement".
- Ultraframe say that section 320 applies to the trading arrangements under which Mr Fielding supplied aluminium to Northstar; and to the trading arrangements under which Kesterwood Extrusions supplied extrusions to Northstar and to Seaquest's dealers. The Burnden Defendants say that section 320 does not apply to contracts or arrangements for the future supply of goods at indeterminate times and of indeterminate amounts.
- Mr Snowden's argument is a simple one. He says that an arrangement cannot fall within section 320 unless under the arrangement the company acquires or is to acquire a non-cash asset of the requisite value. Whether an asset is an asset of the requisite value must be determined at the time when the arrangement is entered into. If the arrangement is such that at the time when it is entered into the comparison cannot be made (because it is unknown what asset will be acquired or when); then it cannot be shown that the arrangement falls within section 320. In the case of a trading relationship it is impossible to say, at the inception of the relationship, what outcome the trading will produce. It may be the case that in the course of such a relationship individual contracts for the supply of goods might be treated as separate arrangements and thus fall within section 320; but that would involve an examination of each individual order.
- In my judgment Mr Snowden's argument is correct as far as it goes. However, I do not consider that it follows that a trading relationship can never fall within section 320. I accept that what section 320 is aimed at is an arrangement, and not (or not necessarily) the individual transactions entered into in pursuance of the arrangement. I accept also that the section must be applied at the inception of the arrangement. The purpose of the section is to ensure that the shareholders approve the arrangement; and this purpose means that the approval must be given once only at the inception of the arrangement if it falls within section 320. I would also accept that if it is impossible to tell, at its inception, whether or not an arrangement would one day involve the acquisition of a non-cash asset of the requisite value, then it does not fall within section 320. Thus Mr Snowden is right to submit that an arrangement under which goods will be supplied in the future in entirely indeterminate quantities will not suffice. However, it is necessary to have in mind that the statutory question is not: what is the value of the non-cash asset that is to be acquired under the arrangement? The question is: will the value of the non-cash asset exceed the statutory minima? If, at the inception of the arrangement, the answer to the later question is "Yes", then I do not consider that it matters that one cannot say by how much it will exceed those minima.
- Mr Parker did not really meet Mr Snowden's main argument which, in my judgment, is correct. Instead, he took up Mr Snowden's point that an individual supply of aluminium can amount to the acquisition of a non-cash asset of the requisite value. However, the purpose underlying this submission was that of attacking the validity of the Northstar debenture. But it seems to me that where this argument breaks down is that by the time any individual supply takes place, as a result of an order placed by Northstar, the debenture has already been granted, and hence the arrangement will already have been made. If the debenture was valid when granted, I do not consider that it will be retrospectively invalidated by a subsequent transaction.
- Mr Snowden was content to accept that for the purpose of deciding whether these assets were of the "requisite value" it was necessary to look at all the assets which were the subject of what he called "a single unitary transaction", rather than to inquire whether any single asset (or any natural lot of assets) encompassed within the transaction had a value in excess of the statutory minimum. I express no view on whether this is right. There are two transactions to consider. The first is the sale of stock. The sale of stock does not raise any question of law, so I deal with it, on the facts, later. The second is the sale by the administrative receiver to TBG of Northstar's plant, machinery office furniture and equipment on 21 June 1999. The second transaction raises the question: does section 320 apply to a sale by an administrative receiver?
- In Demite Ltd v. Protec Health Ltd [1998] BCC 639 Park J held that a sale by a receiver potentially fell within the scope of section 320. He held that the receivers were the agents of the company and that, in law, their act was the company's act. He drew attention to the express exclusion from the scope of section 320 of an arrangement made in the course of a winding up (other than a members' voluntary winding up); and said that in the light of this express exclusion there was no scope for an implied exclusion applicable to a sale by a receiver. He also said that a debenture holder could exercise his own power of sale, in which case the sale would be made by him in his own right, and not through the medium of a receiver.
- Mr Snowden mounted a full-scale attack on this decision. He said that it had caused controversy within the profession; and submitted that there were cogent policy reasons for holding that sales by receivers were outside the scope of section 320. The mischief against which section 320 is directed is the depletion of a company's assets by a transaction between the company and its directors. An administrative receiver is an independent office holder. He is chosen, not by the directors, but by the security holder who appoints him. There is no reason to give the shareholders of an insolvent company a right of veto over sales of assets by a receiver, since a receiver's primary duty was to the creditors (or, at least in the case of a receiver appointed under a security, to the appointing creditor). In addition, a receiver has a duty (owed to the company) to act in good faith for the better realisation of the security.
- Mr Snowden also had a more technical argument, which had not been advanced before Park J. He drew my attention to the speech of Lord Hoffmann in Buchler v. Talbot [2004] AC 298, 309 in which his Lordship said:
- The unanimous conclusion of the House of Lords was that assets comprised within a floating charge that had crystallised were not "assets of the company" within the meaning of section 40 of the Insolvency Act 1986. Lord Rodger of Earlsferry and Lord Walker of Gestingthorpe expressly agreed with Lord Hoffmann's reasoning.
- Building on this foundation, Mr Snowden submitted that:
- In support of his first argument, Mr Snowden pointed out that section 320 does not apply to an asset unless it is of the requisite value. One of the benchmarks for determining whether an asset is of the requisite value is that its value must exceed 10 per cent of "the company's asset value". The company's asset value is primarily determined by reference to the company's accounts. The company's accounts will show the company's net asset value. Thus the 10 per cent value is 10 per cent of the company's net assets, which must be compared with the subject-matter of the transaction. The next step in the argument, adopting a point made by Mr Shashi Rajani in Insolvency Law & Practice Vol 14 No 5, 1998 p. 278, is that:
- In my judgment this conclusion does not follow from the premise. There is an undistributed middle: namely that a charged asset no longer belongs to the company. Is this true? Mr Snowden argues that an asset subject to a floating charge that has crystallised is assigned in equity to the security holder. I do not doubt that a security holder has a proprietary interest in a charged asset. But it does not follow from this that the company has no proprietary interest in the same asset; since proprietary interests may exist concurrently. Mr Snowden relied on the statement of Russell LJ in NW Robbie & Co Ltd v. Witney Warehouse [1963] 1 WLR 1324 to the effect that a floating charge effects an equitable assignment of the charged asset to the security holder. However, in George Barker Transport Ltd v. Eynon [1974] 1 WLR 462 Stamp LJ set out three propositions that, in his view, could not be controverted. The second was that "the appointment of a receiver operates as an equitable assignment (by way of charge) of the property of the company to the debenture holder." The parenthesis is important. Accordingly, even though there is an equitable assignment of an asset comprised in a floating charge once the charge crystallises, it is still an assignment by way of security and not an outright assignment. Indeed, Mr Snowden's reliance on the observations of Lord Hoffmann in Buchler v. Talbot recognises that even after crystallisation of a floating charge the company retains an equity of redemption in the charged assets. Thus I do not accept that the appointment of a receiver deprives the company of its equity of redemption. Any equitable assignment is by way of security only; and not absolute.
- The next strand in Mr Rajani's argument (adopted by Mr Snowden) is that:
- I do not agree with the last two sentences of this analysis. It is necessary first to consider the nature of the equity of redemption. To paraphrase the description in Megarry and Wade on Real Property (6th ed para 19-017), it is necessary to distinguish between the equitable right to redeem and the equity of redemption. The former arises once the legal date for redemption has passed. The latter arises as soon as the security is created. It is an equitable interest in the charged asset consisting of the sum total of the company's rights in the asset. In equity he is the owner of the asset subject to the charge; and the security holder is a mere incumbrancer. In the case of a mortgage of land, the mortgagor's equity of redemption is an equitable interest in the land itself. He may convey, settle, lease or mortgage it, just like any other interest in land. It may pass to another (e.g. a personal representative or a trustee in bankruptcy) by operation of law. It follows, therefore, that the holder of an equity of redemption has a real interest in the charged asset. It is, therefore, a fallacy to say that when a security holder sells an asset subject to a charge he sells only his security interest. He does not. He sells the whole asset. On a sale of the charged asset the equity of redemption in it is extinguished. It is true that in a sense the equity of redemption attaches to any surplus of the proceeds of sale remaining after the security holder has been paid. But this happens because equity regards the seller as holding the surplus on a constructive trust (absent express provision in the security instrument or statute). It does so precisely because of the chargor's proprietary interest in the sold asset. I do not, therefore, consider that it is correct to say that the equity of redemption is not disposed of by a sale. The equitable interest in the charged asset is disposed of; but equity substitutes for it an equitable interest in the surplus proceeds of sale. Perhaps, in the modern law, this would be regarded as no more than an application of the process of tracing. But this would be no different in the case of an outright sale of an uncharged asset by a company, in consequence of which the company's asset is exchanged for cash. I do not, therefore, consider that the undistributed middle in Mr Rajani's argument is correct.
- In addition, I am not convinced by the appeal to the company's accounts on this part of the argument. It is true that the company's asset value is its net asset value. But the company's accounts will show that value by setting out the values of the company's assets as if they were unencumbered on one side of the balance sheet; and its liabilities on the other. That does not, to my mind, demonstrate that the company does not own the charged assets at all.
- I do not, therefore, consider that Buchler v. Talbot (which had not yet been decided and therefore was not cited to Park J) supports Mr Snowden's first argument.
- The second way in which Mr Snowden puts his argument under this head is that the receiver's authority to sell derives from the security instrument; and not from his subsequent decision to realise the security. His agency to act on the company's behalf is an integral part of the security. Once the security has been granted there is nothing more that the company can do. The sale is no more than the completion of the disposition that the company has already made by granting the security in the first place. As long as the debenture was properly granted in the first place, the contingent assignment to the debenture holder has already taken place. It seems to me that the flaw in this argument is that it concentrates on the creation of the security interest, which may well amount to the disposition of the company's asset (subject to its equity of redemption) to the debenture holder. But what section 320 is concerned with is not a disposition to the debenture holder, but a disposition to a director or a person connected with him. Nor is it concerned with a contingent disposition, but an actual one. Although Mr Snowden's argument under this head is, to my mind, an attractive one, it is not enough to persuade me to depart from what Park J actually decided in Demite.
- Lastly, under this head, Mr Snowden relied on considerations of policy which, he said, militated against a sale by a receiver being within the scope of section 320. The policy considerations which were urged upon me were also urged upon Park J. Park J recognised their force, but held that they were outweighed by the force of the statutory language. As Park J pointed out, the security holder may, if he chooses, take possession of the charged assets and sell them himself. If he chooses not to exercise that power, but to appoint a receiver instead, he will not incur any personal liability. The price of using the receiver as a shield against personal responsibilities is compliance with statutory requirements imposed upon companies. The question, however, is not what decision I would reach if starting with a blank sheet; but whether I am clearly convinced that Park J was wrong. Only then am I free not to follow his decision. The policy considerations, although powerful, do not, in my judgment, provide a sufficient reason for departing from his decision that a sale by a receiver can, in principle, fall within section 320. Whether the actual decision is right or wrong must be a matter for a higher court.
- I turn, then, to the second argument, which runs as follows. Just as on the sale of an unencumbered asset the company's interest in the asset is exchanged for cash, so on the sale of a charged asset, the company's equity of redemption in the sold asset is exchanged for an equitable interest in any cash surplus after payment of the secured debt. Accordingly, the asset whose value must exceed the minima is the equity of redemption; and not the value that the charged asset would have had if unencumbered. This question was not argued in Demite. It appears to have been common ground that the assets to be valued were the company's assets as if unencumbered. Neither Ultraframe's written closing, nor Mr Parker in oral submissions, dealt with this point. I must evaluate the argument as best I can.
- Here, I think, Mr Snowden's appeal to the company's accounts has force. One of the relevant comparators is the value of the company's net assets. This concentrates attention on the extent of the company's beneficial interest in the assets in question. In making any comparison, one would expect to be comparing like with like. Thus in comparing the value of an asset of which the company is disposing, one would expect the comparison to be one between the company's beneficial interest in the asset on the one hand, and its beneficial interest in the totality of its assets on the other. At this point, it seems to me that the policy arguments can be brought into play again. If a receiver wishes to sell charged assets, and the extent of the debt is such that there is no possibility of a surplus out of the proceeds of sale being available to the company, what is the point of requiring the shareholders to approve the sale? It would merely give disgruntled shareholders the ability to impede the orderly and speedy realisation of the company's assets towards the discharge of its debts. If, on the other hand, there is a prospect of a surplus which exceeds the requisite value, then there is every point in requiring the shareholders to approve the sale.
- In my judgment Mr Snowden's submissions on this point are correct.
- Ultraframe say that the only way in which a transaction may be authorised is by a general meeting of the company. The Burnden Defendants say that this is not so. They rely on the "Duomatic principle": see Re Duomatic Ltd [1969] 2 Ch 365 in which Buckley J said:
- In Demite Ltd v. Protec Health Ltd [1998] BCC 639 Park J expressed doubt (obiter) whether the Duomatic principle could apply in a case in which the statute prescribes the mechanism for approving a transaction. However, in Re Conegrade Ltd [2003] BIPR 358 Lloyd J took a slightly different view. He said:
- The Burnden Defendants say that a liquidator steps into the shoes of the company, and consequently may bind the company, in the same way as the members, voting in general meeting, can bind it. Consequently they say that if the liquidator of Seaquest has approved a transaction, section 320 is satisfied.
- In my judgment, this argument misses the point. Section 320 applies to a transaction unless the statutory condition is satisfied. The statutory condition is that the transaction is "first" approved by a general meeting. Thus section 320 is dealing with an approval before the transaction is made. If the statutory condition is satisfied, then section 320 never applies; and the transaction is never voidable under section 322.
- Section 322 (2)(c) does, however, say that section 320 does not apply to a transaction if it is, within a reasonable period, affirmed by the company in general meeting. This plainly contemplates an affirmation which takes place after the transaction in question. But a resolution of the company in general meeting need not be communicated to the other party to the transaction; and might not be. In my judgment section 322(2)(c) is dealing with the internal procedures of the company. No one suggests that there was any relevant internal procedure of the companies in this case. I do not therefore have to decide whether Park J or Lloyd J is right. What the argument really goes to is whether a voidable transaction can be subsequently affirmed; and, if so, whether it ceases to be voidable.
- Section 320 says that a transaction is "voidable" at the instance of the company unless one of the statutory conditions is satisfied. One of those conditions is that the transaction is affirmed by the company in general meeting. Ultraframe say that this is the only way in which a transaction may be affirmed. The Burnden Defendants dispute this. They say that the statute simply says that the transaction is voidable unless one of the statutory conditions is satisfied; and that the word "voidable" carries with it the general law relating to the affirmation of voidable contracts.
- Under the general law of contract, whether a voidable contract has been affirmed or not depends on the law of election. There is nothing in Park J's judgment in Demite which suggests that the doctrine of election does not apply to a contract which is voidable under section 320. He said:
- It seems to me that Park J recognised that whether the statutory right had been exercised depended on the election of the company. Ultraframe accept that even if the right to avoid a transaction under section 320 had arisen, it could be lost by estoppel. But this acceptance means that section 320 does not contain a complete statutory code; and opens the way to the construction of "voidable" in accordance with its normal meaning in the law of contract.
- In my judgment a contract voidable under section 320 may cease to be voidable if the company in question elects to affirm it. This is consistent with the effect of non-compliance with section 317, which requires directors to disclose their interests in contracts with the company (see Hely-Hutchinson v. Brayhead Ltd [1968] 1 QB 549, quoted later). I should stress that I am not dealing with a case in which it is alleged that the voidable contract has been affirmed by the company acting through its board of directors. Since the mischief against which section 320 is aimed is the misuse of the powers of the directors in relation to transactions between themselves and the company, it would make little sense if the disabilities imposed by section 320 of such transactions could be avoided by the directors themselves causing a voidable transaction to be affirmed by the company. Different considerations may apply in such a case. The Burnden Defendants rely on the conduct of Seaquest's liquidator. Since questions of affirmation of contract also arise in this case in relation to contracts which are voidable because of other sections of the Companies Act, I postpone my discussion of affirmation for the time being.
- A transaction which falls within section 320 is not voidable if restitution of any money or other asset which is the subject-matter of the arrangement or transaction is no longer possible: section 322 (2)(a). The Burnden Defendants say that in the case of the intellectual property rights licence, the asset which was the subject matter of the arrangement was a licence to exploit design right for a period of five years from 1999 to 2004. No claim to avoid the licence was made until 2002, by which time three of the five years had expired. Consequently, they argue, it is impossible to restore the asset.
- The reference to restitution of the asset clearly takes its inspiration from the general law of rescission of contracts which may be barred by an inability to make restitution (restitutio in integrum). In the context of the general law of contract, the Court of Appeal has held that a tenancy agreement procured by a fraudulent misrepresentation by the tenant may be rescinded even after it has expired by effluxion of time: Killick v. Roberts [1991] 1 WLR 1146. (The significance was that rescission of the contractual tenancy also extinguished a statutory tenancy which would otherwise have arisen on its expiry). That was, however, a case of fraud, in which the court is more willing to mould the remedy of rescission to fit the overall justice of the case.
- In the case of rescission at common law, the courts held that rescission was barred unless precise restitution of the pre-contractual position was possible. Courts of equity, on the other hand, took a more flexible approach and, through the mechanisms of an order for an account or an inquiry, were able to order rescission where substantial restitution was possible. Even so, where the property had been consumed or had fundamentally changed its nature, even a court of equity was defeated.
- Here, however, I am dealing with statutory language; and a statutory remedy (see Re Duckwari plc (No. 2) [1998] 2 BCLC 315, 324). The section says that the transaction is voidable. It also says that a delinquent director may be required to account for profits; or to compensate the company for loss. The section does not empower the court to impose terms on the company as a condition of restitution. It does not therefore (at least expressly) replicate the broad general power of a court of equity to mould the account as between the parties. However, whether the transaction is avoided or not, the delinquent director is still liable to account for his profits; or to compensate the company for its loss. By contrast, in a contract case if restitution is impossible, a compensatory award of damages is the usual remedy.
- In my judgment this justifies a relatively narrow approach to the meaning of "restitution" in section 322 (2)(a). I do not say that perfect restitution must be possible: if a director had acquired a 99 year lease from a company without complying with section 320, the lapse of a few months would not, I think, prevent restitution of the asset. But where, as here, more than half of the term of the licence had expired by the time that the claim to rescind was made, I do not consider that restitution of the asset is possible.
- The Re-Re-Amended Particulars of Claim also allege that the transfer of stock should be set aside. It is obvious that restitution of the stock is impossible. This plea is unarguable.
- In principle, section 322 (3) provides for remedies against three classes of person:
- As Mr Maynard-Connor points out, no claim under section 322 is pleaded against Mr Naden for having authorised any of the impugned transactions. Accordingly, he is not liable under section 322.
- If a person falls into one of these classes, the potential remedies are twofold. One set of remedies looks at gain; and the other at loss. The two remedies are:
- The liability to account for any profit or gain which "he has made" is, in my judgment, confined to a profit or gain which the person in question has personally made. He is not required to account for profits or gains made by other persons who fall within the class of persons liable. By contrast, the liability to indemnify the company against loss is a joint and several liability. Under section 322, therefore, there is no question of holding Mr Fielding personally liable to account for profits made by companies connected with him. Equally, as Mr Parker accepted, there is no warrant, under section 322, for holding TBG (or any other company in the Burnden group) liable for any profit made by BCP.
- Seaquest's articles of association are, so far as material, governed by Table A. Article 85 of Table A provides:
- The statutory obligation of disclosure, to which article 85 is subject, is contained in section 317 of the Companies Act 1985, which says:
- The object of section 317 is to ensure that the interest of any director and of any shadow director in any actual or proposed contract shall (unless the procedure has been adopted of giving a general declaration under subsection (3)) be an item of business at a meeting of the directors. Where a director is interested in a contract, the section secures that three things happen at a directors meeting: first, all the directors should know or be reminded of the interest; second, the making of the declaration should be the occasion for a statutory pause for thought about the existence of the conflict of interest and of the duty to prefer the interests of the company to their own; third, the disclosure or reminder must be a distinct happening at the meeting which therefore must be recorded in the minutes of the meeting. The requirement is for a full and frank declaration by the director, not of "an" interest, but of the precise nature of the interest he holds, and, when his claim to the validity of a contract or arrangement depends upon it, he must show that he has in letter and spirit complied with the section and any article to like effect: Neptune (Vehicle Washing Equipment) Ltd v. Fitzgerald [1996] Ch. 274, 282.
- Section 382 of the Companies Act 1985 requires every company to cause minutes of meetings (including meetings of directors) to be kept. Section 382 (2) says that:
- The signed minute is only evidence of what happened at the meeting; it may be rebutted by other evidence. Where, as commonly happens, formal minutes are prepared in advance of a meeting, they are less cogent evidence of what actually happened at the meeting itself than minutes prepared as a record of what took place.
- The burden lies on the director to show that he made the necessary declaration: Movitex Ltd v. Bullfield [1988] BCLC 104, 125.
- If this section is complied with, then the contract is not liable to be set aside by reason of the application of the strict prohibition on "self-dealing". However, exclusion of the "self-dealing" rule, does not absolve a director from his other fiduciary duties. Thus he must still act in good faith in the interests of the company; and he must not prefer his own interests to those of the company: Neptune (Vehicle Washing Equipment) Ltd v. Fitzgerald (No.2) [1995] BCC 1000, 1016.
- Apart from a potential liability to a fine, section 317 does not provide expressly for any sanction for non-compliance. However, section 317 (9) says that the section does not prejudice the operation of any rule of law restricting directors of a company from having an interest in contracts with the company. Since article 85 of Table A is conditional on compliance with section 317, a director cannot rely on the exclusion of the equitable prohibitions if he has failed to comply with section 317.
- The effect of non-compliance with section 317 was explained by the Court of Appeal in Hely-Hutchinson v. Brayhead Ltd [1968] 1 QB 549 (approved in Guinness plc. v. Saunders [1990] 2 AC 663) as follows:
- It follows, therefore, that even if a director has failed to comply with section 317, a contract in which he is interested may still bind the company, if it has affirmed it.
- Ultraframe say that the only way in which a company can affirm a contract which is voidable for non-compliance with section 317 or 320 is by its shareholders in general meeting. The Burnden Defendants say that, at least in the case of an insolvent company, the liquidator may affirm.
- The consequence of a failure to comply with section 320 is that the arrangement is voidable "at the instance of the company": section 322 (1). It seems to me also that if a transaction is set aside under the "self-dealing rule" for failure to comply with the articles of association and section 317, the person to set it aside is the company. Both rights to set aside transactions are choses in action. Section 144 of the Insolvency Act 1986 requires a liquidator, upon appointment, to take into his custody or control "all the property or things in action to which the company is or appears to be entitled". In my judgment these would include the entitlement to set aside transactions for non-compliance with section 320 or the "self-dealing rule". It follows, in my judgment, that if these choses in action are in the control of the liquidator, so that he can decide to pursue them, it must equally be within his power to decide not to pursue them. If therefore, he considers that it is more beneficial to the company's creditors to keep the transactions alive, he may choose to do so. In my judgment, therefore, a liquidator may affirm a contract which is otherwise voidable at the instance of the company.
- The doctrine of election rests on the basis of informed choice. If a person has (and knows he has) the choice between two inconsistent courses of action; and unequivocally communicates his decision to pursue one of them, he cannot, thereafter, pursue the other. The doctrine of election rests on the communication of the choice, and not on the reaction of the person to whom the choice is communicated. In other words, there is no need to prove reliance on the communication. Reliance belongs to the realm of estoppel; not election.
- What the Burnden Defendants rely on as constituting the election is the demand by Seaquest's liquidator for payments due under the licence coupled with a threat to wind up BCP if the payments were not made. Ultraframe, on the other hand, point out that although the payments were demanded, they were not in fact made in response to the demand. So the question is: does an unqualified demand for payment amount to an affirmation?
- In the law of landlord and tenant the doctrine of election is the foundation of waiver of forfeiture. The question whether an unqualified demand for rent falling due after the date of the breach giving rise to the forfeiture amounts to an election to waive the forfeiture has from time to time been considered by the courts. In Croft v. Lumley (1858) 6 HL Cas 672, 705 Bramwell B said:
- In Segal Estates v. Thoseby [1963] 1 QB 887, 899 Sachs J said:
- These statements might be regarded as obiter. However, in David Blackstone Ltd v. Burnetts (West End) Ltd [1973] 1 WLR 1487 Swanwick J, after a review of the authorities said:
- In Expert Clothing & Sales Ltd v. Hillgate House Ltd [1986] Ch 340, 359 Slade LJ said (obiter):
- Blackstone does not appear to have been cited (although it would not, of course, have been binding on the Court of Appeal).
- In the light of these authorities I conclude that, at least at first instance, the law is that an unqualified demand for payment of sums due under a voidable contract amounts to an election to affirm the contract.
- Section 727 (1) of the Companies Act 1985 says:
- It is a pre-condition to the exercise of the court's discretion to relieve against liability that the director must have acted both honestly and reasonably. While the question whether a director has acted honestly is to be tested subjectively; the question whether he has acted reasonably is an objective one: Coleman Taymar Ltd v. Oakes [2001] 2 BCLC 749, 770. If the director surmounts both these hurdles, then the court has a discretion to relieve. In exercising that discretion the court must have regard to "all the circumstances of the case". The expression "the case" does not mean "the litigation"; but primarily means the circumstances in which the breach took place. Thus in Coleman Taymar, HH Judge Reid QC considered the question of relief on a breach-by-breach basis; and in one case relieved the breach, while in the other he did not. However, "all the circumstances of the case" may, in my judgment, include a review of the director's stewardship of the company; but they do not involve a more wide-ranging inquiry into the director's character and behaviour. The circumstances of the case may also, in my judgment, include the behaviour of the company since the breach complained of.
- The power to relieve is exercisable in favour of an "officer of a company". Section 744 defines this expression so as to include a "director, manager or secretary". As has been seen the statutory definition of "director" in section 741 includes any person occupying the position of a director, by whatever name called (i.e. including a de facto director). But the expression "shadow director" is separately defined by section 741 (2). Given that there is a specific statutory definition of "shadow director" which is not incorporated by reference into the definition of "officer of a company", it must, I think, follow that a shadow director cannot be relieved under section 727.
- Mr Parker submits that, in the case of a contract made between a company and a director, unless section 317 is complied with in full, the prohibition on "self-dealing" applies. He goes on to submit that if the prohibition on self-dealing applies, the court has no power to relieve the delinquent director. He relies in this connection on the speech of Lord Templeman in Guinness plc v. Saunders [1990] 2 AC 663. In that case a committee of the board of Guinness had authorised payment of remuneration to Mr Ward, who was a director. However, the articles of association did not give authority to a committee of the board (as opposed to the full board) to authorise such a payment. Mr Ward attempted to rely on section 727. His reliance was given short shrift by Lord Templeman, who said:
- However, Mr Ward's difficulty in relying on section 727 was that the apparent contract under which he was paid was a void contract. It was not one which the committee of the board had power to make. I do not regard Lord Templeman as having ruled out the possibility of relief under section 727 in a case where the only vitiating factor in a contract is a failure to make disclosure. It is clear that Lord Goff, in the same case (p. 702) was of the view that section 727 might apply in such a case. In Lee Panavision Ltd v. Lee Lighting Ltd [1992] BCLC 22, 33 Dillon LJ said:
- In Runciman v. Walter Runciman plc [1992] BCLC 1084, 1093 Simon Brown J said:
- In Re Dominion International Group (No. 2) [1996] 1 BCLC 572, 596 Knox J said:
- In MacPherson v. European Strategic Bureau Ltd [1999] 2 BCLC 203, 218 Ferris J held that a director ought to be relieved against a failure to declare an interest in a contract where:
- In addition, in Coleman Taymar v. Oakes HH Judge Reid QC decided that section 727 might apply so as to relieve a director of a duty to account which would otherwise have arisen because of a failure to disclose an interest. In Re Duckwari plc [1999] Ch 253 Nourse LJ said that the application of section 727 should not be restricted unless it is necessary to do so.
- I therefore reject Mr Parker's submission that the court has no discretion at all under section 727 in a case where a contract is vitiated by a director's non-disclosure. The cited cases show a series of judges treating a non-disclosure as being capable of being relieved, and also show the circumstances in which relief should be given.
- Although the position may be different where there is only one director (Neptune (Vehicle Washing Equipment) Ltd v. Fitzgerald (No.2) [1995] BCC 1000) it seems to me that where a director fails to disclose an interest which is already known to his fellow directors, and where there is no material prospect of a formal declaration changing the decision they have in fact made, the court should be ready to treat the non-disclosure as no more than a technical breach of duty. If, therefore, the director overcomes the two hurdles of having acted honestly and reasonably, the discretion to relieve is likely to be exercised in his favour.
- In Foskett v. McKeown [2001] 1 AC 102, 127 Lord Millett said:
- As Lord Steyn put it in the same case (p. 113):
- Professor Birks concluded ("The Necessity of a Unitary Law of Tracing"):
- This passage was approved in terms by Lord Steyn and Lord Millett. It follows, therefore that the tracing exercise must be carried out first. Only then can the court consider what rights (if any) the claimant has in the assets that have been identified as being trust property or their identifiable substitutes.
- In Satnam Investments Ltd v. Dunlop Heywood [1999] 3 All ER 652, Satnam's agents (DH) had passed on confidential information to the claimant's business rival (Morbaine). Armed with this information Morbaine acquired a development site which Satnam had wanted to buy. The Court of Appeal rejected an argument that Morbaine held the site on constructive trust for Satnam. One of the problems arose out of tracing. Nourse LJ said:
- The site could not be regarded as a substitute asset for information.
- In Foskett v. McKeown Lord Millett explained the basic rule as follows:
- Where trust property is mixed with other property and an asset is subsequently acquired out of the mixed fund, the position is more complex. Again, it was explained by Lord Millett:
- Lord Millett concluded:
- Ultraframe's claim against K2 and BHU depends on the proposition that it is entitled to trace profits made by TBG into the assets of K2 and BHU. The claim is pleaded in paragraph 24.2B (1) of the Re-Re-re-Amended Particulars of Claim as follows:
- Mr Snowden submits that this cannot be done; and that there is a confusion of thought between the process of identifying assets or their substitutes on the one hand, and a personal liability to account for profits on the other. There is no question (except in a trivial sense) of being "entitled to trace". Of course anyone is entitled to trace his assets, in the sense of being entitled to lead evidence to show what has happened to his assets, or the value represented by his assets, but that is as far is it goes. It is only once the tracing process has taken place that the questions of claims and remedies ("entitlement") arise. Moreover, the concept of a profit is an accounting concept; it is not in itself an identifiable asset, although it may be represented by an identifiable asset (such as money in a bank account). Hence a profit cannot be traced into property.
- The cases involving following and tracing generally involve identifiable assets and their substitutes. Following involves the same asset; tracing involves identifying substitutions. For this purpose identifiable assets include choses in action (such as the credit balance in a bank account). However, it is well settled that where payments of trust money are made into an overdrawn bank account, the tracing process is frustrated. If profits could be traced, the intellectual wrestling of generations of distinguished judges over difficult questions relating to bank accounts would have been entirely superfluous. Mr Snowden's point is that the profits of a business are typically measured at the end of its financial year, when all its income and expenditure are calculated and balanced against each other. A proper calculation of profit may also include notional expenditure (such as a charge for depreciation of assets). In the course of its trading the business's bank balance may fluctuate, and may from time to time become overdrawn. The process of tracing involves tracking the path of the value of a particular asset or payment; not in ignoring the movement of the asset and jumping to the financial year end. In the words of Dr Lionel Smith, tracing "involves the identification of the specific inputs and outputs of substitutions": The Law of Tracing p. 136. Dr Smith goes on to say (p. 156):
- It is right to say, however, that in In Plus Group Ltd v. Pyke [2002] 2 BCLC 201, Brooke LJ said:
- However, Brooke LJ was not concerned with tracing and, in my judgment, was using the word "property" in a very broad sense.
- In my judgment Mr Snowden's submission is correct. The pleaded case is an illegitimate mixing and matching of two quite different things.
- Where a person is not himself a fiduciary, he may become mixed up in a breach by another of a fiduciary duty. He may be liable in one of two ways:
- The former is now known by the shorthand "knowing receipt" and the second by the shorthand "dishonest assistance". Although, for the purpose of legal analysis it is convenient to distinguish between the two types of secondary liability, a person may be liable under both heads, depending on the facts of a particular case.
- The ingredients of knowing receipt were described by Hoffmann LJ in El Ajou v. Dollar Land Holdings [1994] BCC 143 at 154 as follows:
- This formulation of the ingredients of the claim was approved by the Court of Appeal in Brown v. Bennett [1999] BCC 525, 530, in which the Court of Appeal stressed that the receipt "must be the direct consequence of the alleged breach of trust or fiduciary duty of which the recipient is said to have notice". In that case a company called Pinecord Ltd carried on business as a clothing retailer. It went into administrative receivership; and the administrative receiver sold its goodwill and assets to Oasis Ltd, a company in which the directors of Pinecord, the Bennetts, had an interest. The essential allegation was that the Bennetts had planned a phoenix operation by which Pinecord's business was acquired for their benefit. It was accepted that the sale by the administrative receiver was not itself a breach of fiduciary duty. In those circumstances, the most that could be alleged was that Oasis had knowledge of antecedent breaches of duty by Pinecord's directors. The Court of Appeal held that that was not enough for knowing receipt.
- The ingredients of dishonest assistance were set out by Lord Nicholls of Birkenhead in his authoritative opinion in Royal Brunei Airlines Sdn Bhd v. Tan [1995] AC 378. Although some doubt had existed whether his exposition represented English law, that doubt has been dispelled by the decision of the House of Lords in Twinsectra v. Yardley [2002] 2 AC 164. In Tan Lord Nicholls summarised the ingredients of liability as follows (p. 392):
- What constitutes dishonesty in this context is laid down by the majority of the House of Lords in Twinsectra. Dishonesty in this context must be proved according to the so-called "combined test": that is to say:
- Lewin on Trusts (17th ed para 20-50) states:
- It is, therefore, necessary to be cautious about relying on authority from other jurisdictions.
- It is important to keep distinct the two forms of secondary liability; because they have different consequences in terms of remedy.
- In Twinsectra Lord Millett said:
- Although a claim in knowing receipt is receipt-based, it is not dependent on the recipient having retained the trust property. If he has retained it, or if he has retained property which is an identifiable substitute for the original trust property, then the claimant is entitled simply to assert his proprietary rights in that property. He does this by invoking the principles of following and tracing. If the original recipient has passed on the property or its substitute to another person then, subject to any defence which that other may be entitled to raise, the principles of following or tracing continue to apply to the property or its substitute in the hands of that other. If the recipient has not retained the trust property, and its proceeds are no longer identifiable, then the claimant has a personal remedy against the recipient.
- Although a company is the legal and beneficial owner of its own assets, there is no difficulty in classifying property belonging to a company as trust property for the purpose of knowing receipt, where the company's property has been alienated by its directors in breach of their fiduciary duty. But what counts as the company's property?
- Plainly, property which is vested in the company, both legally and beneficially, before any disposition in breach of fiduciary duty, will count as trust property. This was the case in JJ Harrison (Properties) Ltd v. Harrison [2002] 1 BCLC 162 where a director who had bought land belonging to the company, without disclosing its development potential, was held to have acquired the property as constructive trustee.
- But property will also count as the company's property if it is property which the fiduciary has acquired for his own benefit but which, consistently with his fiduciary duties, he ought to have acquired on behalf of the company. The principle is that: "property acquired by a trustee innocently but in breach of trust and the property from time to time representing the same belong in equity to the cestui que trust and not to the trustee personally": A-G of Hong Kong v. Reid [1994] 1 AC 324, 331. The leading (and ancient) case is Keech v. Sandford (1726) Sel.Cas.Ch. 61. In that case a landlord refused to renew a lease to a trustee for the benefit of a minor. The trustee then took a new lease for his own benefit. The new lease had not formed part of the original trust property; the minor could not have acquired the new lease from the landlord; and the trustee acted innocently, believing that he committed no breach of trust and that the new lease did not belong in equity to his cestui que trust. Nevertheless, Lord King L.C. held that "the trustee is the only person of all mankind who might not have the lease". The trustee was obliged to assign the new lease to the minor and account for the profits he had received. The result is only explicable on the basis that the trustee held the lease on the terms of the trust. Thus the rule is that property which a trustee obtains by use of his position as trustee becomes trust property.
- A-G of Hong Kong v. Reid [1994] 1 AC 324 concerned bribes, taken by an employee in fraud of his employer, which he had invested in the purchase of property. The property had increased in value. The Privy Council held that the employer had a proprietary interest both in the bribe and in the asset substituted for it. Thus the property belonged in equity to the employer. The first stage in the analysis was the decision that the bribe itself was trust property. The second stage in the analysis was simply the application of the process of tracing the value of the bribe into the asset that had been substituted for it. Although this case is a decision of the Privy Council, which disapproved the decision of the Court of Appeal in Lister & Co v. Stubbs (1890) 45 Ch D 1, it can be taken to represent English law: Daradayan Holdings Ltd v. Solland International Ltd [2005] Ch 119.
- In this sense property can consist of choses in action (e.g. the benefit of a contract with a third party, or a debt). In Satnam Investments Ltd v. Dunlop Heywood [1999] 3 All ER 652 the Court of Appeal were prepared to assume that confidential information could count as trust property. Thus in the "corporate opportunity" cases, a director who diverts a corporate opportunity away from the company and towards himself holds any resulting chose in action (e.g. a contract enabling him to exploit that opportunity) on trust for the company, provided that there is a sufficient nexus between the property acquired and the breach of duty. It is possible that the corporate opportunity itself may be regarded as trust property, in the sense of being an intangible asset of the company. Even then, there may be difficulties in tracing the information or opportunity into the resulting chose in action for the purposes of a proprietary remedy. The cases to which I was referred (apart from Satnam) do not really discuss the law of tracing in this context. But what is the position where the contract in question is not one which is made between the fiduciary and a third party but is made between the fiduciary and the company itself? This question arises because Ultraframe contend that the intellectual property rights licence made between Seaquest and BCP is held by BCP on trust for Seaquest. As the concept of the alleged trust was explained to me by Mr Parker, I confess that I found it very hard to follow. Under the terms of the licence BCP was entitled to manufacture items falling within the scope of the licence. The alleged trust did not preclude that; so BCP continued to be entitled to manufacture without infringement. Under the terms of the licence, BCP was required to make payments of licence fee to Seaquest. The alleged trust did not alter that either; so BCP (as trustee) continued to be liable to make those payments to Seaquest (as beneficiary). Presumably, as trustee, BCP would be entitled to be indemnified by Seaquest against those payments. However, in addition to paying the licence fee, the consequence of the trust was that BCP was also required to account to Seaquest for the profits that it made either in manufacturing products; or in exploiting the licence by other means (e.g. by sub-licensing). In calculating the profits BCP would be entitled to deduct the licence payments (in addition to the cost of raw materials, overheads etc) and might also be entitled to an allowance for risk and effort. This analysis strikes me as very artificial.
- In Criterion Properties Ltd v. Stratford UK Properties Ltd [2004] 1 WLR 1846 a company had entered into an agreement with one of its directors. Lord Scott of Foscote (with whom the other Law Lords agreed) said:
- Thus Lord Scott distinguishes between rights held under an executory contract with the company which do not count as trust property (or assets); and benefits received under a completed contract, which can. At the stage when the contract is merely executory the only question is whether the contract can be enforced by the fiduciary against the company. That does not depend on "knowing receipt" at all. It depends on whether there are features which vitiate the apparent effect of the contract. Lord Nicholls of Birkenhead analysed the law in much the same way:
- In my judgment this case contradicts Ultraframe's argument that BCP holds the licence agreement on trust for Seaquest. In my judgment it does not. Either the licence is to be set aside, in which case the consequences described by Lord Scott and Lord Nicholls will follow; or it will not, in which case it will take effect according to its terms.
- In Tan Lord Nicholls said (p. 387):
- In similar vein Lord Millett said in Twinsectra (p. 194, dissenting, although not on this point):
- As Lord Millett makes clear in the passage just quoted, the dishonest assistance need not be given at the same time as the original breach. The assistance may be given after the event as part of a cover up.
- It was, of course, common ground that the test for dishonesty is that laid down by the majority in Twinsectra Ltd v. Yardley; namely:
- It is the assistant, rather than the fiduciary, who must be dishonest: Royal Brunei Airlines v. Tan.
- In Brink's Ltd v. Abu-Saleh [1999] CLC 133 Mrs Elcombe accompanied her husband on a number of trips to Switzerland. Mr Elcombe was carrying money which was part of the proceeds of the Brinks-Mat gold bullion robbery. However, Mrs Elcombe did not know that. She thought that the money was the subject of a tax evasion exercise. Brink's claimed against her that she was liable as a dishonest assistant in a breach of trust. Rimer J held (obiter) that although Mrs Elcombe knew that her husband was engaged in a dishonest scheme (i.e. tax evasion) that was not enough. It had to be proved that she knew of the existence of the trust or, at least of the facts giving rise to the trust. Mance J revisited this question in Grupo Torras SA v. Al-Sabah [1999] CLC 1469, 1665-6. He said that he had difficulty in accepting Rimer J's formulation of the requisite knowledge. He concluded, however, that:
- If and in so far as there is a difference of opinion between Rimer J and Mance J, I respectfully prefer the opinion of Mance J.
- It is not necessary for a dishonest assistant to know all the details of the dishonest scheme. As Peter Gibson J said in Baden v. Société Générale etc [1993] 1 WLR 509, 575:
- (In the light of later cases it is clear that it is the dishonesty of the assistant rather than the fiduciary that matters). In Twinsectra Ltd v. Yardley Lord Hoffmann said:
- But it seems to me that, on the basis of this passage, the dishonest assistant must know that the person he is assisting is not entitled to do what he is doing. The reason why, in Twinsectra, Mr Leach escaped liability, was that he thought that the money in issue in that case was at the disposal of his client. He was held to have been wrong; but not dishonest. Likewise in Tan Lord Nicholls said:
- The essence of the requisite knowledge, in this context, is that the assistant knows that the person being assisted is doing something he is not entitled to do. In the case of the proceeds of a bullion robbery, or the payment away of monies held on express trusts, this may not be difficult to establish. But as Twinsectra itself shows, a mistaken appreciation of the legal effect of the relevant documentation is (or can be) critical. Where, as here, the liability for dishonest assistance takes as its foundation a breach of the fiduciary duties owed to a company by one who is not a de jure director of it, establishing the requisite knowledge may be a much more difficult task.
- Although it is not necessary for the dishonest assistant to know all the details of the whole design, he must, I think, know in broad terms what the design is. Liability as a dishonest assistant, as the law has developed, is a secondary liability akin to the criminal liability of one who aids and abets the commission of a criminal offence. In that context, there are well developed principles for determining when an aider and abettor is to be treated as having participated in a joint enterprise. Criminal liability as an accessory depends on proof that the accessory intended, foresaw, or contemplated that an offence would or might be committed in furtherance of the joint enterprise. But it does not extend to the commission of unforeseen and uncontemplated offences that are outside the scope of the joint enterprise. The fine details of these principles need not be discussed here.
- Finally, on this point the test of knowledge is subjective. The question is not: what did the assistant suspect; nor what ought he as a reasonable person to have appreciated? Liability will only be established if the assistant actually knew that the property in question was not at the disposal of the fiduciary; or (perhaps) he shut his eyes to that possibility: Heinl v. Jyske Bank Gibraltar Ltd [1999] 1 Lloyds Rep. Banking 511, 532 (per Nourse LJ), 532 (per Sedley LJ) and 547 (per Colman J).
- Mr Snowden submitted that a finding of knowledge, and for that matter dishonesty, should not be made on the basis of inference. However, unless a dishonest assistant admits dishonesty, it is difficult to see how else a finding of dishonesty could ever be made. As Mr Hochhauser pointed out, most cases involving allegations of dishonest conspiracy are established by inference from proved facts. Of course such inferences are not to be made lightly, but that is a function of the burden of proof; and not the evidence that can be adduced to prove an allegation of dishonesty.
- It is clear that the passive receipt of trust property does not count as assistance: Brown v. Bennett [1999] BCC 525, 533. As Morritt LJ said:
- Likewise in Brink's Ltd v. Abu-Saleh Rimer J held that Mrs Elcombe's presence in the car accompanying her husband abroad on money laundering trips did not amount to assistance "of a nature sufficient to make her an accessory". She was in the car merely in her capacity as Mr Elcombe's wife.
- In Consul Development Pty Ltd v. DPC Estates Pty Ltd (1975) 132 CLR 373, 397 Gibbs J said:
- I hope that I have heeded His Honour's warning. In Boscawen v. Bajwa [1996] 1 WLR 328 Millett LJ said:
- The taking of an account is the means by which a beneficiary requires a trustee to justify his stewardship of trust property. The trustee must show what he has done with that property. If the beneficiary is dissatisfied with the way that a trustee has dealt with trust assets, he may surcharge or falsify the account. He surcharges the account when he alleges that the trustee has not obtained for the benefit of the trust all that he might have done, if he had exercised due care and diligence. If the allegation is proved, then the account is taken as if the trustee had received, for the benefit of the trust, what he would have received if he had exercised due care and diligence. The beneficiary falsifies the account when he alleges that the trustee has applied trust property in a way that he should not have done (e.g. by making an unauthorised investment). If the allegation is proved, then the account will be taken as if the expenditure had not been made; and as if the unauthorised investment had not formed part of the assets of the trust. Of course, if the unauthorised investment has appreciated in value, the beneficiary may choose not to falsify the account: in which case the asset will remain a trust asset and the expenditure on it will be allowed in taking the account.
- There was some debate before me on the question whether the ordering of an account is a personal or a proprietary remedy. The uncertainty may be due to the way in which the words "account" and "accountable" are used. In one sense the order is plainly a personal remedy; since it requires the trustee personally to explain what has happened to the trust property. But, like tracing, it is essentially a preliminary to the making of further orders, once the explanation has been given. Those subsequent orders may be personal or proprietary. Suppose, for example, that the taking of the account reveals that the trustee has made an unauthorised payment out of the trust fund, and has applied it in the purchase of an asset in his own name. Once this fact has been discovered, then if the beneficiary falsifies the account, the trustee will be liable personally to reimburse the unauthorised payment. But if the beneficiary chooses not to falsify the account, then, as I have said, the asset will be treated as a trust asset. This may or may not require the transfer of the asset (for example to co-trustees). If it does, then the remedy will be a proprietary remedy.
- However, leaving aside the case in which the beneficiary chooses not to falsify the account, but adopts an unauthorised transaction, the obligation of a defaulting trustee on the taking of an account is a personal obligation to restore the trust fund: Parker & Mellows: the Modern Law of Trusts (8th ed.) p. 765; AJ Oakley Constructive Trusts (3rd ed.) p. 8; Warman v. Dwyer (1994) 128 ALR 201, 208 (High Court of Australia). In some jurisdictions, the court will impose a constructive trust by way of remedy, but a so-called "remedial constructive trust" is not known in English law: Re Polly Peck International plc (No 2) [1998] 3 All ER 812.
- Other fiduciaries, who are not trustees, are also liable to account. An agent is one example. But the fact that a fiduciary is liable to account does not of itself make him a trustee; or impose an institutional trust on property within his control. This was explained by Millett LJ in Paragon Finance plc v. DB Thakerar & Co [1999] 1 All ER 400. In that case Millett LJ considered the earlier case of Nelson v. Rye [1996] 1 WLR 1378. In Nelson v. Rye the claimant was a solo musician who appointed the defendant his manager on terms that he would collect the fees and royalties which were due to him and pay his expenses; and account to him annually for his net income after deducting his own commission. When the relationship came to an end the plaintiff claimed an account, and the question was whether the account should be limited to the six years before the issue of the writ or whether it should extend over the whole period of the relationship. Millett LJ said:
- A liability to account, therefore, does not carry with it the conclusion that the accounting party is a trustee, or that the person to whom he is liable to account has a proprietary remedy. His liability to account is personal. It seems to me therefore, that when judges speak of someone being "accountable as a constructive trustee" or, as Lord Millett would prefer "accountable in equity", they are generally speaking of a personal liability to account, and are not generally describing a proprietary remedy.
- A beneficiary of a trust is entitled to a continuing beneficial interest not merely in the trust property but in its traceable proceeds also; and his interest binds everyone who takes the property or its traceable proceeds except a bona fide purchaser for value without notice: Foskett v. McKeown [2001] 1 AC 102, 127 (per Lord Millett), 108 (per Lord Browne-Wilkinson). It follows, therefore, that he can enforce his proprietary rights against a recipient of trust property or its traceable proceeds, even if the recipient had no knowledge of the breach of trust, provided that that recipient did not give value for the property. Accordingly, the proprietary remedy does not depend on knowing receipt.
- However, the proprietary remedy does depend on receipt. If the defendant has not received the claimant's property at all (or any identifiable substitute for it), then it is clear that the proprietary remedy will not lie against him. Equally, it depends on retention. If the defendant no longer has the property (or its substitute), the proprietary remedy is defeated.
- The proprietary remedy does not depend on profit. It is not a claim for unjust enrichment. As Lord Millett explained (at 129):
- If the claimant is successful in establishing the proprietary remedy, he will be entitled to the transfer of his property or its identifiable substitute. It will be transferred to him in the state in which it is when the order is enforced; so that if the property (or its substitute) has increased in value, the claimant will receive the benefit of that increase. Equally, if there have been additions or accretions to the property, he will receive those too.
- The proprietary remedy is not discretionary. As Lord Browne-Wilkinson explained in Foskett v. McKeown:
- One of the allegations is that Northstar transferred computers to Seaquest; and that the computers "inevitably contained the software they were carrying, including the information, data and programmes" described elsewhere. The items referred to were the First Degree program "Conservatory Designer"; an associate database of component parts (i.e. the roof file), and a Sage Accounting System.
- Northstar's entitlement to use "Conservatory Designer" was under a non-exclusive licence. A non-exclusive licence cannot be regarded as a piece of property. Although there was no direct evidence about Northstar's entitlement to use Sage programs, it is almost inevitable that that entitlement was also under a non-exclusive licence.
- The roof file is capable of being a database and, as such, to fall within the scope of database right. But no attempt was made to show that the conditions that must be fulfilled in order for database right to arise were in fact fulfilled; nor was there any attempt to show who might be entitled to database right, if it existed. It was not alleged that the information contained within the roof file was confidential or a trade secret; and consequently that was not explored in the evidence. The "no profit rule" may render a fiduciary liable to account for a profit made by the use of information he acquires as a result of his fiduciary position; but that is not the same as saying that the information itself is trust property or is a traceable asset.
- There is, of course, no doubt that design right, and other species of intellectual property recognised by the law, is property. As property, there is equally no doubt that it can be the subject matter of a trust. But Ultraframe's case goes further. They allege that the whole of the K2 system is held on trust for Seaquest. This allegation is based on the proposition that the K2 system has "evolved" from the original Quickfit system. This is not an allegation that has found its way into the pleadings. The pleading refers to design right alone, and infringement of designs protected by design right. The intellectual property rights licence was also concerned only with those rights that are protected by the law of intellectual property; and not with a more amorphous concept of an evolving system.
- What we are concerned with here is, I think, not the physical components of the system. It is obvious that they are continuously manufactured from new supplies of aluminium, uPVC and so on; sold to fabricators; and incorporated into conservatories up and down the country. So the allegation cannot mean that the Burnden Defendants have taken the physical components of the system.
- Nor are we concerned with the particular designs in which Laddie J held that Northstar was entitled to design right. Ultraframe disclaimed any suggestion (despite the pleading) that their case under this head was based on infringement of design right. Moreover, it is not disputed that Seaquest acquired by assignment whatever design right Northstar had; and has retained ownership of those rights. Whether BCP was granted a valid licence to exploit those rights is, of course, in issue; but that is a different question. The argument under this head assumes that the licence was invalid. What Ultraframe say is that the system sold in March 2000 is "identifiably the same system" as the Quickfit system, even though it has "evolved" over time. Thus, they say, the system is held on trust for Seaquest.
- If we are not concerned with the physical components of the system, and we are not concerned with design right either, what are we concerned with? The only answer that I can see is that we are concerned with the idea of the system. It is a general theme of the law of intellectual property that ideas are not protectable rights. There is no property in an idea, although the use of an idea may be restricted by an obligation of confidentiality. That is not alleged in this case.
- Mr Purvis submits that:
- I agree with him. In my judgment the "system" cannot be the subject of a proprietary claim.
- Mr Purvis also submits that the test proposed by Mr Speck; namely whether the system is "new" or modified or has evolved in the way one would expect a system to evolve is an obscure and meaningless test, without a legal foundation. The law recognises that one cannot copy a design in which another owns design right. Minor differences may not be enough to prevent copying. But the concept of evolution is very different. As a matter of fact, the allegation that the system has evolved is true. But human beings have evolved from apes. No one could sensibly say that they are the same; even though, so it is said, we share 90 per cent of our DNA with chimpanzees. A proprietary claim requires the identification of the property which once formed the subject matter of the trust, and subsequently following that property or tracing its value into a substitute. In my judgment Mr Purvis is right on this point too. I conclude that the "system" is not the proper subject of a proprietary claim.
- One major area of dispute was whether a business or the profits of a business could be made the subject of a proprietary claim. Ultraframe say that it can. They say that a business counts as property for this purpose; and that profits count as the "fruits" of the original trust property. The Burnden Defendants say that unless there is a proprietary claim to shares in a company or a specifically identified business asset (including an intangible asset such as goodwill), it cannot.
- In Re Jarvis [1958] 1 WLR 815 an executrix ran a business which had been left to her and her sister. She was held to be accountable in principle for profit (although the claim failed for other reasons). Upjohn J said:
- He held that there was no general rule, save that a trustee may not make a profit out of his trust. It all depended on the facts. On the facts, he held that the executrix had reincarnated the testator's own business, and hence the second method of framing the account was the correct one.
- Ultraframe relied heavily on the decision of Kearney J in Timber Engineering Co Pty Ltd v. Anderson [1980] 2 NSWLR 488. In that case the business of the claimant company ("TECO"), which was the manufacture and sale of timber connecting and framing devices for use in the building trade, was run in New South Wales by its manager there, Anderson; and Toy, its sales representative in the state. Working independently, in 1976 both Anderson and Toy began to sell TECO products on their own account; in fraud of TECO. In March 1976 Anderson and his wife incorporated Mallory Trading Pty Ltd ("Mallory Trading"). In the following month Anderson and Toy then each learned of the other's fraudulent activities and decided to join forces; so Toy and his wife joined them in conducting the businesses of TECO and Mallory Trading in conjunction. Through Mallory, they diverted a portion of the business and profits of TECO. In July 1977 Toy resigned from TECO to work full time for Mallory Trading; and in November 1977 Anderson was dismissed, whereupon he, too, began to work full time for Mallory Trading. In February 1978 they incorporated another company, Mallory Timber Products Pty Ltd ("Mallory Timber") to which they transferred the business of Mallory Trading. TECO sought (amongst other things) an account of profits and declaration of trust of the businesses of Mallory Trading and Mallory Timber and of the shares in both companies held by Anderson, Toy and their respective wives. After considering a number of authorities, Kearney J expressed his agreement with the following proposition, stated by Dr PD Finn in Fiduciary Relations:
- That, then, was the principle that Kearney J applied to the facts that he found. What he proceeded to do was to decide whether the trust property was extant. He said:
- July 1977 was, of course, the date when Toy resigned from TECO. Kearney J then dealt with a number of arguments relating to subsequent events. The real issue was whether the trust property represented by the business of Mallory Trading remained extant. The defendants' first submission was that the business of Mallory Timber was a fresh unrelated business free from any trust. The judge described that as "insupportable". He said:
- The defendants' next submission was that if there was any liability after July 1977, the liability should be limited to an account of profits, and should not extend to a declaration that the business was itself held on trust. The basis of this submission was that, whatever the position might have been in July 1977, the continued carrying on of the business had been wholly due to the defendants' own efforts; and that any benefit attributable to the trust as it existed in July 1977 had been displaced. Kearney J dealt with this submission as follows:
- The defendants' next submission was that any account should be limited to former customers of TECO, and that the extent of sales to those customers could be readily ascertained from the accounts. Kearney J rejected that submission too. He said that this submission took:
- He concluded:
- I have a number of difficulties in accepting this reasoning as representing English law. First, the two possibilities to which Upjohn J referred in Re Jarvis were methods of moulding an account under which a fiduciary was personally liable. They were not concerned with a proprietary remedy. Second, if, as Foskett v. McKeown establishes, the proprietary remedy is not a discretionary one, how was Kearney J able to order the making of all just allowances? It seems to me to be clear that he approached the question as one in which he had a choice to enable "justice to be done". That is not the ascertainment of "hard-nosed property rights". If the business was trust property, it belonged to the claimant; and no question of just allowances arose. Third, in holding that the business represented the original business, he appears to have applied the exercise of tracing; but without identifying the specific asset whose value or substitute he was tracing. The law of tracing was not discussed at all. Fourth, by apparently casting on the fiduciary the burden of laying claim to a specific asset, he appears to have adopted an approach which differs from that of Lord Millett in Foskett v. McKeown. Fifth, it is difficult to reconcile the approach of Kearney J with the subsequent decision of the High Court of Australia in Warman v. Dyer (1994) 128 ALR 201.
- Warman v. Dyer was another case of a fiduciary diverting a business in breach of fiduciary duty. In their joint judgment, Their Honours said:
- Their Honours continued:
- This careful analysis of discretionary factors seems to me to be quite inconsistent with the application of a non-discretionary proprietary remedy. It is also worth noting that the trial judge had held that the goodwill of the diverted business (a proprietary asset) was held on trust for the claimant; but the High Court discharged his order to that effect.
- The same points also, in my judgment, dispose of Ultraframe's reliance on the decision of the House of Lords in Boardman v. Phipps [1967] 2 AC 46. That was a case in which a fiduciary (in fact an agent rather than a trustee) was held liable to account for profits, but where the court held that he was entitled to a liberal allowance for the skill and risk that he undertook personally in making the profit. Since the question of profit is irrelevant to a proprietary claim; and since the making of an allowance is a discretionary exercise, I cannot accept Ultraframe's submission that Boardman v. Phipps is an example of a proprietary remedy.
- Accordingly, I accept the submission of the Burnden Defendants that a proprietary remedy is not available in the case of an alleged misappropriation of a business (as opposed to a proprietary claim to shares in a company or to a specific business asset, including an intangible but proprietary asset). I also accept their submission that a proprietary claim does not apply to profits.
- The basic rule, as stated by Lord Browne-Wilkinson in Target Holdings Ltd v. Redferns [1996] AC 421, 434 (omitting citation of authority) is:
- As the Latin makes clear, this is a personal remedy. Lord Millett made the same point in Foskett v. McKeown ("A beneficiary's claim against a trustee for breach of trust is a personal claim.") Plainly, however, there is an overlap with the proprietary remedy, in cases where specific restitution of the trust property is still possible; although double recovery would not be permitted.
- Where a fiduciary makes an unauthorised profit he is liable to account for that profit. He is treated as having made the profit for the benefit of the trust; and hence the account may be surcharged with that profit. Part of the dispute in the present case is whether he is only liable to account for profits that he himself has made; or whether he is also liable to account for profits made by others. Mr Snowden submits that a fiduciary is only liable to account for profits that he himself has made; and is not liable to account for a profit made by a third party (except in those rare cases in which, as a result of piercing the corporate veil, a profit made by a company is treated as a profit made by its controller). Mr Hochhauser submits that a fiduciary (and a dishonest assistant) are each jointly and severally liable to account for all profits made as a result of a breach of trust; whether or not they have personally made those profits. Consideration of this dispute has required some close analysis of decided cases.
- I return to Cook v. Deeks [1916] 1 AC 554. I have already set out the facts; but it will be recalled that Messrs Deeks and Hinds were the directors of the Toronto Construction Company. They negotiated a lucrative construction contract with the Canadian Pacific Railway. During the course of the negotiations, they decided to enter into the contract personally, on their own behalves. However, they incorporated a new company, the Dominion Construction Company to carry out the work. Precisely what happened next is obscure, but the report records that: "The contract was accordingly taken over by this company, by whom the work was carried out and the profits made." The Privy Council held that Messrs Deeks and Hinds were guilty of a breach of duty in the course they took to secure the contract, and must be regarded as holding it for the benefit of the Toronto Construction Company. The Board added:
- The reference to "all the other defendants" is a reference both to the directors and to the Dominion Construction Company. Thus the Dominion Construction Company was ordered to account for the profit that it had made. This passage does not, at least in terms, say that Messrs Deeks and Hinds were personally liable themselves to account for profits made by the Dominion Construction Company. Indeed the account was directed against the Dominion Construction Company. If Messrs Deeks and Hinds had been liable to account for their own profits as well as those made by the Dominion Construction Company, there would have been the possibility of double recovery, about which one would have expected something to have been said. Mr Hochhauser says that the finding that the Dominion Construction Company made the profit shows that the order made against the directors must have been made on the basis that they were jointly liable with the Dominion Construction Company for profits made by that company; otherwise there would have been no point in ordering an account against the directors personally. Whatever is the true explanation of the order made by the Board, I do not consider that I can take this case as clear authority for the proposition that a fiduciary is liable to account for a profit that he has not made.
- The next case is the decision of the House of Lords in Regal (Hastings) Ltd v. Gulliver [1967] 2 AC 134. The facts of the case are of critical importance. Regal were in negotiation for the purchase of two cinemas in Hastings. There were five directors on the board, including Mr Gulliver, the chairman. Regal incorporated a subsidiary, Hastings Amalgamated Cinemas Ltd, with a share capital of £5,000. There were six directors on its board, who included the five directors of Regal. Regal was only prepared to subscribe £2,000. Consequently, it was agreed that each of the directors of Amalgamated would themselves subscribe for 500 shares each, with the exception of Mr Gulliver. He said that he would find investors. He duly did so, and as a result 200 shares in Amalgamated were allotted to a Swiss company called Seguliva; 200 to a company called South Downs Land Co Ltd and 100 to a Miss Geering. Mr Gulliver himself held 85 out of 500 shares in Seguliva and 100 out of 1,000 shares in South Downs Land Co. He was a director of Seguliva and the managing director of South Downs Land Co, and signed the subscription cheques on their behalf.. Miss Geering was a friend of his. The shares in Amalgamated were subsequently sold at a profit; and the issue was whether the directors were liable to account to Regal for their profit. Lord Russell of Killowen stated the basic principle as follows (p. 144):
- No question of a proprietary remedy arose in that case, because the shares had been sold. Applying the principle thus stated, Lord Russell held that all the directors (except Mr Gulliver) were liable to account for the profits they had made. He then turned to consider the liability of Mr Gulliver. Mr Gulliver argued that he himself had made no profit; and therefore there was nothing for which he was liable to account. Lord Russell accepted this argument, distinguishing cases of partnership. He said that the profit did not belong to Mr Gulliver and that, accordingly, he was not liable to account for it. The next argument was that Mr Gulliver should be liable to account for the indirect profit made on his shareholding in Seguliva and South Downs Land Co respectively. But Lord Russell rejected that argument too, holding that there was no evidence that either company had distributed a profit (i.e. to Mr Gulliver). Lastly, Lord Russell rejected an argument that Mr Gulliver should account for profits made in respect of shares which did not belong to him beneficially. He concluded therefore that Mr Gulliver had made no profit for which he was accountable. Lord Macmillan agreed, saying that it had not been proved that Mr Gulliver had made any profit personally. Lords Wright and Porter agreed with Lord Russell about Mr Gulliver. Viscount Sankey also agreed, saying:
- The upshot of this decision, therefore, is that a fiduciary was not liable to account for profits made by a company in which he had a minority shareholding.
- I have already described the facts in Canadian Aero Services Ltd v. O'Malley. Mr O'Malley and Dr Zarzycki were senior officers of the claimant ("Canaero"). Having attempted, unsuccessfully, to procure a contract for Canaero to carry out a topographical survey and mapping of part of Guyana, they resigned from the company. Subsequently, they incorporated their own company, Terra Surveys Ltd ("Terra"). Terra was successful, shortly afterwards, in obtaining the contract for the topographical survey and mapping. Canaero brought a claim against Mr O'Malley, Dr Zarzycki and Terra. The claim failed before Grant J ((1969) CPR 1) and the Ontario Court of Appeal ((1971) 23 DLR (3d) 632); but succeeded in the Supreme Court of Canada ((1973) 40 DLR (3d) 371). In order to understand the relief granted by the Supreme Court it is necessary to understand the nature of the claim that Canaero made. This appears most clearly from the judgment of Grant J at first instance. He described the claim as follows:
- The claimant's claim was, therefore, a claim for its own loss; not a claim for an account of the defendants' gain. Grant J found that if Canaero had been awarded the contract (which he found was unlikely) it would have made a profit of $302,000-odd. Although he dismissed the action he said that if it had succeeded he would have awarded general damages of $125,000.
- Accordingly the claim was a claim in conspiracy by unlawful means, the unlawful means being breaches of the personal defendants' fiduciary duties. The relief claimed was not equitable relief; but common law damages. The measure of damages was not the defendants' gain; but Canaero's loss. Terra's liability was alleged to be tortious liability as co-conspirator; not as knowing recipient of trust property. The claim failed because the judge decided that there was no breach of fiduciary duty on which to found the unlawful means conspiracy. The decision in the Ontario Court of Appeal turned on questions that are irrelevant to anything I have to decide.
- In the Supreme Court Laskin J said that Terra had been joined "as the vehicle through which the individual defendants in fact obtained the benefit for which Canaero had been negotiating". After a close analysis of the legal principles the Supreme Court decided that Mr O'Malley and Dr Zarzycki were indeed in breach of fiduciary duty. Laskin J then turned to the question of relief. He said (p. 391):
- Judgment was therefore entered against Mr O'Malley, Dr Zarzycki and Terra for $125,000 damages. Since the claim remained a claim for damages, it seems to me that the explanation of this case, and the relief granted, is that the breach of fiduciary duty by Mr O'Malley and Dr Zarzycki provided the unlawful means which founded the conspiracy. Again, in my judgment the case is not direct authority for the proposition that a fiduciary is liable to account for a profit made by somebody else. On the contrary, the principle described by Laskin J is that the fiduciaries are liable to account "according to their gain"; although there does not appear to have been any attempt to discover what profits any of the defendants had actually made.
- Lewin on Trusts (17th ed para 20-46) states the law as follows:
- In such a case, therefore, Lewin suggests that the fiduciary and the company are jointly and severally liable. The question when an individual is personally accountable for property received by a company as a result of his breach of fiduciary duty was considered by Morritt V-C in Trustor AB v. Smallbone (No. 2) [2001] 1 WLR 1177. Mr Smallbone was a director of Trustor. In breach of duty he caused payments to be made from the company's bank account into the bank account of another company called Introcom. Introcom applied part of the money it had received for the benefit of Mr Smallbone. The Court of Appeal had decided that Mr Smallbone was jointly and severally liable with Introcom for the money that had ended up in his hands. The question before the Vice Chancellor was whether Mr Smallbone was personally liable to account for the remainder of the money received by Introcom. The argument that he should be liable was ultimately based on knowing receipt. Trustor argued that Introcom's receipt should be treated as Mr Smallbone's receipt. Trustor submitted that the circumstances were such as to warrant the court "piercing the corporate veil" and recognising the receipt by Introcom as the receipt by Mr Smallbone. It argued that the authorities justified such a course in three, potentially overlapping, categories, namely (1) where the company was shown to be a façade or sham with no unconnected third party involved, (2) where the company was involved in some impropriety and (3) where it is necessary to do so in the interests of justice and no unconnected third party is involved. The Vice Chancellor accepted that in the first category the court could "pierce the corporate veil"; but rejected the remainder of the submission expressed in these broad terms. He held that the third proposition was inconsistent with the decision of the Court of Appeal in Adams v. Cape Industries plc [1990] 1 Ch. 433. He said of the second proposition:
- The Vice Chancellor went on to hold that Introcom was indeed a device or façade in that it was used as the vehicle for the receipt of the money of Trustor. Its use was improper as it was the means by which Mr Smallbone committed unauthorised and inexcusable breaches of his duty as a director of Trustor. It was, therefore, an appropriate case for piercing the corporate veil. Consequently, he held that Mr Smallbone was jointly and severally liable to account for the balance of the monies received by Introcom. In Gencor ACP Ltd v. Dalby [2000] 2 BCLC 734, 744 Rimer J was also prepared to pierce the corporate veil and treat a receipt by a company wholly owned and controlled by a fiduciary as a receipt by the fiduciary himself.
- This approach coincides with the way in which Lewin describes the trustee as liable to account for a profit made by a company which is a mere cloak or alter ego for him; but not with the parenthetical statement that he is liable to account for a profit made by a company in which "he has a substantial interest".
- However, in CMS Dolphin Ltd v. Simonet [2001] 2 BCLC 704 Lawrence Collins J adopted a broader approach. Since Mr Snowden subjected this decision to sustained criticism; and urged me not to follow it, I must quote it extensively. Although I have already described the facts, I should, I think, repeat them. Mr Ball and Mr Simonet formed an advertising agency called CMS Dolphin. Mr Simonet was the managing director. Following a period of tension between Mr Ball and Mr Simonet, Mr Simonet resigned and set up a rival agency called Millennium. All the staff of CMS Dolphin left and joined Millennium; and its principal clients changed their allegiance too. Millennium was a partnership. After a short period of trading, the partners incorporated the business in a company called Blue. Blue took over the business that had been carried on by Millennium. Blue subsequently became insolvent. CMS Dolphin claimed that Mr Simonet was in breach of his fiduciary duties as a director in diverting business opportunities from CMS Dolphin to Millennium; and then transferring the business to Blue. Lawrence Collins J held that that claim had been established. The question then arose whether Mr Simonet was personally liable to account for profits made by Blue and, if so, to what extent. The judge first held that where the director puts the contract into a partnership, he is fully accountable even if his partners are entitled to part of the profit and are ignorant of his breach of fiduciary duty. This proposition is based on the decision of the House of Lords in Imperial Mercantile Credit Association v Coleman (1873) LR 6 HL 189; and Mr Snowden does not quarrel with it. The judge continued:
- He then quoted the passage from the opinion of the Privy Council that I have already quoted. However, it seems to me that the quoted passage (and Lawrence Collin J's summary of the decision) is equally compatible with the proposition that the directors and the company are liable to account for their own profits; not each other's. Lawrence Collins J then referred to the Canaero case. He said that in that case:
- However, as I have said, it seems to me that the relief granted in that case was not an account; but damages for conspiracy. If the relief granted in Canaero was equitable relief, it can, as it seems to me, only have been equitable compensation for Canaero's loss.
- Lawrence Collins J continued:
- He concluded:
- Lawrence Collins J expressed his final conclusion as follows:
- The last sentence is clearly obiter.
- In Quarter Master UK Ltd v. Pyke [2005] 1 BCLC 245 Mr Paul Morgan QC, sitting as a judge of the Chancery Division, followed Simonet. However, it was common ground in the case before him that the defaulting fiduciaries were liable to account for profits made by their company; and the point was not argued.
- As Mr Snowden pointed out, Lawrence Collins J made it clear that he was not piercing the corporate veil. As Trustor makes clear that can only be done in limited circumstances. What Lawrence Collins J held was that the cases showed that directors are "equally liable with the corporate vehicle formed by them" because they have "jointly participated" in a breach of trust.
- On analysis, it seems to me that the two cases to which Lawrence Collins J referred do not establish that proposition. Cook v. Deeks, as I have said was a case in which the directors and the company were each ordered to account for profits. But there is no indication that the order for the account went further than ordering each of them to account for his (or its) own profits. The Canaero case is not a case of an account at all; but of an award of damages against joint tortfeasors for conspiracy by unlawful means; or, perhaps, an award of equitable compensation for the beneficiary's loss. The proposition as formulated by Lawrence Collins J is also open to the objection that "joint participation" in a breach of trust is not a cause of action in English law. Secondary liability for breach of trust is founded either on knowing receipt of trust property or on dishonest assistance in a breach of trust. The concept of "joint participation" has echoes of the Australian concept of "knowing participation" which Lewin says (and I agree) is not part of English law.
- As I have said, in Regal (Hastings) Ltd v. Gulliver, Mr Gulliver was held not to be accountable for profits made by companies in which he had shareholdings. Lawrence Collins J said of that case that it was not authority "for the proposition that where a director puts the profit into a company in which he has an interest he is not accountable for profits". This way of putting the point, in my respectful opinion, blurs the distinction between a case in which the director himself receives the trust property which he later "puts" into a company, and a case in which he never receives it at all. In the former case he would himself be personally liable to account on the basis of knowing receipt and his subsequent disposal of the trust property would be nothing to the point. That was in fact the case that Lawrence Collins J was considering because the business was diverted first to Millennium (the partnership) and only afterwards from Millennium to Blue (the company). It is the latter case which it the more difficult. I find it difficult to see how Regal (Hastings) Ltd v Gulliver can be other than authority for the proposition that a fiduciary is not liable to account for a profit that he has not made. Turning to Lawrence Collins J's reasons for distinguishing Regal (Hastings) Ltd v Gulliver:
- I regret, therefore, that I do not find these reasons provide a sufficient basis for distinguishing Regal (Hastings) v. Gulliver; and I do not consider that Cook v. Deeks supports the proposition that Lawrence Collins J derived from it. It seems to me, therefore, that the mere fact that a fiduciary has a substantial interest in a company which knowingly receives trust property does not, in my judgment, make the fiduciary personally accountable for the receipt. However, the company will itself be liable to any remedies available against a knowing recipient. The case is otherwise where the company is a mere cloak or alter ego of the fiduciary, in which case it may be appropriate to pierce the corporate veil and treat the company's receipt as the fiduciary's receipt. Different considerations may also apply where the fiduciary receives the profit and then diverts it to a company.
- In addition to the proprietary remedy (if it is still available) the claimant has a personal remedy for an account against the knowing recipient. Obviously, the personal remedy depends on establishing knowing receipt, but it does not depend on retention. Indeed it is needed precisely where the recipient has not retained the property. In addition, the personal remedy requires the knowing recipient to account for any benefit he has received or acquired as a result of the knowing receipt. However, a knowing recipient is not, in my judgment, liable to account for a benefit received by someone else.
- In Trustor AB v. Smallbone (unreported 9 May 2000) Scott V-C discussed the restitutionary remedies available against a knowing recipient. The case concerned the misappropriation of monies belonging to Trustor, which had been paid to a company called Introcom. He said:
- The ordering of an account is an equitable remedy. It is not discretionary in the true sense. It is granted or withheld on the basis of equitable principles. But one of those principles is that of proportionality. In Satnam Investments Ltd v. Dunlop Heywood [1999] 3 All ER 652 property agents had acquired confidential information about a potential development site in the course of acting for a client. In breach of duty they disclosed that information to a rival (Morbaine). The question arose whether Morbaine (which had since purchased the site) could be made liable to account for profits. Nourse LJ said:
- It seems to me, therefore, that one of the grounds on which an account may be withheld is that the taking of an account would be a disproportionate response to the gain that appears to have been made, or to the nature of that which has been misused.
- If an account is ordered, the question then arises whether the account should be limited in some way, and if so, how. I have already mentioned the rival approaches encapsulated by Upjohn J in Re Jarvis [1958] 1 WLR 815. After considering that case, Mason J said in Hospital Products Ltd v. United States Surgical Corp (1984) 156 CLR 41, 110 that:
- In Warman v. Dwyer (1994) 128 ALR 201 the High Court of Australia considered the form of the account to be ordered in a case of a fiduciary who had diverted to himself an agency contract for the distribution of gearboxes. I have already quoted much of the relevant passage in discussing the scope of the proprietary remedy, but it bears repetition in this context:
- The court went on to say that it was of the first importance "to ascertain precisely what it was that was acquired in consequence of the fiduciary's breach of duty." Having considered the facts, and in particular the likelihood that the agency contract would have been terminated anyway, the court ordered an account of profits for a period of two years; less an appropriate allowance for expenses, skill, expertise, effort and resources contributed by the defendants.
- In CMS Dolphin v. Simonet [2001] 2 BCLC 704, 732 Lawrence Collins J said this about the scope of the account:
- However, having considered the facts, he appears to me to have limited the account of profits to profits derived from those clients who were actually enticed away from CMS Dolphin: see para [140] of the judgment.
- In Lindsley v. Woodfull [2004] 2 BCLC 201 the account was limited to profits earned down to the date on which a partner's retirement took effect, together with a payment of the capital value of the business advantage as a going concern as at that date.
- Ultraframe say that the business carried on by BCP and subsequently TBG is the same business as that carried on by Northstar and Seaquest. Accordingly, they submit BCP and TBG are accountable for all the profits of that business, whether or not assets belonging (or formerly belonging) to Northstar and Seaquest are still employed in it. They rely on the principle that to the extent that there has been intermingling of trust assets with assets introduced by and belonging to the trustee, the onus is on the trustee to show what he has introduced and what assets presently held by the trustee are derived solely from his own assets The Burnden Defendants say that this is not the correct approach. They say that it is necessary for Ultraframe to establish precisely what property belonging to Northstar or Seaquest has been misappropriated. An account of profits will only be given in relation to profits earned by such misappropriation.
- I do not consider that either submission is completely correct. Both are possible ways of fashioning the account, but neither is the only way. The governing principles are, in my judgment, these:
- The Burnden Defendants submit that since a claim against a dishonest assistant is fault-based rather than receipt based, the only available remedy is a compensatory one. A compensatory remedy is limited to compensating the beneficiary for the loss he has suffered. It does not extend to stripping the dishonest assistant of any profit he has made. The only limited exception to this principle is in the case of a dishonest assistant who takes a bribe. The Burnden Defendants accept that in such a case both the giver of the bribe and the recipient of the bribe can be made to disgorge any profit they have made: Fyffes Group Ltd v. Templeman [2000] 2 Lloyds Rep 643. But this, they say, is based on public policy considerations which are particularly applicable to the corrosive nature of bribery.
- This is not the way in which Lewin states the law. In para. 20-50 the editors say:
- It is fair to say that, with the exception of the Fyffes Group case, all the authorities cited are Canadian or Australian, but Lewin does not suggest that the law in this respect is different in those jurisdictions. Peter Smith J seems to have taken a similar view in Crown Dilmun v. Sutton [2004] 1 BCLC 468, 513, although it is not entirely clear whether he was considering liability for knowing receipt, dishonest assistance or both. Peter Smith J's remarks were also, in my judgment, confined to the profit which the dishonest assistant had himself made (or would make); they did not extend to the profits made by others.
- In Consul Development Pty Ltd v. DPC Estates Pty Ltd (1975) 132 CLR 373, 397 Gibbs J said:
- As Toulson J pointed out in Fyffes Group this statement of principle was approved by the High Court of Australia in Warman International Ltd. v. Dwyer (1995) 182 C.L.R. 544. He then set out the rival arguments as follows:
- Having considered a number of authorities Toulson J held that the second of these two arguments was correct. He held that a dishonest assistant was liable to account for profits he derived from his dishonest assistance. On the facts, however, he declined to order an account of profits against the dishonest assistant, because the profit that the dishonest assistant had made was no more than the "ordinary profit" that was inherent in the transaction into which it entered with the principal. There is nothing to suggest that Toulson J's adoption of the broad principle formulated by Gibbs J was confined to cases of bribery, although it is fair to say that he did stress its corrosive nature. In my judgment the principle is not so confined; and a dishonest assistant is liable to account for any profit that he makes from his dishonest assistance or from the underlying breach of trust. Mr Snowden says that Gibbs J's formulation is based on the Australian concept of "knowing participation" in a breach of trust; and that His Honour failed to make the distinction between knowing receipt on the one hand and dishonest assistance on the other. This may well be so; but does it make any difference? Toulson J evidently thought not. Suppose that a burglary takes place, with the assistance of a corrupt security guard. The gang of burglars pay the security guard a bribe; and also pay a driver to drive the getaway vehicle. The driver is paid out of the burglars' own money, and in advance of the burglary; so that there is no question of its being any part of the proceeds of the burglary itself. The proceeds of the burglary are later recovered in full. Mr Snowden would accept that the security guard can be made to disgorge his bribe. Why should the getaway driver not be personally compelled to disgorge his fee? I can see no just reason why not. I reject Mr Snowden's submission that, save in the case of bribery, a compensatory remedy is the only available remedy against a dishonest assistant.
- Ultraframe, however, go further. They say, in reliance on the extract from Lewin quoted above, that it does not matter whether the defaulting fiduciary or the dishonest assistant has made the profits, because a dishonest assistant in the scheme is liable for the whole profit of the scheme which has been assisted. The cases I have referred to thus far do not suggest that the dishonest assistant (not himself owing fiduciary duties) is liable to account for profits beyond the profit that he himself has made. The only authority cited in Lewin in support of this proposition is Canada Safeway Ltd v. Thompson [1951] 3 DLR 295 and [1952] 2 DLR 591, both decisions of Manson J in the British Columbia Supreme Court. The case concerned the purchase of shares. Mr Raley was a director of the claimant. He bought shares in another company which was a major customer of the claimant; concealing that fact from the claimant, which would have been interested in acquiring the shares itself. Mr Raley was not a defendant to the action. The defendants had joined in the share purchase, each acquiring shares on his own behalf. Manson J found that the defendants knew that the acquisition of the shares would be a breach of duty by Mr Raley; and that they fraudulently conspired with him to conceal the acquisition from the claimant. He held that the defendants became trustees de son tort or constructive trustees. He then said ([1951] 3 DLR 323):
- In a subsequent judgment to settle the form of the order he said ([1952] 2 DLR 592):
- Canada Safeway is persuasive authority for Ultraframe's submission. However:
- I was also referred to the decision of HH Judge Seymour QC in Comax Secure Business Services Ltd v. Wilson (unreported 21 June 2001). In that case the judge held that Mr Wilson (who appeared in person) was liable to account for profits received by a company called Nemesis Ltd, which he controlled. It appears that the judge found that Mr Wilson was liable as a dishonest assistant (although the finding is not quite expressed in those terms). He said:
- The judge did not refer to any authority on the question of remedy; but his decision seems to have been based on the finding that the dishonest assistant (Mr Wilson) was himself in a position to receive the profit personally, which he chose not to receive, but diverted elsewhere. This seems to me to blur the distinction between liability based on knowing receipt (receipt-based) and liability based on dishonest assistance (fault-based). I do not consider that this authority significantly advances Ultraframe's case.
- I can see that it makes sense for a dishonest assistant to be jointly and severally liable for any loss which the beneficiary suffers as a result of a breach of trust. I can see also that it makes sense for a dishonest assistant to be liable to disgorge any profit which he himself has made as a result of assisting in the breach. However, I cannot take the next step to the conclusion that a dishonest assistant is also liable to pay to the beneficiary an amount equal to a profit which he did not make and which has produced no corresponding loss to the beneficiary. As James LJ pointed out in Vyse v. Foster (1872) LR 8 Ch App 309:
- I was not referred to any authority binding me so to hold; and I decline to do so.
- Mr Fielding was appointed a director of Seaquest on 29 October 1999. He was never appointed a director of Northstar, which went into receivership on 21 June 1999. Ultraframe say that Mr Fielding was a shadow or de facto director of both companies from about October 1998. Scattered about various parts of the Re-Re-Amended Particulars of Claim, Ultraframe give the following principal particulars of this allegation (which I have attempted to put in chronological order):
- The pleading does not differentiate between those facts which are alleged to support the allegation that Mr Fielding was a de facto director; and those which are alleged to support the allegation that he was a shadow director. Nor does the pleading distinguish between Northstar and Seaquest. In this sense the pleading is a "double rolled-up plea". However, I will have to do the best I can.
- In their closing submissions Ultraframe relied on a number of passages in the evidence relating to Mr Fielding's relationship with other companies (particularly Kesterwood and BCP). The broad thrust of the submission was that Mr Fielding used a number of euphemisms for his role in companies where he had not been formally appointed as a director, but his favourite was "funder". Indeed, this, according to Ultraframe, was "a mantra used by a number of defence witnesses to explain his close involvement in and control of companies in which he had no formal managerial position". Ultraframe submitted that that he was no passive investor, but used his status as "funder" as a justification for the exercise of control. I do not consider that evidence relating to other companies is helpful in enabling me to decide whether Mr Fielding was a director (either shadow or de facto) of Northstar or Seaquest. The answer to that question must depend on what he (and the de jure directors) did or did not do in relation to those two companies.
- On 8 January 1999 Mr Fielding swore an affidavit in which he said:
- On 5 February 1999 he wrote a letter to his solicitors under the heading "Seaquest Systems Ltd" in which he said:
- Mr Roche thought that this was a fair description so far as Seaquest was concerned. However, he did not agree that this had been the position since the autumn of 1998. He said that Northstar was out of control, both before and after the move to Burnden Works.
- Mr Naden said in his witness statement that:
- Mr Snowden went through the pleaded allegations one by one and submitted that each of the activities relied on could have been performed by someone who was not a director. However, Mr Hochhauser submitted, in my judgment correctly, that in determining whether someone has become a shadow director it is necessary to look at all the various matters cumulatively. Nevertheless, for the purposes of exposition, it is convenient to deal with the various factors one by one.
- Mr Fielding attended meetings with Mr Birkett on 3 September 1998, 16 September 1998, 16 October 1998, 23 October 1998, 17 November 1998, 18 November 1998, 24 November 1998, 25 November 1998 and 13 January 1999. Only the meetings on 24 November were expressly styled "board meetings". Mr Naden attended the meetings on 16 September, 16 October, 23 October, 17 November (when the Northstar debenture was signed), 18 November, 24 November and 13 January 1999.
- The meetings of 3 and 16 September were, in my judgment, concerned with the trading relationship between Northstar and Kesterwood; and did not concern matters internal to Northstar. The first meeting at which decisions were made was that of 16 October. I find that the decision to move the business of Seaquest and the components side of Northstar's business to Burnden Works was made at that meeting, although it was not formally minuted until 24 November. Mr Fielding attended the meeting on 24 November. The decision to move was made at Mr Fielding's suggestion. Although Mr Birkett had reservations about the decision, I do not find that Mr Fielding imposed it. I reject, therefore, the allegation that Mr Fielding "told" Mr Naden and Mr Birkett that this was to happen. I also find that it was at the meeting on 16 October that the debenture was agreed; following the raising of the question of a debenture by Mr Roche at the meeting on 16 September 1998. Although the decision to move was an internal Northstar and Seaquest matter, nevertheless I do not consider that the meeting of 16 October can be characterised purely as a Northstar or Seaquest board meeting: it was a meeting between Northstar and Seaquest on the one hand, and Dearward Profiles (or Kesterwood Extrusions) on the other. Nevertheless all the participants at that meeting discussed both internal and external matters. The meeting of 23 October was concerned with the implementation of the "netting off" arrangement that had been agreed at the meeting on 16 October. This too was a matter as between Northstar on the one hand and Mr Fielding and his companies on the other.
- But as from 24 November there was, in my judgment, a change. From then on Mr Fielding did become more involved in matters internal to Northstar. Once Seaquest and the Northstar component business had moved to Burnden Works in January 1999 Mr Fielding participated in many of the management decisions.
- Mr Hindley began work in earnest, on Mr Fielding's instructions, on 21 October. Until the end of the year, his work was limited to investigating the state of Northstar's accounts. But once the accounting records were moved to Burnden Works in January 1999, he began to make entries into the live data. Mr Hindley did liaise with the tax and VAT authorities after November 1998. However, Mr Hindley was not in charge of the day to day cash flow; and he did not supervise it. Moreover, as Mr Snowden correctly pointed out, Mr Hindley was not a director of Northstar; so the question whether he acted on Mr Fielding's instructions is not relevant. However, he reported to Mr Fielding; and consequently as from January 1999 Mr Fielding had available to him financial information on which decisions could be based.
- The decision to change Seaquest's registered office to the Burnden Works was made at the meeting of 16 October. It was Mr Birkett's suggestion to do this; and the necessary forms were signed by Mr Naden on 1 November 1998. I do not attach any significance to the change of registered office: after all, it is commonplace for the registered office of a small company to be the offices of its accountants.
- The decision to move the business of Seaquest and the components side of Northstar's business had been taken at the meeting on 16 October. Mr Sheffield undoubtedly had an important role to play in the co-ordination of the move; not least because he was in charge of allocating space within Burnden Works. But Mr Sheffield's actions were, in my judgment, no more than consequential on that decision. Although the specific allegation was not among those pleaded, Ultraframe relied on the fact that minutes of meeting attended by Mr Sheffield (in the absence of Mr Fielding) were typed on Mr Fielding's personal letterhead. Mr Sheffield said that this was done because it gave the minutes "a little bit of added impetus that we do the actions which are carried out – which need to be carried out." I am prepared to accept that Mr Fielding's views and wishes began to carry weight once the decision to move to Burnden Works had been made. That, however, is not the same as control.
- Although it is alleged that Mr Birkett and Mr Naden "began transferring the operations of Northstar and Seaquest" in November 1998, this is not so. No operations were transferred before January 1999. What happened before that was that there were discussions about the impending transfer, and the making of arrangements for the transfer, in consequence of the decision made on 16 October 1998.
- These were granted on 6 November (Seaquest) and 17 November (Northstar) respectively. I have already concluded that both were genuine commercial transactions. The Northstar debenture was granted in anticipation of continuing supplies of aluminium; and the Seaquest debenture was granted in anticipation of financial support from Mr Fielding. I reject the allegation that Mr Fielding "directed" Mr Naden and Mr Birkett to grant them. (In fact, as I have noted, Mr Birkett's evidence was that Mr Davies, rather than Mr Fielding directed the grant). But once the debentures were granted, I consider that Mr Fielding's involvement in the internal affairs of both companies grew.
- Mr Fielding became the sole signatory on Seaquest's bank account on the same day that the Seaquest debenture was executed. Mr Snowden submitted that Ultraframe's pleaded case eschewed any claim that Mr Fielding acted as a director (of any sort) of Seaquest as a result of the fact that he was the signatory to its bank account. He said that this was not referred to in the course of Ultraframe's opening (either written or oral). He complained that despite this, Ultraframe attempted to explore such matters in evidence, with the apparent intention of expanding the basis of the allegation that Mr Fielding was a "director" well beyond the parameters of the pleaded case. He submitted that, accordingly, Ultraframe ought not to be entitled to support any substantive plea with evidence elicited only in the course of cross-examination, many days into the trial itself. I do not consider that this submission is well-founded. Paragraph 11.5 of the Re-Re-Amended Particulars of Claim pleads the fact that Mr Fielding was the sole signatory on Seaquest's bank account. It is true that it would have been clearer if the pleading of this fact had been part of paragraph 11.2, which gives particulars of the facts relied on in support of the allegation that Mr Fielding was a shadow or de facto director of Seaquest. But to prevent Ultraframe from relying on that fact would, in my judgment, be construing the pleading too narrowly. On the other hand the mere fact that Mr Fielding was a sole signatory on the bank account does not make him a de facto or shadow director (although it does make him a fiduciary in relation to the funds in the account). Signing cheques is plainly a function that can be carried out by someone below board level, as is demonstrated by the fact that Ms Patey was a signatory on Northstar's bank account. The real question is how the account was operated; and whether it was operated in accordance with the instructions of the de jure directors or not. Mr Snowden was on stronger ground when he said that there was no evidence of any "untoward management" of the Seaquest bank account or that Mr Fielding acted in relation to that account in any way that was contrary to the wishes of the de jure directors of Seaquest.
- The accounts and computers were transferred to (or installed in) Burnden Works in January 1999.
- Component stock was not moved to Burnden Works until 27 January 1999 and the days that followed. Distribution of stock presumably began shortly thereafter, although BCP did not start distributing it before the beginning of March 1999.
- It is common ground that on 4 February 1999 Mr Fielding became the company secretary of Seaquest.
- Kesterwood became Northstar's supplier of uPVC extrusions in July 1997; and Kesterwood Extrusions continued the supply after the assignments of January 1998 as Seaquest's nominated "mill" for the supply of uPVC extrusions. After January 1998 it supplied Northstar in connection with Northstar's business as a fabricator of roofs, in the same way as it supplied other dealers. I do not begin to see how the fact of supply (or the fact that Kesterwood Extrusions continued as Seaquest's nominated "mill") supports an allegation that Mr Fielding became a director of Northstar or Seaquest in November 1998. The pleaded allegations are also factually incorrect. Kesterwood Extrusions did not supply any extrusions to Seaquest. Dearward (as opposed to Mr Fielding himself) never sold any aluminium to Northstar. For the first two consignments of aluminium (up to the end of 1998) the supply chain was Alumax ? Dearward ? Mr Fielding ? Northstar. Thereafter, Mr Fielding invoiced Seaquest; so that the supply chain became Alumax ? Dearward ? Mr Fielding ? Seaquest ? Northstar. Dearward Profiles did not supply aluminium to Seaquest. It supplied Seaquest's customers as the nominated "mill" until about February 1999.
- Although it is alleged that Mr Fielding charged Northstar excessive rent or licence fee, no particulars of the allegation have been given; and there is no evidence that Northstar paid or was charged any rent. The leases were granted to Seaquest in March 1999. It is true that there was no real arms' length negotiation over the rent or other terms of the leases.
- Although pleaded, this allegation was not referred to in Ultraframe's closing address. Moreover, it did not take place until May 1999, some six months after Ultraframe allege that Mr Fielding became a director of Northstar and Seaquest.
- Since Northstar ceased to supply components in early 1999, and went into receivership on 21 June 1999, this allegation cannot support the case in relation to Northstar. However, it does, in my judgment, point towards the conclusion that by June 1999 Mr Fielding was playing a full part in Seaquest's business decisions.
- I do not consider that it is possible, on looking at the totality of the evidence, to conclude that by November 1998 (and more specifically by 17 November 1998 when the Northstar debenture was executed) the directors of Northstar (i.e. Messrs Birkett and Naden) "were accustomed to act" on the directions or instructions of Mr Fielding. By 17 November, Northstar had decided to move its accounts and components business to Burnden Works; and had decided to grant (and had granted) the debenture to Mr Fielding in order to secure supplies of aluminium. The grant of the debenture was not done at the direction of Mr Fielding; it was the basis on which he was willing to place himself in the supply chain. It may well be that Northstar had no real commercial alternative but to accept his offer; but this transaction was an inter partes one rather than an internal matter for Northstar. I am prepared to accept that Mr Fielding suggested the move and actively participated in the meeting at which the decision was reached. But it was a decision that all those involved in Northstar considered was in the best interests of Northstar; and it was not a decision imposed by Mr Fielding. So far as Mr Hindley is concerned, I consider that Ultraframe have overstated his role; at least during 1998. Nor do I consider that these facts establish that Mr Fielding became a de facto director of Northstar before the end of 1998.
- Once Northstar had moved its accounts and components business to Burnden Works, things changed. From the middle of January 1999 Mr Fielding did become much more involved in the internal affairs of Northstar. He was concerned with the planning of Glassex; he appointed Mr Hutchinson and Mr Hindley to set up accounting systems; and he discussed budgets with Mr Roche. By then, and certainly by March 1999, when Mr Birkett was suspended, it could fairly be said that Mr Fielding was part of the corporate governance of Northstar. I do, however, accept that to a considerable extent Northstar was "out of control" until March 1999, particularly so far as Mr Birkett was concerned. He was simply too unreliable to act on the instructions of anyone. Mr Naden was more complaisant; but he was neither the whole board of Northstar, nor a governing majority of the board.
- In my judgment, Mr Fielding became a de facto director of Northstar (in the sense of having at least an equal voice with its de jure directors in important business decisions; and of being part of the corporate structure of governance) probably from January 1999; but certainly from March 1999 when Mr Birkett was suspended. He remained a de facto director until 21 June 1999 when Northstar went into receivership. I do not consider that he was a shadow director before he became a de facto director, because I do not consider that the board was "accustomed to act" on his instructions or directions before that time.
- There are five additional factors which bear on Mr Fielding's position vis-à-vis Seaquest. The first is the fact that Mr Ivison was a director of Seaquest until January 1999. The second is that Mr Fielding was the sole signatory on the bank account as from 6 November 1998. The third is that he said in a letter to his own solicitors on 5 February 1999 that he was "now running the company". The fourth is that he made the decision to change the supply of components from Northstar to BCP in early 1999, although the decision was not implemented until BCP began trading on 1 March 1999. The fifth is that the leases were granted to Seaquest, also in March 1999.
- Since Mr Ivison took no real part in the corporate governance of Seaquest, he was not, in my judgment, part of the governing majority of the board. Accordingly, his evidence that he was not a "yes man" so far as Mr Fielding was concerned is of little, if any weight. In the absence of evidence about how the bank account was conducted, I cannot place significant weight on the second of these factors. However, the third, fourth and fifth factors make it easier to come to the conclusion that Mr Fielding became a de facto director of Seaquest in January 1999; and I so find. Again, I do not consider that he was a shadow director before he became a de facto director, because I do not consider that the board was "accustomed to act" on his instructions or directions before that time.
- Ultraframe say that the Northstar and Seaquest debentures should be set aside for the following reasons.
- It was a breach of duty for Mr Naden and Mr Birkett, as directors of Northstar and Seaquest to have caused those companies to have issued the Northstar and Seaquest Debentures because:
- No valid and effective resolutions of the boards of directors of Northstar and Seaquest were passed authorising the issue of the debentures. There were no meetings of the boards of directors of Northstar or Seaquest to consider the issue of the Northstar and Seaquest Debentures (para. 9.1).
- Mr Fielding knew that Mr Naden and Mr Birkett had exercised their power to grant the Northstar and Seaquest Debentures for improper purposes and in breach of their fiduciary duties (para. 9.2)
- Neither the Northstar debenture nor the Seaquest debenture were granted for genuine consideration (para 9.3 and 9.4).
- In directing Mr Naden and Mr Birkett on behalf of Seaquest to grant him the Seaquest Debenture Mr Fielding acted otherwise than bona fide in the best interests of Seaquest, in breach of such fiduciary duties, in breach of the no profit rule and he had regard to his own interests and not those of Seaquest, such that the debenture should be set aside (para 12.2).
- In directing Mr Naden and Mr Birkett on behalf of Northstar to grant him the Northstar Debenture Mr Fielding acted otherwise than bona fide in the best interests of Northstar, in breach of such fiduciary duties, in breach of the no profit rule and he had regard to his own interests and not those of Northstar, such that the debenture should be set aside (para. 12.3).
- The Northstar and Seaquest debentures should also be set aside on the grounds that in neither case did a meeting of shareholders approve the issue to Mr Fielding of a debenture (para. 12.5).
- If the Northstar debenture was part of an arrangement for the supply of aluminium by Dearward or Mr Fielding to Northstar, the aluminium was of the requisite value under s 320 of the Companies Act 1985. Accordingly, the arrangement for the grant of the Northstar debenture to Mr Fielding was an arrangement within s. 320. The formalities required by the section were not complied with. Mr Fielding is therefore liable to account for any gain that he has made as a result of the arrangement (para 12.5A).
- The debt of Northstar to Kesterwood Extrusions of £69,623.30 (if it existed) constituted a non-cash asset within section 320 the value of which exceeded the called up share capital of Seaquest; and its acquisition by Seaquest from Mr Fielding was not approved by Seaquest in general meeting. Accordingly, the arrangement for the grant of the Seaquest debenture to Mr Fielding was an arrangement within s. 320 CA and was voidable at the instance of Seaquest (para 12.7).
- I have found that the reason for the grant of the Northstar debenture was Northstar's desire to continue to receive supplies of aluminium and its perception that Alumax had refused to continue to supply it.
- In their closing address Ultraframe mounted a full-scale attack on the alleged commercial justification for the Northstar debenture:
- Whether there was a need for Northstar to grant the debenture; and whether there were alternatives that could have been explored is not, in my judgment, the point. As both sides acknowledged the relevant test is what the directors believed was in the interests of Northstar; not what a court might believe. Since, in my judgment, the directors of Northstar believed that the grant of the debenture was necessary to ensure continuing supplies of aluminium, and that a continued supply of aluminium was in Northstar's best interests, I find that it was not granted for an improper purpose. It also seems to me that the possibility of payment for aluminium being routed through Seaquest is irrelevant. Seaquest was operating the "mill direct" system. In buying aluminium from Alumax (i.e. direct from the "mill"), Northstar was acting in the same way as any other fabricator of roofs. I can see no reason why Seaquest should have been under any obligation to assist one of its dealers in paying for its own supplies of aluminium. Equally Mr Fielding's preparedness to guarantee payment does not seem to me to vitiate the grant of the debenture. If Mr Fielding had guaranteed Northstar's liability to Alumax and that guarantee had been called on, he would have been entitled to an indemnity from Northstar. To secure that potential indebtedness would give him priority over unsecured creditors, whereas reliance on a belief that he was a shareholder would leave him last in line in the event of Northstar's insolvency. Nor do I accept that the Northstar debenture was granted "at the direction of" Mr Fielding. Mr Birkett's evidence was quite the contrary. He said that the debenture was granted at the direction of Mr Davies. But in fact, I consider that the grant of the debenture was made as part of a bargain under which Mr Fielding stepped into the breach and secured the continuing supply of aluminium. This is not, in my judgment, a case in which Mr Fielding's interests conflicted with those of Northstar. They both had the same interests: to secure supplies of aluminium. This finding also disposes of the allegation that the Northstar debenture was not granted for genuine consideration.
- The allegation that the grant to Mr Fielding of the debenture was a breach of the "no profit" rule is one that I find puzzling. The grant of a debenture does not generate any profit. It merely secures a debt. If there is no debt, the debenture has no effect. It is not suggested that any loan by Mr Fielding to Northstar was interest bearing. So if a debt were repaid, all that he would receive would be his money back. I do not consider that Mr Fielding made a profit out of the grant of the debenture.
- Ultraframe submitted that:
- However, this submission, in my judgment, overlooks three things. First, the directors did not owe a fiduciary duty to the trustees as particular shareholders. Their primary duty was to Northstar as a corporation. Without supplies of aluminium Northstar could not have continued to fabricate roofs. Second, since Northstar was, on any view, in severe financial difficulty and probably insolvent, the directors' duties included a duty to consider the interests of Northstar's creditors. Third, the grant of the debenture did not alter the beneficial ownership of any shareholding in the company.
- It is true that there was no board resolution or board meeting at which the grant of the Northstar debenture was considered and approved. Nor, obviously, is there any resolution approving the grant. But the two officers of Northstar, Messrs Naden and Birkett plainly approved the grant. In their final address Ultraframe did not rely on this pleaded allegation; so I say no more about it.
- I have already dealt with the allegation that the Northstar debenture was (or was part of) an arrangement to which section 320 of the Companies Act applied. I have held that it was not. I have also found that Mr Fielding was neither a de facto director nor a shadow director of Northstar at the date of grant of the Northstar debenture. For that reason also, section 320 does not apply.
- The attack on the Northstar debenture therefore fails.
- I have already concluded that the grant of the Seaquest debenture was a genuine transaction, albeit based on a misapprehension of the effect of the "netting off arrangement".
- For the reasons that I have tried to explain in considering the question whether the Seaquest debenture was a genuine transaction, the general attack on the Seaquest debenture also fails.
- The Seaquest debenture was granted as part of the arrangement under which Mr Fielding "sold" Seaquest the debt owed by Northstar to Kesterwood Extrusions. Ultraframe say that Seaquest's acquisition of the transferred debt was the acquisition of a non-cash asset of the requisite value falling within section 320. However, I have found that Mr Fielding was neither a de facto director nor a shadow director of Seaquest at the date of grant of the Seaquest debenture. For that reason also, section 320 does not apply.
- The attack on the Seaquest debenture therefore fails.
- The pleaded case is that Northstar's components business was taken over by BCP for "no or no adequate consideration" (Paragraph 15.3). The plea of "no consideration" is immediately contradicted by the particulars of the allegation; which assert (correctly) that Northstar received £7,000-odd for stock. The pleading goes on to allege that the transfer of the component business and stock ought to have been approved by Northstar in general meeting; but was not (Paragraph 15.4). It is therefore said that the transfer should be set aside under section 320; and that Mr Fielding and BCP are liable to account for any gain (Paragraph 15.5 and 15.6). It is not alleged that the decision to change supplier was in principle a breach of fiduciary duty on the part of anyone. Paragraph 15.1 of the Re-Re-Amended Particulars of Claim alleges that Mr Fielding, using his de facto control of Northstar and Seaquest, began "transferring the operations of Northstar and Seaquest to Burnden Works"; but this is no more than an allegation that the location of the businesses changed. It cannot, I think, be read as an allegation of a breach of fiduciary duty in changing supplier. It is, however, fair to say that paragraph 11.1 contains the following general allegation:
- Although this is an allegation of dishonesty against Mr Fielding, there is no allegation of breach of fiduciary duty by Mr Naden or Mr Birkett in changing supplier. Nevertheless I think that I should briefly consider the position of both companies. The decision to change suppliers was, I find, taken by Mr Fielding, with the acquiescence of Mr Naden and Mr Birkett, in February 1999. By this time Mr Fielding had become a de facto director of both Northstar and Seaquest.
- I have already explained that Northstar's dual business of fabricating roofs in competition with other dealers and of supplying components to those self-same dealers, was causing dissatisfaction among them. Mr Birkett recognised (as Mr Hacking's letter to him of 17 February 1999 shows) that Northstar would either have to give up fabricating roofs, or give up supplying components. According to Mr Hall, Northstar's turnover attributable to the supply of components represented some 18 per cent of its total turnover; with the fabrication of roofs accounting for the remainder. Although the gross profit margin on components was extremely high, a number of payments would have to be made out of that gross profit margin; notably:
- It seems likely, therefore, that the components side of the business was less profitable than fabrications (although both were only marginally profitable). There were also problems with the personnel at Wilton Street. Mr Birkett had to sack one of the employees for drug taking towards the middle of 1998; and there were discrepancies in the stock which gave rise to concerns abut the honesty of some of them. Mr Naden said that he received reports of drugs, sexual harassment and thefts. In addition Mr Sheffield's customer survey revealed a number of complaints about Northstar's performance in the supply of components. I have already described the logistical problems; the short and incorrect orders, and so on in describing Northstar's financial position in 1998. In short, Northstar's management capabilities were overwhelmed.
- In addition, Northstar had yet to be paid for the assignments of the intellectual property rights that had taken place in January 1998. The more profitable Seaquest's business was, the better the prospect of Northstar being paid.
- If one or other of the dual parts of Northstar's business had to go, it made sense from Northstar's perspective that it should be the supply of components.
- From Seaquest's perspective a change of supplier also made sense. It would eliminate the dissatisfaction felt by the dealers about being supplied with components by one of their competitors. It would eliminate much of the customer dissatisfaction revealed by Mr Sheffield's survey. Northstar was also on the verge of insolvency (if not actually insolvent) throughout 1998. It was therefore in Seaquest's interest to find a reliable and stable supplier.
- It is also the case that by assigning the intellectual property rights to Seaquest, Northstar had put the power into Seaquest's hands to change supplier without Northstar's consent. At the time of the assignment Northstar knew that some of the directors of Seaquest were also directors of Northstar as well. If a decision by Seaquest, acting in its own interests, or by Seaquest's directors, acting in Seaquest's interests, to change component suppliers was in conflict with Northstar's interests, that conflict was of Northstar's own making.
- In all these circumstances, I do not consider that it was a breach of fiduciary duty by Mr Naden or Mr Birkett to change supplier. The sale by Northstar to Seaquest of its stock at the end of December 1998 and before the move to Burnden Works also pre-dated Mr Fielding's becoming a de facto director of either company.
- The principal attack on the sale of the stock is made under section 320. The Burnden Defendants at one stage suggested that since Ultraframe had not proved the true value of the stock, section 320 could not apply. However, Mr Snowden accepted, in the light of his acceptance that section 320 could apply to a single unitary transaction the consideration for which exceeded the requisite value; and in the light of the fact that the consideration that Northstar actually received (£7,000-odd) exceeded that value, that section 320 did potentially apply.
- The stock passed from Northstar to Seaquest; and thence from Seaquest to BCP. The pleaded complaint is that the transfer of stock should have been approved by Northstar in general meeting. This complaint must, therefore, relate to the sale of stock by Northstar to Seaquest. The sale of stock by Northstar to Seaquest took place on 31 December 1998, when Mr Birkett issued his invoice. At that time:
- Accordingly, in my judgment, section 320 does not apply to the sale of stock by Northstar to Seaquest. Even if it did, section 320 would require Seaquest to account for its gain. Quite apart from the obvious difficulties of one co-claimant claiming against another, Seaquest simply did not make any gain.
- Under the agreement relating to aluminium, Mr Fielding was to buy aluminium from Alumax; sell it on to Dearward, which would then sell it on again to Northstar. The administration charge was supposed to be 2.5 per cent of the value of the order. However, the invoices do not appear to follow the intended arrangement. Dearward invoiced Mr and Mrs Fielding for the price of the goods as charged by Alumax plus an administration charge of 2.5 per cent; and then Mr Fielding invoiced Northstar for the amount of the goods plus an administration charge of 5 per cent. The first two deliveries of aluminium made on 11 November and 30 November 1998 were invoiced to Northstar. After the second delivery of aluminium, Dearward invoiced Seaquest, rather than Northstar; because Mr Fielding considered Seaquest to be a better credit risk. Seaquest was also charged an administration charge on an administration charge. Mr Fielding accepted that these doubled administration charges were wrong.
- According to Mr Hall (whose evidence was not disputed) the total administration charge that Mr Fielding charged Northstar on sales of aluminium that he made to it was £1,159.07. These charges were levied before the end of 1998; that is to say before Mr Fielding became a de facto director of Northstar. In relation to these charges, therefore, Mr Fielding was not required to comply with section 317 or section 320 of the Companies Act 1985.
- Again according to Mr Hall, the total administration charge that Mr Fielding charged Seaquest on sales of aluminium that he made to it (and which were passed on by Seaquest to Northstar) was £1,741.62. Of this amount £1,083.45 was charged before the end of 1998 and £658.17 was charged on 26 February 1999. The base cost of the aluminium invoiced on 26 February 1999 was £13,163.45. By this time, Mr Fielding was a de facto director of Seaquest.
- The Re-Re-Amended Particulars of Claim plead that each supply of aluminium to Seaquest required approval under section 320. At that time Seaquest's accounts had not been prepared; and its issued share capital was £100. The statutory minimum is therefore £2,000. Since the base cost of the aluminium was £13,163.45 this plea is well-founded, even though Mr Fielding's personal profit was less than £2,000. However, since the aluminium has no doubt been used in the manufacture of conservatory roofs, restitution is impossible. Thus the claim is not for any of the transactions to be set aside; but that Mr Fielding profited by charging commission on the supply of materials supplied to Seaquest by Alumax, and is liable to account for that profit.
- On the face of it Mr Fielding has profited from the transaction (once he had become a de facto director of Seaquest) to the extent of £656.17. It is not suggested that he made a formal declaration of his interest at a meeting of directors; or that the transaction was approved by Seaquest in general meeting.
- I have held that section 727 of the Companies Act 1985 can, in principle, be exercised in favour of a director who has not complied with section 320. Assuming that Mr Fielding acted honestly and (from his own perspective) reasonably in this respect, I do not consider that he ought fairly to be excused. My reasons are:
- Accordingly, Mr Fielding is liable to account for his profit of £656.17
- The allegation under this head is that Seaquest bought uPVC from Mr Fielding at prices that included a commission charge of 2.5 per cent. It then passed on the charge to Northstar. All the relevant invoices, with one exception, pre-date the end of 1998. They therefore pre-date Mr Fielding having become a de facto director of Seaquest. The one exception is an invoice for components which was charged to Seaquest by an invoice dated 18 January 1999 in the sum of £2,029.42; of which commission accounted for £49.50.
- Again it is asserted that the supply of components required approval in general meeting under section 3320 and again it is alleged that Mr Fielding is liable to account for his profit.
- For the same reasons I have explained in relation to the supply of aluminium, I consider that Mr Fielding is liable to account for his profit of £49.50 and that he is not entitled to be relieved under section 727.
- Paragraph 16.6 of the Re-Re-Amended Particulars of Claim alleges that shortly after 21 June 1999, Mr Long, Northstar's receiver, sold Northstar's remaining plant and machinery, office furniture and stock to TBG for £11,500 without taking any steps to market it. Paragraph 16.7 alleges that the sale was liable to be set aside under section 320; and as being in breach of the "no profit" rule.
- There is no pleaded allegation that the sale was at an undervalue; although an allegation to this effect was put to Mr Fielding by Mr Hochhauser in cross-examination. An allegation to this effect directly impugns the conduct of the receiver who is not a party to the action. He (and his assistant) were to have been called as witnesses by Ultraframe; but in the event they were not. Mr Hall identified various discrepancies in values attributed to the various items; but he fairly says that:
- In those circumstances, I do not consider that it would be right to allow Ultraframe to rely on an allegation of a sale at an undervalue.
- I have already held that, in principle, section 320 can apply to a sale by a receiver. But I have also held that it is the company's equity of redemption in the property sold, rather than its unencumbered value, which must exceed the requisite value. Assuming (as I do) that the value of what was sold was £11,500, there is no real possibility of Northstar's equity of redemption in the property sold having had any value at all. It was hopelessly insolvent. The statement of affairs recorded a deficiency as regards creditors of £280,000-odd.
- Accordingly I conclude that it has not been established that the sale by the receiver fell within section 320 because the property sold did not amount to non-cash assets of the requisite value.
- Although I have held that, in principle, the "no profit rule" is not excluded by the appointment of an administrative receiver, I do not consider that it applies to the transaction I am now considering. My reasons are:
- Accordingly the attack based on the "no profit rule" fails.
- Paragraph 14.1 of the Re-Re-Amended Particulars of Claim allege that since November 1998:
- It is then alleged that these transactions were favourable to Mr Fielding and his companies at the expense of Northstar and Seaquest and that Mr Fielding and his companies have profited as a result. Each arrangement for the supply of goods is alleged to be an arrangement to which section 320 applies; and that Mr Fielding, BCP and TBG are liable to account for profits. In the alternative it is alleged that the arrangements have caused loss or damage to Northstar and Seaquest.
- Kesterwood Extrusions did not make any supplies to Northstar or Seaquest after November 1998. This allegation fails on the facts.
- Although Dearward was part of the supply chain from Alumax, it did not supply either Northstar or Seaquest. The supplies came from Mr Fielding; and I have already dealt with his liability under the heading of "commission charges".
- There are three allegations relating to Dearward Profiles. The first is that it supplied uPVC extrusions to Seaquest's customers. A supply by Dearward Profiles to Seaquest's customers would have resulted in Dearward Profiles becoming liable to pay commission to Seaquest. There would have been no contract for the supply of anything between Dearward Profiles and Seaquest. All that would have passed between Dearward Profiles and Seaquest would have been cash. There is, therefore, nothing on which section 320 can bite.
- So far as the general allegation of profit is concerned, I cannot see that the supply of uPVC extrusions to Seaquest's customers, resulting in a payment of commission by Dearward Profiles to Seaquest, at a rate determined by Seaquest, raises any conflict of interest or improper profit at all. This allegation fails.
- The second allegation is that Dearward Profiles supplied uPVC extrusions to Seaquest. It did not. In so far as uPVC extrusions were supplied to Seaquest, the supply came from Mr Fielding. I have already dealt with his liability under the heading of "commission charges".
- The third allegation is that Dearward Profiles supplied uPVC extrusions to Northstar. Dearward Profiles became the supplier of uPVC extrusions in July 1998, before Mr Fielding became (or is alleged to have become) a de facto director of Northstar or Seaquest. Any initial "arrangement" by which Northstar became obliged to buy its requirements for uPVC extrusions from Dearward Profiles cannot, therefore have been caught either by section 320 or by section 317. Supplies of uPVC extrusions continued after January 1999, by which time Mr Fielding had become a de facto director of Northstar and Seaquest. But since this was a continuation of an established trading arrangement, I do not consider that it was caught by section 320. Moreover, as I have explained, a trading arrangement of this nature (under which future orders for goods of indeterminate amount are contemplated) does not fall within section 320 at all. Nor has it been established that any individual order of uPVC extrusions exceeded the "requisite value". Section 320 does not, therefore apply.
- Any profit that Mr Fielding made did not come about because of his position as a de facto director of Northstar or Seaquest. There was simply no causative link between his fiduciary position and the trading arrangements which had begun months before; and simply continued. In addition, it cannot be said that Dearward Profiles was merely a cloak for Mr Fielding or his alter ego. Mr Fielding would not have been accountable for any profit that Dearward Profiles made.
- That leaves the question of "the self-dealing rule" and the "no conflict rule". Although the Burnden Defendants suggested that Mr Fielding was entitled to rely on article 85 of Table A, there is no evidence to suggest that he made any declaration of his interest at any meeting of the directors of either Northstar or Seaquest. I do not consider that Mr Fielding is entitled to rely on article 85. However, it seems to me that the answer to this complaint lies in the nature of the two rules relied on. Neither are absolute prohibitions. Both give way to the informed consent of the principal. Mr Fielding's position was that he owed fiduciary duties both to Northstar and to Dearward Profiles. Northstar knew that Mr Fielding was the moving spirit behind Dearward Profiles. It voluntarily bought uPVC extrusions from Dearward Profiles with that knowledge. The supply of uPVC extrusions by the one to the other produced no actual conflict of interest (at all events unless and until any question of a price increase arose). No pleaded complaint is based on any price increase. In my judgment neither the "self dealing rule" nor the "no conflict rule" applies to continued supplies of uPVC extrusions by Dearward Profiles to Northstar in the light of Northstar's knowledge.
- Paragraph 14.4 of the Re-re-Amended Particulars of Claim pleads the payment of the management charges. The legal consequences are set out in the ensuing paragraphs as follows:
- I do not think that this allegation has anything to do with Kesterwood Extrusions, Dearward or Dearward Profiles. Burnden and BCP raised management charges against Seaquest for the year 1999. Mr Fielding said that these charges were agreed between him, Mr Naden and Mr Roche; although Mr Roche said that he was not involved in agreeing the amount of the charge. The interim charge was £14,250 per month. Back in the summer of 1998 Mr Roche had suggested that Northstar should make management charges against Seaquest. But at that time the charge was only £1,600 a week (approximately £7,200 a month); and thus about half the charge raised by TBG and BCP. Mr Maynard-Connor suggested in his closing address that Mr Naden had been involved (peripherally) in the raising of the impugned management charge. But Mr Naden's evidence in his witness statement was as follows:
- Thus Mr Naden's professed memory only relates to the charges made by Northstar. He recalls nothing about charges made by BCP or TBG. The reference to charges made by Northstar must be a reference to the charges made in the summer of 1998.
- TBG raised an invoice for £99,750 plus VAT; and BCP raised an invoice for £71,250 plus VAT. The total amount came to £171,000 plus VAT. The first of the invoices is dated 30 April 1999 (after Mr Fielding became a de facto director of Seaquest). These charges were said to represent the real cost of employing staff who had been informally seconded to Seaquest to enable it to run its business. The invoices in respect of Mr Naden were raised by Mr Hindley, who calculated the figures, having been given instructions to do so by Mr Fielding. Mr Fielding provided Mr Hindley with the proportions of the costs to include in the invoices. Mr Hindley took these figures at face value, although he said that if he had thought that they were "really excessive" he would have challenged them. Mr Hindley did not deal with management charges for any other personnel.
- I accept Ultraframe's submission that the charges were decided upon by Mr Fielding; and that Mr Naden had no involvement in the levying of the charges or their amount.
- In his witness statement Mr Fielding provided a breakdown of the time and cost of the staff who had been involved. These differed from breakdowns given by Mr Fielding in earlier statements. The figures given by Mr Fielding in his witness statement were as follows:
- Mr Sheffield's evidence in his witness statement was:
- In these circumstances it is difficult to see how Mr Sheffield could have been charged out to Seaquest on the basis that he was working full time for Seaquest for 11 months. I conclude that the recharge of Mr Sheffield's services was unreasonably inflated.
- Mr Naden continued to run Northstar's fabrication business until June 1999 when it went into receivership. Thereafter he continued to deal on a day to day basis with fabrication issues. It is difficult to see how, in these circumstances, Mr Naden spent 75 per cent of his time for six and a half months working for Seaquest (which did not fabricate roofs). I conclude that the recharge of Mr Naden's services was unreasonably inflated.
- Mr Gray was involved in a supervisory capacity in overseeing the transfer of components from Wilton Street in late January and early February 1999. At the time, in consequence of the interim invoice that Mr Birkett had prepared, these components were Seaquest's. He arranged the transport for the components. He also dealt with the revaluation of the stock. But from 21 April 1999 (at the latest) the stock became BCP's. He can only have been dealing with stock on Seaquest's behalf between the end of January and 21 April 1999 (a period of less than three months). He also said that he got involved with Seaquest in dealing with Alumax over aluminium supplies as he got involved with BCP. This involved borrowing aluminium from dealers and shipping it to other dealers. The precise boundaries between Seaquest and BCP in this respect were by no means clear. It is difficult to see, in these circumstances, how Mr Gray could have spent 50 per cent of his time for nine months working for Seaquest. I conclude that the recharge of Mr Gray's services was unreasonably inflated
- Mr Read transferred his employment from Northstar to TBG in March 1999. His services were immediately recharged to Seaquest on the basis that he was occupied full time on Seaquest's business. The amount recharged was greater than his salary, because Mr Fielding said that his calculation of the charge included other associated expenses of employing him, such as national insurance; the cost of his car and petrol; mobile telephone and so on. However, I consider that it is probable that Mr Read did spend all his time on Seaquest's business. I consider that it would not have been unreasonable to have recharged Mr Read's services by reference to the overall cost of employing him (including the extras mentioned by Mr Fielding). I am not able to conclude that the recharge for Mr Read's services was excessive.
- The precise details of other employees were not explored in evidence. But I do not consider that this matters. It is something that can be dealt with on an inquiry.
- Ultraframe summarise their complaint about the management charges as follows:
- While it is an exaggeration to say that no work was being done for Seaquest (which, after all, had no employees of its own), I conclude that the charges levied were themselves exaggerated; and were determined by Mr Fielding alone. I agree with Ultraframe that the levying of these charges at these rates was a breach of Mr Fielding's fiduciary duties as de facto director of Seaquest. I agree also that Mr Naden simply surrendered his discretion as director of Seaquest to Mr Fielding in this respect. Although it was argued that the mere fact that entry into a transaction on terms unfavourable to Seaquest was not a breach of fiduciary duty (as opposed to a duty of skill and care) this is not, in my judgment, a case of a fiduciary "loyally doing his incompetent best". Rather, in the case of Mr Fielding it was a case of preferring one of his principals (BCP or as the case may be TBG) to another (Seaquest); and in the case of Mr Naden it was a case of his abdicating any responsibility at all.
- It is not alleged that Mr Naden or Mr Fielding personally profited from the levying of management charges. In the case of Mr Naden this is self-evident. In the case of Mr Fielding, the only way in which he personally could have profited was indirectly through his shareholdings in BCP or TBG. But it was not demonstrated that he did. In my judgment the only remedy that lies against Mr Naden and Mr Fielding personally is that of equitable compensation for any loss suffered by Seaquest. That loss would be measured by the amount of the management charge, after giving credit for the true value of any services that Seaquest received.
- As against BCP and TBG it is alleged that they knowingly received trust property (i.e. the money that Seaquest paid). It is not seriously disputed that Mr Fielding's knowledge can be attributed to BCP (of which he was sole director until March 2000) and TBG (of which he was and remains a director). In those circumstances I consider that both the receipt of trust property and the requisite knowledge are established against both BCP and TBG. Both are parties to the action; and, in my judgment, both are liable to account for profits that they have respectively made from the levying of management charges. The profits are to be measured by subtracting from the charges levied, the true cost of employing the various employees apportioned according to the time that BCP and TBG respectively can establish that those employees spent on Seaquest's business. By "true cost" I include not only the underlying wage bill, but also costs such as national insurance and also the cost of "perks" (such as company car, mobile phone etc) to which each employee was contractually entitled.
- For the reasons I have given, I reject the contention that the profits can be traced into other companies.
- Ultraframe make four complaints about the leases granted to Seaquest, which were granted in March 1999, after Mr Fielding had become a de facto director of Seaquest. First, they say that Mr Fielding was in a position of conflict of interest. However, the pleaded conflict is not based on the mere fact of the grant of the leases. Rather, the allegation is that the rent charged was far in excess of the rent that had previously been payable. Second, they say that the grant of the leases should have been approved by a general meeting of Seaquest, but was not. A general meeting was required because of section 320 of the Companies Act 1985. Third, they say that the rent and service charges for which Seaquest made itself liable were unreasonably high. Fourth, they say that since Seaquest was only a broker and had no staff, stock or manufacturing capability, it had no need of the leased space at all.
- The formal decision to move to Burnden Works was taken on 24 November 1998, before Mr Fielding had become a de facto director of Seaquest. Mr Naden was the sole director of Seaquest at the time. He was present at the meeting on 24 November; and in my judgment must have understood what was going on and assented to it. The meeting itself was held at Burnden Works, of which everyone knew that Mr Fielding was the owner (although they might not have known that he shared ownership with Mrs Fielding). His evidence was as follows:
- I have already found that all those who were associated with Seaquest thought that the move to Burnden Works was a good idea; and in Seaquest's interest. If Seaquest was to move to Burnden Works, it was obvious that its occupation would have to be regulated somehow; and a lease (or leases) was the obvious answer. The lease itself, to which Mr and Mrs Fielding were parties, disclosed on its face what Mr Fielding's interest was. Moreover, Seaquest in fact moved in to Burnden Works early in January 1999; which was also before Mr Fielding became a de facto director of Seaquest.
- I am dubious whether the "no conflict rule" applies in a case where a transaction has been agreed before the putative fiduciary becomes a fiduciary, but is completed after he does so. But in case it does, I will go on to consider the other complaints before considering the question of relief.
- I have already concluded that in principle section 320 applies to the grant of a rack rent lease. I have also concluded that in assessing whether the "non-cash asset" is of the requisite value, it is the capital value of the lease that counts. If that is right, and if the object of the inquiry is the value of the leases (being the assets acquired by the company), my instinct is that the leases would have no value in the hands of Seaquest, since they were short term leases granted at rack rents. My instinct would be stronger if, as Ultraframe claim, the rents are unreasonably high. More than that, although I heard evidence from Mr Summers, a valuer called on behalf of Ultraframe, he did not address the question whether the leases had any capital value at all. I conclude that Ultraframe have failed to prove that the leases were assets of the requisite value. This complaint therefore fails.
- The complaint made on the pleadings is not that the rents charged were unreasonably high. Rather, the pleaded complaint is that that the rents charged were "far in excess of that which Northstar and Seaquest had paid for their occupation of their previous premises". Put in that way, the complaint goes nowhere. There are all sorts of reasons why rent for one set of premises may be far higher than rent for another. They may be bigger, better, in a different location, let on different terms and so on.
- Ultraframe did not apply for permission to amend the Particulars of Claim to allege that the rents charged were unreasonably high. This complaint is not, therefore, open to them. Nevertheless, since I heard evidence on this question without objection, I will set out my factual findings about it, in case a higher court decides that this complaint is one that Ultraframe is entitled to make.
- The complaint that Seaquest had no need of all the leased space only emerged in the course of Mr Fielding's cross-examination. It was not a pleaded complaint. Consequently, I do not consider that it is a complaint that is open to Ultraframe. Since it is a question of fact rather than a discrete question of expert evidence, I do not propose to attempt to make any findings based on partial evidence only. In fact there was evidence (from both Mr Fielding and Mr Roberts) that Seaquest did have need of most, if not all, of the leased space.
- As I have said the rent of Unit G3 (shorn of rates) devalues to £8.16 per square foot. Mr Bernard Summers FRICS, Ultraframe's expert, considered that the appropriate band of rental values for "offices at the Burnden Works" was between £5.50 and £8 per square foot. His view was based principally on two comparables. The first was a letting of newly constructed offices at £10 per square foot, which Mr Summers discounted by 20 per cent to allow for differences in specification and location. This fixed his upper limit. The second was a rent review of a large Victorian building in a predominantly residential area at £5 per square foot. This fixed his lower limit. Both the comparables were based on much longer term lettings than the one year lease granted to Seaquest. Mr Summers recognised that a short term letting might have greater attractions to a tenant; and that a landlord would be prepared to accept a lower rent for longer term security of income. He had not, however, allowed anything for this in forming his opinion. Moreover, neither comparable was a transaction related to furnished offices. The fact that Unit G3 was furnished must also have added something to its value. Thus, in my judgment, Mr Summers' upper limit was too low.
- I should note that Mr Summers entered a caveat that the condition of Unit G3 at the date of the letting in 1999 might have been substantially poorer than the condition in which he saw it towards the end of 2004. However, based on the evidence, there is no need to make any adjustment for this, as no works have been carried out to Unit G3 since 1999.
- Perhaps more importantly, Mr Summers had not appreciated that the rents payable by Seaquest included fixed service charges, whereas the rents payable for his comparables did not. A fixed service charge is a benefit to a tenant.
- As I have said the rent of Unit LG3 devalues to £3.89 per square foot. Mr Summers' view was that the appropriate band of value was £1.60 to £3.10 per square foot (allowing a discount of 20 per cent from the norm to take account of difficulties of access). Mr Summers' opinion was based on a schedule of comparables relating to lettings of more modern industrial accommodation. This schedule established the "tone of the list" as being between £3 and £4 per square foot. This schedule also related to units let on longer term conventional leases, rather than the short term letting granted to Seaquest. In my judgment, therefore, Mr Summers' band is too low.
- Based on this evidence I conclude that the rent of Unit LG3 (if looked at alone) was on the high side in 1999; but not so high as to be stigmatised as unreasonable. However, the letting of Unit LG3 was part of a package with Unit G3. Looked at together, the aggregate rent for the two (exclusive of rates) was £17,600-odd. This was only 10 per cent above Mr Summers' aggregate of rents at the upper end of his band, and well within normal valuation tolerances, as Mr Summers himself accepted in cross-examination.
- The rent of this unit devalues at £4.82 per square foot. Mr Summers' opinion was that the appropriate band for this unit was between £1.75 and £3.80 per square foot. Again, Mr Summers' view was based on his schedule of comparables, which established the "tone of the list" as between £3 and £4 per square foot for lettings on longer term leases. His conclusion was that the rent for unit G1 was "a little bit excessive". Again, it seemed to me that Mr Summers had not taken into account that the service charge was a fixed one, which would itself have represented a benefit to the tenant. Based on this evidence I conclude that, at worst, the rent of Unit G1 was on the high side, but was not so excessive as to be stigmatised as unreasonable.
- Mr Summers expressed "concern" about the level of service charge. However, he did not appear to have considered the extent of the services encompassed in the service charge (which included, for instance, rates, heating, telephones and the provision of a fork lift truck). He also did not seem to appreciate that the service charge was fixed, rather than variable; and thought that a landlord "is strictly accountable" for the expenditure that he incurs on providing services. This latter proposition seemed to me to be based on a misapprehension that section 20 of the Landlord and Tenant Act 1985 (which only applies to variable service charges in leases of dwellings) applied equally to a fixed service charge in a lease of commercial property.
- Mr Summers' evidence does not, in my judgment, establish that the level of service charge was unreasonable.
- Seaquest's move to Burnden Works was agreed and implemented before Mr Fielding became a fiduciary. His interest in Burnden Works was obvious and known to Mr Naden. The move was in Seaquest's interest. If Seaquest moved into Burnden Works a lease or leases was an obvious way of regulating its occupation. The rent and service charges were not unreasonable. I am satisfied that, in granting the leases, Mr Fielding acted honestly and reasonably. In those circumstances, if Mr Fielding would otherwise be accountable for profits, I consider that he ought fairly and reasonably to be excused; and I excuse him.
- The only complaint levelled against Mr Naden is that he permitted a transaction on terms unfavourable to Seaquest. I do not consider that, for the reasons I have given, this allegation is made out on the facts. But even if it had been, this would, in my judgment, have been a case of a fiduciary loyally doing his incompetent best. It would not have amounted to a breach of fiduciary duty.
- The attack on the leases fails.
- Ultraframe say that Mr Naden entered into the loan agreement at Mr Fielding's direction and in breach of his fiduciary duty to Seaquest. The particulars of this allegation concentrate on the allegation that the amount of the indebtedness was overstated. They also allege that the acknowledged figure of indebtedness did not take account of a payment made by Seaquest to Mr Fielding on 27 January 1999 (Re-Re Amended Particulars of Claim, para. 18). In consequence, Ultraframe say that the loan agreement should be set aside.
- In their closing address Ultraframe say:
- This plea ignores the reason for the making of the loan agreement. The purpose of the loan agreement was not to record the amount that Seaquest owed Mr Fielding. Mr Morlidge had already established that in the course of his audit. He considered that Seaquest owed Mr Fielding over £330,000. The problem was that the whole of the loan was repayable on demand. That made Seaquest insolvent. So Mr Morlidge suggested that Mr Fielding should defer at least £250,000 of the loan; and Mr Fielding agreed to do that. So the point of the loan agreement was to postpone Seaquest's liability to repay the greater part of the indebtedness. Plainly a postponement of liability is in the debtor's interest rather than the creditor's. Mr Fielding did not improve his position: he worsened it. From having had a debt to him of £330,000 payable on demand, he agreed to postpone £250,000 of it until July 2000.
- The loan agreement was entered into on Mr Morlidge's professional advice that unless a substantial part of the loan was deferred he would not be able to audit Seaquest's accounts on a going concern basis. It follows, therefore, that Mr Naden did not enter into the loan agreement at Mr Fielding's direction. The postponement of liability to repay was in Seaquest's interests; so there was no breach of fiduciary duty on the part of Mr Naden.
- There is no basis on which the loan agreement should be set aside.
- The intellectual property rights licence agreement between Seaquest and BCP was made on 23 November 1999. By this time Mr Fielding was a de jure director of Seaquest. Ultraframe say that the licence should be set aside because:
- The Burnden Defendants dispute these allegations. In addition they say that if the licence was liable to be set aside, it has been affirmed by Seaquest, acting by its liquidator; with the consequence that it cannot now be set aside. As a further alternative, they say that Mr Fielding (and if necessary Mr Naden) ought to be relieved against liability under section 727.
- At the date of the licence agreement the directors of Seaquest were Mr Naden and Mr Fielding. Both of them said that they believed the licence was in Seaquest's best interests. I have already described the position that Seaquest found itself in towards the end of 1999. Mr Morlidge had already refused to audit Seaquest's accounts on a going concern basis unless Mr Fielding postponed a substantial part of his loan. Seaquest was under considerable financial pressure, not least from Ultraframe. An outright sale of the intellectual property rights was only a remote possibility. Even then it would be difficult to procure a credible valuation. If not the only obvious solution, a licence was at least one of the obvious solutions. BCP was prepared to agree a very full price. Although Ultraframe suggested that Seaquest should have approached it to see whether it was interested, that seems to me to be an unrealistic suggestion in view of the extremely hostile litigation in which Ultraframe was attempting to establish that Northstar and Seaquest had no intellectual property rights to sell. In my judgment both Mr Fielding and Mr Naden were entitled to take the view that they did; and I accept their evidence that that was the view that they did take. In my judgment it is not possible to say that the licence was granted for an improper purpose.
- I have held that the licence was a non-cash asset. It is common ground that no consent was sought from the company in general meeting. Subject to other defences, the claim under section 320 is made out. The consequence of this is that the licence agreement is voidable at the instance of Seaquest.
- It is common ground that, as a director of and shareholder in BCP Mr Fielding had an indirect interest in the licence. The dispute under this head is whether he made a sufficient declaration of his interest. It is fair to say that Mr Fielding could not recall what declaration (if any) he had made. Mr Roche could not remember either; and Mr Naden, who was the only other person present at the meeting, did not give evidence about it. Mr Hochhauser invites me to conclude that despite the minute recording that all necessary declarations were made, no such declaration in fact took place. On the basis of the minute, I find that some form of declaration took place. However, I am unable to find that the declaration took the form of declaring the precise interest that Mr Fielding had in the contract. On this basis I am, I think, bound to conclude that Mr Fielding has not discharged the burden of showing that the requisite declaration was made. The consequence of this is that the licence agreement is voidable at the instance of Seaquest.
- On the other hand, I find that both Mr Fielding (obviously) and also Mr Naden knew that Mr Fielding was a director of and the driving force behind BCP. I find that a declaration would not have increased the relevant knowledge either of Mr Fielding or of Mr Naden; and I also find that even if a full and frank declaration had been made, the transaction would still have gone ahead.
- I have already concluded that a demand for payment due under the licence is capable of amounting to an affirmation of the contract. I have also concluded that a liquidator may affirm a contract which is otherwise voidable at the instance of the company. In my judgment the liquidator of Seaquest did affirm the licence by unequivocally demanding payment under it. I also note that paragraph 17.3 of the Re-Re-Amended Particulars of Claim itself complains that Mr Fielding and Mr Naden failed to take any steps to compel BCP to pay the second and subsequent instalments of licence fee due under the licence. That plea sits very ill with a claim that the licence has not been affirmed. The licence having been affirmed, it cannot now be set aside. However, affirmation does not necessarily preclude a liability to account for gain under section 322.
- I have already recorded that Ultraframe accept that, under section 322, there is no question of holding Mr Fielding accountable for any profit or gain made by BCP. I do not think that Ultraframe accepted that the same applied to non-disclosure under section 317; since non-compliance with that section brings the "no profit" or "self-dealing" rules into play. However, the grant of the licence to BCP was not a case of a fiduciary diverting a profit which he himself was in a position to receive. There was never any question of the licence being granted to Mr Fielding personally; BCP had been distributing the system for many months. It has not been proved that Mr Fielding personally made any profit from the grant of the licence. In my judgment there is nothing for which he is liable to account.
- I must next consider the question of relief for Mr Fielding under section 727. I have found that the licence agreement was a genuine transaction; and was one which both Seaquest's directors believed (with justification) to have been in Seaquest's best interest. In deciding to enter into the transaction Mr Fielding did, in my judgment, act both honestly and reasonably. I add to that:
- In those circumstances, I consider that Mr Fielding ought fairly to be excused for his breach of duty; and I excuse him.
- The attack on the licence agreement therefore fails.
- The pleaded case is that:
- This allegation must be considered in relation to two periods: the period from April to November 1999, and the period after November 1999.
- This period ends with the grant of the licence; which ended BCP's obligation to pay commission, and substituted an obligation to pay the licence fee. During this period, supplies of uPVC extrusions were made to Seaquest's dealers. These supplies attracted an obligation on the part of the supplier to pay commission to Seaquest.
- Mr Hall included in paragraph 7.4.4 of his report a table showing the commission paid to Seaquest. It is not possible to identify from that table the "mill" from which the commission came. The table shows that commission continued to be paid throughout 1999, although at levels steadily declining from April 1999. However, Seaquest's sales ledger reports continue to show commission as being due from BCP up to December 1999. Mr Hall also recorded a sale of aluminium and other goods by BCP to Seaquest in May and June 1999 for a total of £36,888, which Seaquest "paid for" by way of set-off of commission that would otherwise have been due. Accordingly the allegation that no commission was paid fails on the facts.
- Moreover, I do not understand the pleading to allege that Seaquest granted BCP or TBG a binding gratuitous licence to reproduce the parts of the system in which Seaquest owed design right without paying commission. If that had been alleged, it would have been a change in the supply arrangements. Rather, I think that what is alleged is that Mr Fielding and Mr Naden failed to enforce the liability of BCP and TBG to pay commission that had become due. If I have correctly understood the allegation, then the debt remains due; and Seaquest's liquidator can enforce it (subject to any question of limitation). Accordingly I cannot see that any breach of fiduciary duty has caused any loss to Seaquest. The company's property, which is the chose in action represented by the liability to pay commission, remains the company's property.
- So far as the corporate defendants are concerned, the case against them is framed as one in dishonest assistance. But if I have correctly understood the allegation, there is nothing to suggest that they assisted in any decision not to collect commission payments. All they did was to supply uPVC extrusions and, in so doing, incurred a liability to pay commission to Seaquest. Even if they did assist, I cannot see that the manufacture and supply of uPVC extrusions, even if commission due was not paid, was dishonest. At best a failure to pay commission due would have amounted to a deliberate breach of contract. But it cannot be said that a deliberate breach of contract is, without more, dishonest. Moreover, the claim is that the corporate defendants must account for all the profit that they made in selling parts of the system without paying commission. Even if liability were established, that plea seems to me to be extravagant. The commission must have been set at a level which enabled the suppliers to make profits themselves, otherwise they would not have been willing to make the supplies. I cannot see why their liability would be more than the commission which, in breach of contract, they had failed to pay.
- This period begins with the grant of the licence to BCP. I have held that the licence is valid. By granting the licence, Seaquest exchanged its right to commission for the right to the licence fee. No liability for failure to require the payment of commission can arise in relation to this period. The licence fee remains due and payable; and the Burnden Defendants have tendered payment.
- Paragraph 17.3 of the Re-Re-Amended Particulars of Claim alleges:
- The allegation assumes that a failure to comply with an executory obligation to make periodic payments means that in the case of a transaction, the consideration for which was the assumption of that obligation, the consideration has failed. This only has to be stated to be seen to be legally incorrect. The consideration for the grant of the licence was not the payment of licence fee, but the executory obligation to pay it. It was alleged that there had been a waiver of that liability; but no attempt was made to establish on the facts that any form of waiver binding on Seaquest had been made.
- The first payment due under the licence was paid. That is acknowledged in the pleading. The second instalment of the licence fee fell due on 14 April 2000. By then Seaquest had gone into liquidation. Mr Naden and Mr Fielding had ceased to be directors of Seaquest. Mr Seery had been appointed the liquidator on 10 April 2000. If anyone is to blame for not having required BCP to have made the second and subsequent payments of licence fee, it is him.
- This allegation is unsustainable both in law and in fact.
- Paragraph 20 of the Re-Re-Amended Particulars of Claim proceeds by the following steps:
- I have already found that as between Northstar and Seaquest the tooling in question belonged to Seaquest. Companies within the Burnden Group manufactured uPVC extrusions using those tools, until they were replaced with new tools, of better quality, paid for by TBG. While extrusions were manufactured in the period before the grant of the intellectual property rights licence by Seaquest to BCP, commission became payable by BCP to Seaquest on the sale of extrusions to dealers. There is no evidence that at any time before January 1998 (when the intellectual property rights were assigned by Northstar to Seaquest) or at any time thereafter, either Northstar or Seaquest made a separate charge for the use of tooling. This applies both to the supplier of uPVC extrusions and also to the suppliers of aluminium extrusions and injection moulded components, who also used tools that belonged to Seaquest. The obvious inference is that the agreed commission charges included the use of the tools. After the grant of the intellectual property rights licence by Seaquest to BCP the commission charges were replaced by the licence fee. The obvious inference is that the licence fee included the right to use the tools for the purpose of reproducing the designs covered by the licence. In addition, by the time that the licence was granted the uPVC extrusion tools were close to or at the end of their useful life.
- I cannot see that there has been any breach of fiduciary duty in this respect.
- Even if a breach of fiduciary duty had been established, I cannot see that it would follow that "any tooling" owned by Mr Fielding or his companies would be held on trust for Seaquest. It is obvious that replacement tools of better quality than those that had belonged to Seaquest were bought by TBG with its own money between December 1999 and September 2003. I cannot see that it is possible to trace the value of a worn out tool of inferior quality into a new tool of superior quality.
- Paragraph 22 of the Re-re-Amended Particulars of Claim pleads that:
- As Mr Hochhauser made clear both in his opening and in his closing address, the case against Mrs Fielding is based solely on an allegation of dishonest assistance in a breach of fiduciary duty. Although the pleading identifies the knowledge that Mrs Fielding is alleged to have had, it does not identify what it was that she did to assist the breaches of fiduciary duty. She does not feature in the pleaded narrative at all. This is not the way to plead a claim based on dishonest assistance.
- In the course of his closing address Mr Hochhauser said that the case of dishonest assistance was based on the following:
- It seemed to me, however, that the real thrust of Mr Hochauser's case was his submission that Mrs Fielding's activities on behalf of BCP amounted (to use his metaphor) to "holding the basket while the fruit was shaken from the tree".
- Mr Hochhauser relied on a few lines from the transcript of Mr Fielding's evidence; but that evidence has to be seen in context. The fuller extract reads as follows:
- I cannot regard this as any sort of admission by Mr Fielding that Mrs Fielding was a decision-maker in relation to the impugned transactions; or that, in 1999, she was a joint decision maker with her husband.
- I cannot see that Mrs Fielding's executive role at Dearward has any bearing on the issue. Her signature of the Dearward letter does show (as she accepted) that on some occasions she is prepared to be untruthful; and her conduct in procuring members of her family to hold nominee shares shows that she is prepared to participate in concealment. I take this into account; but even at its highest it shows no more than propensity. Even then, its effect must not be exaggerated.
- The acquisition of Burnden Works took place in 1996. It preceded Mr Fielding's introduction to Northstar; and preceded the incorporation of Seaquest. It was a property investment. I cannot see that it has any bearing on the issue. TBG included a number of businesses, most of which had little in common with the businesses carried on by Northstar and Seaquest.
- I have found that this was a genuine letter; and that the Northstar debenture was a genuine transaction. Mrs Fielding's signature of this letter takes the case no further.
- I have rejected the suggestion that Mrs Fielding was part of the management of Northstar. Although she became involved in the sales side of Seaquest's business in January 1999, what she did in that role was in furtherance of Seaquest's interests. It does not demonstrate dishonest assistance in a plot to rob Northstar or Seaquest of their assets. Mrs Fielding's brief period of tenure as Seaquest's company secretary was purely formal.
- Mr Hochhauser pointed out that Mrs Fielding had "placed herself four-square behind" Mr Walsh's evidence. Indeed she did. I have found that Mr Walsh's evidence was untrue; and that Mrs Fielding's denials of her son's capacity to engage in discreditable behaviour (which may have been affected by her witness training) did not carry much weight. On the other hand, Mrs Fielding did not claim to have any first hand knowledge of the drafting and production of the Northstar supply agreement (which she might easily have done if she was as black a villainess as Mr Hochhauser suggests). I have accepted Mrs Fielding's evidence on many other disputed points. In addition, Mrs Fielding did not make her first witness statement until the immediate run-up to trial. Any misleading evidence that she might have given could not have affected the breaches of fiduciary duty alleged; all of which were, by then, complete.
- Mrs Fielding's role at BCP was essentially selling and customer liaison. There is no evidence that she was involved in the fabrication of roofs (which had been the other part of Northstar's business). Fabrication of roofs was, in any event small scale, and was, I think, undertaken by TBG rather than by BCP. BCP was distributing the system on Seaquest's behalf and (as I have found) continued to pay (or at least accrue liability to pay) commission to Seaquest. This cannot, in my judgment, amount to assistance in a breach of fiduciary duty vis-à-vis Seaquest. It is, I think, possible that her role in the sale and distribution of the system (in so far as it consisted of components that had previously been sold by Northstar) could amount to assistance.
- Ultraframe submitted that:
- I agree that for Mrs Fielding to be liable as a dishonest assistant it is not necessary for her to have known every detail of what her husband did. But as the submission realises, she must have known that what he was doing was dishonest. In other words she must have consciously realised that what he was doing fell short of the standards of honesty of ordinary people.
- It seems to me that, in essence, what this submission comes to is that Mrs Fielding knew that it was dishonest:
- I do not consider that Mrs Fielding realised or suspected that any of these actions were dishonest in the above sense; if, indeed, any of them were.
- The pleaded case is that she knew that Mr Fielding was "a de facto and/or shadow director of Northstar and Seaquest". This is the foundation for the plea that she knew that in causing the businesses and assets of those companies to be transferred "the directors of Northstar and Seaquest were acting in breach of their fiduciary duties". This plea attributes to Mrs Fielding a remarkable knowledge of the law. I am unable to find that Mrs Fielding had any appreciation of the fiduciary duties that her husband owed to Northstar or Seaquest at a time when he was not a de jure director of them. She did not know that there was any possibility of the "no conflict rule" or the "no profit rule" applying to him in that situation; still less that it was wrong (let alone dishonest) to take advantage of a "maturing business opportunity".
- The claim against Mrs Fielding fails.
- I have already dealt with the principal allegations against Mr Naden in considering the impugned transactions. To summarise:
- I regard the establishment by Mr Naden of Majestic Roofs as too far removed from any of the events in issue to be regarded as a profit made by him resulting from his position as director of either Northstar or Seaquest. There is no reasonable connection between them. He has no interest in the companies within the Burnden Group. He cannot, therefore, be accountable for any profit or gain made by them.
- As I see it, therefore, Mr Naden's liability is limited to a liability to pay equitable compensation for the overcharge attributable to management charges levied on Seaquest. This liability overlaps with the liability to account of both BCP and TBG. Any order that I make must avoid double recovery.
- Ultraframe summarise the role of Mr Clayton in their final submissions as follows:
- None of these allegations, even if true, support the legal basis of the pleaded claim by Northstar and Seaquest against Mr Clayton. They might have supported a claim by the trustees, but they do not lead to any liability to Northstar or Seaquest themselves, with the possible exception of the allegation that Mr Clayton dishonestly assisted in diverting to Mr Davies money which should have gone to Northstar. But even then, Ultraframe do not allege that this was money to which Mr Davies had no claim; it was money that, on Ultraframe's case, Northstar owed Mr Davies. The purpose of the subterfuge alleged against Mr Clayton was not to bypass Northstar; but to bypass the trustees. It is not alleged that Mr Clayton was involved in any of the transactions impugned in the pleadings.
- Mr Birkett said that in late March 1998 Mr Davies asked him to arrange for the appointment of Mr Clayton as a director of Northstar; and that he instructed Mr Vibrans to prepare the necessary paperwork. On 6 April 1998 Mr Vibrans sent Mr Birkett a number of documents, including form 288a appointing Mr Clayton as a director of Northstar. Mr Clayton was recorded at Companies House as having been appointed a director of Northstar although he never consented to accept office by signing form 288a. On 27 July 1998 Mr Birkett wrote to Mr Vibrans to tell him that Mr Clayton had declined to accept appointment as a director of Northstar.
- On 16 April 1998 Mr Clayton attended a meeting with Mr Birkett, Mr Naden and Mr Whitby at which Mr Whitby was sacked. In an earlier witness statement he denied having been at the meeting, but he accepted that his earlier evidence was wrong. Apart from his attendance at that meeting he took no part in the management of its business. Mr Clayton said that his attendance at that meeting was simply to give moral support to Mr Birkett and Mr Naden.
- In my judgment the case against Mr Clayton, at its highest, is that he was a de facto director of Northstar between 6 April 1998 and 27 July 1998.
- Taking the case at its highest, Mr Clayton did not, therefore, owe directors' duties to Northstar at any time before 6 April 1998 or at any time after 27 July 1998. As Mr Hochhauser accepted, no transaction of any significance took place between April and July 1998. Mr Clayton did not participate in any of the impugned transactions entered into by Northstar. It is not suggested that he was aware of any of them, either in advance of their taking place, or afterwards. The highest that the case is put against him is that he was present at a meeting at the Riverhead Tap in Marsden; a meeting which I have found did not take place.
- To the extent that Mr Clayton was dishonest (which he was) it was dishonest assistance in relation to the bogus loan (which was a means of siphoning money owed by Northstar to Mr Davies) and the failed claim to the shares. He neither assisted in or knew of the transactions that are impugned in this case. To use the language of joint venture: the impugned transactions were not part of the joint venture to which Mr Clayton was a party.
- The pleaded claim against Mr Clayton therefore fails.
- Paragraph 24 of the Re-re-Amended Particulars of Claim alleges:
- I have held that the licence agreement was valid, and did not amount to a breach of fiduciary duty. This allegation therefore fails. I have held that Seaquest suffered no loss as a result of this transaction; so that no claim arises under section 322 (3) (b) of the Companies Act 1985.
- That leaves the claim for an account of gain under section 322 (3) (a). BCP paid a full and fair price for the licence. It is, in those circumstances, difficult to see what gain it made out of the transaction (as opposed to a gain made out of exploiting the licence for which it paid a full and fair price). Moreover, as I have held, the liquidators have affirmed the licence. In addition, when it granted the sub-licence to TBG the price that it was entitled to receive from TBG was less than it agreed to pay for the licence. Accordingly, I conclude that it has not been shown that BCP had made a gain for which it is liable to account.
- I have held that BCP and TBG are liable to account, on the basis of knowing receipt of trust property, for profits that they have respectively made out of the management charges. Apart from that, this allegation fails.
- I have held that the sale by the receiver is not liable to be set aside, and that, since it was not at an undervalue, it has not been shown that it resulted in any profit. This allegation therefore fails.
- I have found that the use of tooling was included as part of the agreed commission payable to Seaquest and, subsequently, as part of the licence fee. This allegation therefore fails.
- The claim in relation to the intellectual property rights stands or falls with the validity of the intellectual property rights licence.
- I have found that the decision to change supplier was made in February 1999, by which time Mr Fielding was a de facto director of Northstar and Seaquest. The change of supplier was not, however, a breach of fiduciary duty to Northstar. This allegation therefore fails.
- So far as the stock is concerned, the transaction complained of is the sale from Northstar to Seaquest. This took place at the end of December 1998, before Mr Fielding became a de facto director of either company. This allegation therefore fails.
- If I am wrong about that, and TBG is liable to account for profits made out of the components side of Northstar's business, then in fashioning any account, I would have taken into consideration:
- I would not have ordered an account of profits by TBG beyond Glassex 2000. To go further would have amounted to unjustly enriching Northstar.
- TBG cannot be regarded as a cloak for Mr Fielding, or as his alter ego. I would not have held Mr Fielding liable to account for profits made by TBG.
- This business (in the form in which Northstar carried it on) never was taken over by BCP or TBG. Neither company fabricated any roofs before Northstar went into receivership; and its fabrication staff were dismissed by the receiver. After the receivership TBG fabricated a few of Northstar's outstanding orders, with the receiver's consent. Such fabrication of roofs as TBG carried on thereafter was largely for training and demonstration purposes, and as an overflow service to its dealers. This allegation therefore fails.
- Seaquest's business was the exploitation of its intellectual property rights. This claim therefore stands or falls on the validity of the intellectual property rights licence. I have held it to be valid.
- If I am wrong about that then in fashioning any account against BCP or TBG, I would have taken into consideration:
- I would not have ordered an account of profits beyond Glassex 2001. To go further would have amounted to unjustly enriching Seaquest.
- TBG and BCP cannot be regarded as a cloak for Mr Fielding, or as his alter ego. I would not have held Mr Fielding liable to account for profits made by TBG or BCP.
- Paragraph 24.2A of the Re-Re-Amended Particulars of Claim pleads:
- Paragraph 24.2B pleads:
- Paragraph 24.2B also pleads:
- It goes on to allege that the distribution of property by TBG to BHU amounted to knowing receipt of trust property; and that the diversion of TBG's business to K2 amounted to knowing receipt of trust property by K2 as well as a dishonest breach of trust by TBG in which K2 dishonestly participated.
- I have already explained that TBG continues to manufacture the roofs, and then sells them at a price fixed internally to K2 which, in turn, sells them on to customers. There has been no transfer of business assets from TBG to K2. It follows, in my judgment, that there has been no diversion of business from TBG to K2. If there had been, I would have limited any account in relation to the components in the manner I have explained.
- As I have said more than once, Seaquest's only asset was its intellectual property rights. It remains entitled to them, subject to the licence. So there has been no diversion of business if, as I have held, the licence is valid. If there had been, I would have limited any account in relation to the exploitation of the intellectual property rights in the manner I have explained.
- For the reasons I have given, the claimants are not entitled to trace profits into BHU and K2.
- It has been established that Emlyn Street was acquired with money that came from TBG's own resources (having regard to the many businesses within its trading divisions) and the aid of a bank loan. It was not acquired with trust monies. I reach the same conclusion about the property at Crown Gardens.
- For the reasons I have given, both factual and legal, the businesses of BHU and K2 are not held on trust for the claimants.
- The claims against BHU and K2 fail.
- Mr Naden claims contribution against Mr Birkett against his own liability. I have held that Mr Naden is liable to pay equitable compensation to Seaquest for the overcharge for management charges.
- Mr Birkett had been suspended in March 1999. The first invoice for management charges was not issued until after his suspension. In those circumstances, I do not consider that there is any reason to apportion any liability under this head to Mr Birkett.
- However, it is right to record that until his suspension, Mr Birkett clearly dominated Mr Naden, just as Mr Davies had done. On the other hand, it is no defence to a claim for breach of fiduciary duty that one delinquent trustee had been dominated by another. Company directors take collective responsibility. Had the question arisen in relation to proved breaches of duty before Mr Birkett's suspension, I would have apportioned 50 per cent of Mr Naden's liability for compensation to Mr Birkett. I do not believe that the question of apportionment arises in relation to any account of profit or gain.
- Mr Fielding claims that Northstar owes him £68,600.11. The claim is made up as follows:
- Northstar's liability under this head is a direct reflection of my findings about Mr Fielding's loan. I have found that Mr Fielding did lend Northstar £80,000. Subject to the question of the transfer of half the debt from Northstar to Seaquest, Northstar owes Mr Fielding this sum. Apart from an instruction from Mr Fielding to Mr Hindley to make the accounting entries, there is no evidence about how this liability came to be transferred. Since both Northstar and Seaquest are insolvent, it makes no practical difference whether the £40,000 is owed by the one or the other.
- However, if it matters, I am prepared to find that the liability was not validly transferred, because it does not appear to have been carried out with the agreement of either company, and was made by Mr Hindley on the basis of his erroneous assumption that Mr Fielding lent £40,000 to each company. I consider therefore that Northstar owes the full sum of £80,000.
- The sum claimed under this head represents the aluminium that was supplied to Northstar on 11 November 1998. In the light of my findings, the only contentious item is the administration charge. I have found that the administration charge on the supply of aluminium invoiced on 26 February 1999 (amounting to £656.17) is a sum for which Mr Fielding is liable to account. On the face of it, it would seem that that sum can be set off against the amount that Northstar would otherwise owe Mr Fielding.
- Since I have concluded that the Northstar debenture was a genuine transaction the debt is a secured debt.
- Subject, therefore, to set-off, Northstar owes Mr Fielding £108,600.11
- Mr Fielding claims Seaquest owes him £330,380, made up as follows:
- As I have said, if it matters I am prepared to find that the £40,000 purportedly transferred from Northstar to Seaquest was not validly transferred. I find that this item is not a liability of Seaquest.
- Mr Fielding has proved that he lent the second item (£70,000) to Seaquest and that Seaquest lent £50,000 of that sum to Northstar. This item therefore forms part of Seaquest's debt to Mr Fielding.
- Mr Fielding's loan of the third item (£20,000) is common ground So is the fourth item (£360).
- The fifth item (£150,000) was lent by Mr Fielding to Seaquest. It was used by Seaquest to pay for deleted stock (£135,304.29) and rent owed to Mr and Mrs Fielding (£11,829.31). There is no challenge to the charge for deleted stock (except for the unpleaded challenge that the liability was Northstar's rather than Seaquest's; which has no practical consequences). I have found that the rental liability was a valid liability. Consequently the fact that Mr Fielding lent money to Seaquest to discharge a rental liability owing to himself and his wife is no ground for impugning this payment.
- The sixth item (£50,000) was lent by Mr Fielding to Seaquest to enable it to discharge its liability to pay management charges levied by BCP and/or TBG. I have found that the levying of these charges was a breach of fiduciary duty by Mr Fielding for which he is liable to pay equitable compensation; and that BCP and TBG are liable to account for profit that they made. On the face of it is seems to me that Mr Fielding's liability to pay equitable compensation can be set off in partial reduction of Seaquest's liability to repay Mr Fielding this instalment of the loan.
- I have found that the Seaquest debenture was a valid transaction. Consequently whatever Seaquest owes Mr Fielding is a secured debt. Subject to set-off, Seaquest owes Mr Fielding £290,360.
- The accountancy records show that Seaquest paid £109,452.08 to the bank account of Mr and Mrs Fielding's partnership on 28 January 1999. If this was part repayment of a loan by Mr Fielding to Seaquest, then I agree that it should be deducted from what Seaquest owes Mr Fielding. By 28 January 1999 Mr Fielding had lent Seaquest £70,000 in cash and the "transfer" of half Northstar's debt had been entered into Seaquest's accounts. The aggregate of these sums is £110,000; although I have held that the "transfer" of Northstar's debt was ineffective.
- However, Mr Fielding's evidence was that the payment by Seaquest of £109,452 was not the repayment of "loan capital"; but a payment for uPVC extrusions. If this is correct, then the payment was not a repayment of debt; and it should not be deducted from what Seaquest owes Mr Fielding. The Burnden Defendants say that Mr Fielding's evidence in this respect was not challenged. I think that this is right; and that even in their closing submissions (both written and oral) Ultraframe did not suggest that the payment was for something else. Although there are puzzling features about why Seaquest should have been paying for uPVC extrusions at all; and if so, why it should be paying Mr Fielding personally rather than, say, Dearward Profiles, I do not think that I should reject Mr Fielding's evidence in the absence of a challenge to it on this question. I find, therefore, that the payment of £109,452 was not a repayment of any part of Seaquest's debt; but was a payment for uPVC extrusions.
- The source of the funds from which this payment was made to Mr Fielding was a payment of commission that Dearward Profiles made to Seaquest a few days earlier. That, however, does not directly impinge on the question whether Seaquest owed Mr Fielding money (as he says it did) for uPVC extrusions. However, it does appear to have amounted to a breach of the order of HH Judge Behrens made on 12 November 1998 by which he ordered that all commissions should be paid into a designated bank account. That may have consequences of its own for Seaquest, but it does not mean that Seaquest did not owe Mr Fielding the money.
- In my judgment, the deduction should not be made.
- A theme that recurred during Mr Hochhauser's closing address was that I must look at the big picture, and not dissect the issues one by one. It is, I think, appropriate for me to explain what I think the big picture is.
- For as long as Mr Davies was in charge of Northstar it was a poorly and corruptly run company. It was under attack by Ultraframe and wobbling constantly on the brink of insolvency. Even if Mr Davies had not been corrupt, Northstar would probably still have been overwhelmed by the fight against Ultraframe.
- Following Mr Davies' bankruptcy, there was an attempt to protect the "system" against Ultraframe by assigning the intellectual property rights to Seaquest; but Seaquest soon came under attack itself. Mr Birkett and Mr Clayton (with Mr Naden's compliance) engaged in a dishonest deception to attempt to save Mr Davies' interest in Northstar and Seaquest from being taken by the trustees in bankruptcy. But the dishonest scheme failed (except that some money, which Northstar owed Mr Davies, has been siphoned out of the company to him, when it should have gone to the trustees).
- Neither Northstar's components business nor its fabrication business was particularly profitable. Seaquest had a potentially valuable asset in the shape of its intellectual property rights; but it would have taken considerable investment in new tools and better design to turn it into a market leader. Seaquest did not have the resources to enable it to do that. Both companies were in constant need of money.
- Mr Fielding was willing to provide the money; and he did. But even that was not enough to save Northstar or Seaquest from insolvency. Mr Fielding also did a later deal with Mr Davies in which he bought him out of Northstar and Seaquest. When the deal was attacked by the trustees he dishonestly attempted to falsify a claim to ownership of the shares in both companies. But that claim was unsuccessful too.
- The dishonest claim to the shares was separate from the monies that Mr Fielding made available to Northstar and Seaquest.
- Mr Fielding and his companies have built a successful series of businesses, most of which have nothing to do with the former businesses of Northstar or Seaquest. They do, however, continue to supply components to be used in fabrication; but that was only a small part of Northstar's turnover; and in any event, Northstar could not have continued both as supplier of components and as fabricator of roofs in competition with the dealers to whom it supplied components. There was no long term prospect of that business continuing in Northstar's hands. It is true that, at least until Glassex 2001, Mr Fielding's companies reproduced designs in which Seaquest was entitled to design right, but it did so under the terms of a licence granted for full consideration. It also modified and improved those designs, and added new products to its rebranded system. Far from exploiting any goodwill belonging to Northstar or Seaquest, they made a concerted effort to relaunch the system. In consequence of huge investment and substantial redesign, the system as it exists today is capable of at least challenging the market leaders, which Seaquest's system could not do. Although the system has evolved, the result of the evolution is that a different animal has emerged.
- This is not, of course, the big picture that Mr Hochhauser painted; but it is the one that I see.
- The Particulars of Claim in the New IP Action allege infringement by TBG (not BCP) of unregistered design rights associated with the Quickfit system. Although both Northstar and Seaquest are claimants, it is now common ground that the rights belong to Seaquest, since both sides accept that the assignment of 13 January 1998 was effective to transfer those rights. It follows that Northstar has no cause of action.
- The allegations of infringement are specific to particular components. Some 15 separate components of the Quickfit system (out of some 99 components) are identified as being the subject of design right. Similarly, 15 separate components of the K2 system are identified as infringing. With the exception of the ridge cover, where a later modification is identified as a further infringement, the designs which are alleged to infringe are the original designs of the components of the K2 system as launched at Glassex in March 2000.
- The Particulars of Claim also plead secondary infringement, but Mr Speck did not pursue this part of the claim "as it only adds to the inquiry for no point".
- The Particulars of Claim also allege that Mr and Mrs Fielding are personally liable for the infringement by TBG on the ground that:
- It is not in dispute that the pleaded designs were reproduced by TBG as part of the original K2 system distributed immediately after Glassex 2000. The only issue is whether they were entitled to do so, because of the licence granted by Seaquest to BCP and, later, the sub-licence granted by BCP to TBG. Subject to one or two minor points, it is common ground that if the licence is upheld, the New IP Action fails.
- The test applicable to the question whether an individual is jointly liable for a tort committed by a company was formulated by Chadwick LJ in MCA Record Inc v. Charly Records Ltd [2002] FSR 26 as follows:
- The thrust of this test seems to me to be that if a person wishes to shelter behind the shield of the separate corporate personality of a company, he must respect that personality. If he does no more than act through the constitutional organs of the company, then he will usually escape personal liability. But if he ignores the corporate governance of the company, then he steps out from behind that shield and is potentially in the firing line himself.
- The evidence did not, to my mind, show that Mr Fielding stepped outside the bounds of proper corporate governance of TBG. Nor did it show that he took any design decisions. They were taken by Mr McMahon. Still less did the evidence show that Mrs Fielding participated in these design decisions. I do not consider that Mr Fielding's part in obtaining the licence (even if invalid) is enough to make him personally liable for subsequent acts of infringement by TBG. In my judgment even if TBG is liable for infringement, Mr and Mrs Fielding are not.
- As I have said, the key components and assemblies forming part of the K2 system were redesigned between Glassex 2000 and Glassex 2001. One question that arose was whether Ultraframe are entitled to rely on the redesigns as amounting to infringements, even though they had not been pleaded. Mr Speck says that this is a proper subject for the inquiry into damages; and need not be proved at the stage of establishing liability. Mr Purvis says that each infringement is a separate cause of action; and must be established at this preliminary stage. No further application to amend the Particulars of Claim was made.
- Both sides referred me to the decision of HH Judge Fysh QC in Building Product Design Ltd v. Sandtoft Roof Tiles Ltd (No. 2) [2004] FSR 41. In that case the subject matter of the original action was a "vent tile" which is intended to be incorporated into the ridge of the roof of a building to ventilate for example, an attic. The tile which had been pleaded in the particulars of infringement was a clay half-round ridge vent tile; and this tile was the only infringement mentioned in the agreed order. BPD wished three other tiles made by Sandtoft, viz. a concrete half round ridge tile together with two angled tiles to be included in the inquiry. Sandtoft objected. Sandtoft admitted selling such further tiles before the commencement of the action but argued that the pleadings and the agreed order being limited to the clay half-round ridge tiles only, there was no scope for these other tiles to be included in the enquiry. It was not in dispute that the clay and concrete tiles were identical save of course as to the material of which they were made. In the course of a case management conference on the inquiry, HH Judge Fysh QC held that on the "clay v. concrete" tile issue, the order could be corrected under the slip rule; and that the concrete half round ridge tiles could properly be regarded as falling within the scope of the inquiry as to damages. He dismissed BDP's application to have the angled tiles included in the inquiry. BDP then brought a second action, claiming that the angled tiles infringed its patent. HH Judge Fysh QC struck out the second action as an abuse of process. He expressed his conclusion as follows:
- The "clay v. concrete" issue involved a correction of the original order under the slip rule. In other words it related to the correction of a mistake in the original order. Whether the infringing tiles were made of clay or concrete was immaterial. By contrast, when the infringing product was a different product, the judge held that it should have been specifically pleaded. I do not consider that this approach is limited to patent infringement. In my judgment it applies to design right infringement too. In my judgment Ultraframe are not entitled to rely on infringement by unpleaded articles which differ from the articles that have been pleaded as infringements.
- The licences expired on 31 December 2004. That was after the beginning of the second five year period of the subsistence of design right. During this period an alleged infringer is entitled to a licence as of right. TBG has offered to take such a licence. Accordingly, even if I had found infringement proved, I would not have granted an injunction.
- I have decided that the licence was valid. The items pleaded as infringing items were covered by the terms of the licence. Those items have not been copied since the licence expired. Consequently the New IP Action fails.
- I deal with this in dealing with the Burnden Action.
- The Burnden Group relies on four causes of action:
- In addition, in its counterclaim in the New IP Action, the Burnden Group alleges infringement of design right in three designs in which Laddie J held that previous Quickfit companies were entitled to design right (the wallplate, the finial and the ogee gutter bracket). The Court of Appeal varied his decision to the extent that they held that legal title to the designs belonged to Mr Davies; but he held the design right on trust for the relevant Quickfit company.
- In relation to each cause of action, the Burnden Group claims as assignee from QCL. These are the assignments that the Court of Appeal held are still subject to challenge. However, they have not (yet) been set aside and I must therefore treat them as valid.
- The claim under this head is that between January 1994 and its liquidation on 6 December 1995 QCL carried on business in the manufacture of conservatory roofs. It carried on that business under the name "Quickfit" and used a logo of a particular design. Because of its trading activities, it established substantial goodwill in the Quickfit name. The goodwill remained in existence despite the winding up.
- Between December 1995 and May 1996 Mr Davies carried on business on his own account, using the names "Quickfit Roof Systems" "Quickfit Fabrications" and "Quickfit Trims". In May 1996 Mr Davies caused Northstar to be incorporated. Northstar also carried on business in the manufacture and supply of conservatory roofs, under the names "Quickfit", "Quickfit Conservatory Roof Systems" and "Quickfit Conservatories"; and also by reference to the logo.
- This was calculated to deceive customers into believing that Northstar's business was the business of QCL or was authorised by QCL. Because of that deception, QCL suffered loss, in that its liquidator was deprived of the opportunity to sell the goodwill. This amounted to passing off.
- From January 1998 Seaquest also traded under the names "Quickfit", "Quickfit Conservatory Roof Systems" and "Quickfit Conservatories"; and also by reference to the logo.
- This was also calculated to deceive customers into believing that Seaquest's business was the business of QCL or was authorised by QCL. Because of that deception, QCL suffered loss, in that its liquidator was deprived of the opportunity to sell the goodwill. This too amounted to passing off.
- The Defence alleges that:
- Although three sets of tools were pleaded, in the end the Burnden Group relied on only two. These were:
- It is alleged that these tools belonged to QCL at the date of its liquidation.
- Between May 1996 and January 1998 Northstar dealt with these tools in a manner inconsistent with QCL's rights as true owner by instructing Axis Profiles to take the Nenplas tools and Alumax to take the Kaye tools, and then placing and continuing to place orders for extrusions that would be made with those tools. From January 1998 Seaquest did the same.
- The Defence in essence consists of non-admissions.
- This claim relates to the design drawings associated with the three designs which the Court of Appeal decided that Mr Davies held on trust for earlier Quickfit companies. The allegation is that Northstar and Seaquest used these drawings to make further drawings.
- The Defence in essence consists of non-admissions.
- The claim in knowing receipt is based on the following allegations:
- The Defence consists of a denial.
- It is common ground that the tort of passing off protects goodwill. It is also common ground that in order to establish a cause of action in passing off, the claimant must establish the "classical trinity" of:
- Goodwill is the attractive force that brings in custom. In English law it is classified as personal property. It is usually associated in the public eye with a trading name or brand, which the public has come to associate with a particular trader. In considering the question whether QCL was the owner of any goodwill, two questions arise:
- It is clear that, as a matter of law, goodwill can be abandoned. A common case in which abandonment is held to have taken place is where a business is discontinued, with no prospect of restarting, and its assets are broken up and sold: Pink v. Sharwood (1913) 30 RPC 725. Mr Purvis submitted that goodwill cannot be abandoned unless the person alleged to have abandoned it knew that he had it and intended to abandon it. However, the requirement of an intention to abandon was rejected in Norman Kark Publications Ltd v. Odhams Press Ltd [1962] RPC 163. Mr Wadlow says in his book The Law of Passing Off (3rd ed. Para. 3-178):
- I agree. In my judgment when QCL went into liquidation, without any attempt being made to sell any of its assets (still less sell the business and goodwill as a going concern), its goodwill was destroyed. In Pink v. Sharwood Eve J also said that it was impossible for the claimant to obtain an injunction restraining the sale by another manufacturer of his goods so as to lead to the belief that they were the goods of someone who in fact had no goods on the market; and had had no goods on the market for some years. In my judgment this also applies to the present case.
- Mr Speck submits that in any event the Quickfit name was used by earlier "Quickfit" companies, each of which was in the conservatory business. Thus, he submits, to the extent that QCL generated goodwill, it did so tortiously, with the result that goodwill that it generated accrued to the earlier Quickfit company. For this proposition he relies on the decision of Lightman J in Modus Vivendi pc v. Keen (World Marketing Ltd) (unreported 5 July 1995). The case concerned the sale of Ronson butane gas cans in China. Ronson's distributor in China introduced his own product (deceptively similar to Ronson's product) under the name "Purilite". Lightman J said:
- This submission seems to me to assume that when the earlier Quickfit companies themselves went into liquidation, they did not abandon such goodwill as they had. However, in each case, there was no attempt to sell the assets of the business or the goodwill. In each case, I infer that goodwill was abandoned. I need not therefore decide whether Mr Speck's legal point is a good one. But even if it were, it would mean little more than that the Burnden Group had identified the wrong claimant. In fact the Burnden Group have also acquired the claims of earlier Quickfit companies (although these, too, are subject to challenge). If this had been the substantive pleaded defence, an application to amend the pleadings could have been made.
- It also seems to me to be unrealistic to assert in proceedings begun in August 2004 that there was any subsisting goodwill attaching to a business run by a small company that went into insolvent liquidation some nine and a half years earlier. In the intervening period the name "Quickfit" had been used by Mr Davies personally, Northstar and Seaquest without any objection from any representative of QCL. Had it been necessary to do so, I would have held that the claim was barred by acquiescence.
- I also consider that it has not been demonstrated that QCL has suffered any loss or damage.
- The passing off claim therefore fails.
- The factual basis for this claim is as follows. QCL used external extrusion companies to manufacture the component parts of the system. This required specific tooling in the form of dies to be produced. The dies were produced on the basis of detailed drawings which were created by the extrusion companies from the original drawings of the customer; and were signed off by the customer as authorisation to go ahead and produce the tooling. When the tooling was paid for it belonged to the customer; although it remained at the premises of the tooling company for production purposes. The detailed design drawings for those tools were created by Nenplas. In each case, the drawing identifies the customer as "Quickfit Conservatories Limited", and they are signed off by Mr Davies as director. They are signed off on various dates, mostly from mid-1995. The relevant tooling was produced for QCL and Nenplas made extrusions for QCL from that tooling. The tooling was probably paid for by QCL. Nenplas continued to produce tooling for "Quickfit" until October 1996.
- Following the incorporation of Northstar, Northstar continued to place orders with the extruders, although the tooling belonged to QCL. In the case of the Nenplas tooling, they instructed new extruders, Axis Profiles, to remove the tooling from Nenplas and to use it themselves.
- So far as tools held by Alumax are concerned, on 4 November 1995 Mr Tucker of Alumax received a fax from Mr Davies on QCL fax paper asking him to "confirm tooling dates and bulk orders please". Alumax quoted on 8 November 1995 and again on 15 November 1995. A salesman from Alumax (Mr Allport) then visited QCL at their premises, probably on 15 November 1995, and obtained the order for four dies, together with a cheque. These are likely to have been the four dies sent by Alumax to QCL for approval on 13 November 1995. Delivery of the parts was required by Christmas. It is likely that Alumax went ahead and manufactured the dies. Under Alumax's standard terms and conditions, property passed to the customer on payment. It is likely that payment was made before QCL went into liquidation. So these dies would appear to have belonged to QCL prior to its insolvency.
- Northstar continued to place orders with Alumax for aluminium extrusions.
- The Burnden Group submit that these facts amount to conversion of the tooling, because Northstar dealt with the tooling in a manner inconsistent with the rights of the true owner. So far as the Nenplas tooling is concerned, I consider that this submission is well-founded because Northstar positively instructed Axis Profiles to collect and remove the tools.
- However, I am not convinced that conversion has been established in relation to the Alumax tooling. It seems to me that the mere placing of orders for extrusions with an extruder does not necessarily authorise the extruder to use someone else's tooling; and does not amount to an assertion of dominion over it. It is for the extruder to decide how he will fulfil a customer's order for an extrusion.
- This claim relates to design documents associated with the three designs in which QCL is entitled to design right. The evidence about the use of these documents is sketchy. Since the claim is one of conversion, the claim must relate to the pieces of paper themselves, and not to any designs or information contained in them. It has not, in my judgment, been established that QCL has suffered any loss by reason of the use of these pieces of paper.
- The short answer to this claim is that, so far as design right is concerned, Northstar received no property. If and in so far as design right belonged to QCL, Northstar may have infringed that right; but it did not receive any property.
- Ultraframe say that any claim for conversion is statute barred. The claim was made in August 2004. However, Northstar went into creditors' voluntary liquidation on 10 April 2000. The Burnden Group say that Northstar's entry into liquidation stopped time running. They rely on the decision of HH Judge Baker QC in Re Case of Taff Wells Ltd [1992] BCLC 11 in which the judge said:
- It was not suggested that there is any difference in this respect between a compulsory winding up and a creditors' voluntary winding up. Accordingly, in my judgment the defence of limitation fails. It follows that the Burnden Group are entitled to judgment for damages for conversion of the Nenplas tooling. However, since the assignment of QCL's causes of action to Mr Fielding (and thence to the Burnden Group) are under challenge, I will hear submissions on whether any judgment should be stayed pending the outcome of that application.
- There is no dispute that, following the decision of the Court of Appeal, Mr Davies was the legal owner of design right in three designs which he held as follows:
- There is also no dispute that Northstar manufactured or authorised the manufacture of articles to these designs. Although a claim in secondary infringement was pleaded against Seaquest, I did not understand Mr Purvis to press it.
- The defence to the claim is that Mr Davies consented to the acts complained of. As a matter of fact, this is plainly true. Mr Davies incorporated Northstar for the purpose of manufacturing and exploiting the Quickfit system. He did not distinguish between the legal personalities of the various companies, and he clearly intended Northstar to exploit designs in all parts of the system (including those that belonged to NIS or to QCL). What legal consequences follow?
- Mr Purvis submits that Mr Davies lost control of QCL on 6 December 1995, when it went into liquidation. Northstar was not incorporated until May 1996. It follows, he says, that Mr Davies could not have given consent on behalf of QCL to the infringement by Northstar. If the question were whether Mr Davies could have given consent to Northstar as agent for QCL, Mr Purvis' submission would be unanswerable. But I do not consider that this is the right question. So far as design right was concerned, the relationship between Mr Davies and QCL was not that of agent and principal: it was that of trustee and beneficiary. A trustee is not the agent of the beneficiary. QCL could have called for an assignment of the legal title to the design right during the period of Northstar's infringement; but it never did. As legal owner of the design right, Mr Davies was, in my judgment, the person empowered, as against third parties, to consent to acts that would otherwise have amounted to infringement. The same is true for the design that Mr Davies held on trust for NIS.
- Accordingly, in my judgment, Mr Davies did validly consent to the manufacture by Northstar of articles to the design in which QCL and NIS had the beneficial interest.
- Accordingly, in my judgment the defence to the claim for infringement succeeds.
- The Northstar Supply Agreement and the Seaquest Supply agreement were not genuine transactions. Mr Fielding's alleged agreement to buy Mr Naden's shares was not a genuine agreement.
- Mr Clayton did not make the loan he alleged. The loan was fictitious; and designed to enable money to be siphoned out of Northstar to Mr Davies, in repayment of a loan that Mr Davies had made to Northstar.
- But Mr Fielding did make the loan to Northstar that he alleged.
- The agreement between Mr Fielding and Mr Clayton was not a genuine agreement.
- No conspiracy was hatched at the pub meeting at the Nag's Head; and the meeting at the Riverhead Brewery tap did not take place. However, there was a dishonest conspiracy (to which Mr Clayton and Mr Fielding were party) to advance a false claim to ownership of the shares in Northstar and Seaquest. That conspiracy failed in its objective; and no loss is alleged to have flowed from it in consequence of HH Judge Behrens' decision.
- The Northstar debenture was a genuine transaction, into which Northstar entered in order to secure its supplies of aluminium. The Seaquest debenture was a genuine transaction; although it was based on a misapprehension about the effect of the "netting off" arrangement.
- The move to Burnden Works was in the interests of Northstar and Seaquest.
- Mr Fielding became a de facto director of Northstar and Seaquest in January 1999. He did not become a shadow director of either.
- The sale of stock from Northstar to Seaquest cannot be impugned.
- The change of components supplier was not a breach of fiduciary duty.
- Mr Fielding is liable to account for commission on sales of aluminium to the extent of £656.17 and on uPVC extrusions to the extent of £49.50.
- The sale by the receiver cannot be impugned.
- The supply contracts cannot be impugned.
- Mr Naden and Mr Fielding are liable to pay equitable compensation to Seaquest in respect of an overcharge of management charges. BCP and TBG are liable to account for their respective profits, on the basis of knowing receipt of trust property.
- The lease granted to Seaquest cannot be impugned.
- The loan agreement cannot be impugned.
- The intellectual property rights licence agreement cannot be impugned.
- Neither Mr Fielding nor Mr Naden are liable for having failed to require payment of commission or licence fee.
- Subject to any question of set-off, Northstar owes Mr Fielding £108,600.11; and the debt is a secured debt.
- Subject to any question of set-off, Seaquest owes Mr Fielding £290,360; and the debt is a secured debt.
- The claim against Mrs Fielding for dishonest assistance in a breach of fiduciary duty fails.
- The claim against Mr Clayton for dishonest assistance in a breach of fiduciary duty fails.
- Neither TBG nor BCP holds (or held) its business on trust for Northstar or Seaquest.
- In any event, Northstar and Seaquest are not entitled to trace profits into the assets of BHU or K2.
- The New IP action fails.
- The Burnden Action succeeds in so far as it relates to the conversion of tools in the possession of Nenplas; but otherwise fails.
- During the course of the trial I had to make many opposed procedural rulings. I said that I would adjourn any applications for permission to appeal until the handing down of the substantive judgment. The same applies to the ruling on preliminary issues that I gave immediately before the trial began.
- There will, therefore, have to be a further hearing to consider these questions; as well as questions arising out of this judgment, including:
- Since this judgment takes considerable time to digest, I do not anticipate that that hearing will take place on the handing down of judgment. It will have to be arranged for a time convenient to all parties.
- Lastly I would like to express my sincere gratitude to all counsel and solicitors, for the enormous effort and professionalism they have put in to the presentation of their respective cases; and for the very considerable help that they have given me in this very demanding litigation.
TECHNICAL REQUIREMENTS OF THE COMPANIES ACT
Non-cash assets
The statutory provisions
"(1) With the exceptions provided by the section next following, a company shall not enter into an arrangement:
(a) whereby a director of the company or its holding company, or a person connected with such a director, acquires or is to acquire one or more non-cash assets of the requisite value from the company; or
(b) whereby the company acquires or is to acquire one or more non-cash assets of the requisite value from such a director or a person so connected, unless the arrangement is first approved by a resolution of the company in general meeting and, if the director or connected person is a director of its holding company or a person connected with such a director, by a resolution in general meeting of the holding company
(2) For this purpose a non-cash asset is of the requisite value if at the time the arrangement in question is entered into its value is not less than £2,000 but (subject to that) exceeds £100,000 or 10 per cent. of the company's asset value, that is-
(a) except in a case falling within paragraph (b) below, the value of the company's net assets determined by reference to the accounts prepared and laid under Part VII in respect of the last preceding financial year in respect of which such accounts were so laid; and
(b) where no accounts have been so prepared and laid before that time, the amount of the company's called-up share capital.
(3) For purposes of this section and sections 321 and 322, a shadow director is treated as a director."
"any property or interest in property other than cash"
"(1) An arrangement entered into by a company in contravention of section 320, and any transaction entered into in pursuance of the arrangement (whether by the company or any other person) is voidable at the instance of the company unless one or more of the conditions specified in the next subsection is satisfied.
(2) Those conditions are that--
(a) restitution of any money or other asset which is the subject-matter of the arrangement or transaction is no longer possible or the company has been indemnified in pursuance of this section by any other person for the loss or damage suffered by it; or
(b) any rights acquired bona fide for value and without actual notice of the contravention by any person who is not a party to the arrangement or transaction would be affected by its avoidance; or
(c) the arrangement is, within a reasonable period, affirmed by the company in general meeting and, if it is an arrangement for the transfer of an asset to or by a director of its holding company or a person who is connected with such a director, is so affirmed with the approval of the holding company given by a resolution in general meeting.
(3) If an arrangement is entered into with a company by a director of the company or its holding company or a person connected with him in contravention of section 320, that director and the person so connected, and any other director of the company who authorised the arrangement or any transaction entered into in pursuance of such an arrangement, is liable--
(a) to account to the company for any gain which he has made directly or indirectly by the arrangement or transaction, and
(b) (jointly and severally with any other person liable under this subsection) to indemnify the company for any loss or damage resulting from the arrangement or transaction.
(4) Subsection (3) is without prejudice to any liability imposed otherwise than by that subsection, and is subject to the following two subsections; and the liability under subsection (3) arises whether or not the arrangement or transaction entered into has been avoided in pursuance of subsection (1)."
What are non-cash assets of the requisite value?
Does section 320 apply to the grant of a lease?
Does section 320 apply to the grant of a licence?
"A licence passes no proprietary interest in anything; it only makes an action lawful that would otherwise have been unlawful."
"I would reject the suggestion that the right that is conferred by the grant of a licence is anything wider than a consent on behalf of the patentee to the doing of an act which absent that consent would be unlawful."
i) A waste management licence is "property" for the purposes of the Insolvency Act 1986: Re Celtic Extraction Ltd [2001] Ch. 475;
ii) Textile export quotas (which are a permission to export textiles) may be "property" for the purposes of the law of theft: A-G of Hong Kong v. Nai-Keung [1987] 1 WLR 1339;
iii) A permit to explore for petroleum may be "property" for the purposes of compulsory acquisition: Commonwealth of Australia v WMC Resources Ltd (1998) 194 CLR 1;
iv) Milk quota may be an "asset" for the purposes of capital gains tax; or property for the purposes of the law of trusts: Swift v. Dairywise [2000] 1 All ER 320;
v) The benefit of a non-assignable contract may be "property" for the purposes of the Partnership Act 1890: Don King Productions Inc v. Warren [2000] Ch. 291.
"Design right is a property right which subsists in accordance with this Part in an original design"
"(1) Design right is transmissible by assignment, by testamentary disposition, or by operation of law, as personal or moveable property.
(2) An assignment or other transmission of design right may be partial, that is limited so as to apply:
(a) to one or more, but not all, of the things the design right owner has the exclusive right to do;
(b) to part, but not the whole of the period for which the right is to subsist.
(3) …
(4) A licence granted by the owner of design right is binding on every successor in title to his interest in the right, except a purchaser in good faith for valuable consideration and without notice (actual or constructive) of the licence or a person deriving title from such a purchaser…"
"a licence in writing signed by or on behalf of the design right owner authorising the licensee to the exclusion of all other persons, including the person granting the licence, to exercise a right which would otherwise be exercisable exclusively by the design right owner."
"First, I would not expect a licensee to be treated as having a property interest in the copyright. Under the general law a licensee is a person who enjoys contractual rights as against the property owner. I can find nothing in the Act which conflicts with the principle that the licensee's rights rest in contract and are not proprietary. Under section 19 of the Act an exclusive licensee is given a procedural right of action to sue for infringement. But the section is purely procedural, and, save in the case of interlocutory injunctions, requires the owner of the copyright to be joined as a party. Section 19 (4) provides that any defence available against the owner of the copyright shall be available against the licensee, i.e., the licensee is enforcing the proprietary rights of the owner. Section 36 (4) gets nearer to enlarging the rights of a licensee into a proprietary right since his licence is made binding on successors in title of the original grantor of the licence. On the other hand, the Act clearly distinguishes between assignees and licensees: see section 36. Indeed, in section 19 (2) for procedural purposes a licence is to be treated as though it were an assignment: if, as the plaintiffs contend, under section 49 (5) an exclusive licensee has to be treated as owner of the rights, section 19 (2) is wholly otiose. Therefore in my judgment the scheme of the Act preserves the normal distinction between assignees who have proprietary rights and licensees whose substantive rights are contractual. Therefore an exclusive licensee cannot show, as the words of section 49 (5) require, that he is "entitled to the copyright"."
The debentures
"The mere creation of a security over a company's assets does not deplete them and does not come within the paragraph. By charging its assets the company appropriates them to meet the liabilities due to the secured creditor and adversely affects the rights of other creditors in the event of insolvency. But it does not deplete its assets or diminish their value. It retains the right to redeem and the right to sell or remortgage the charged assets. All it loses is the ability to apply the proceeds otherwise than in satisfaction of the secured debt. That is not something capable of valuation in monetary terms and is not customarily disposed of for value.
In the present case the company did not suffer that loss by reason of the grant of the debenture. Once the bank had demanded a debenture the company could not have sold or charged its assets without applying the proceeds in reduction of the overdraft; had it attempted to do so, the bank would at once have called in the overdraft. By granting the debenture the company parted with nothing of value, and the value of the consideration which it received in return was incapable of being measured in money or money's worth."
Does section 320 apply to the trading arrangements?
The stock and the chattels
Does section 320 apply to a sale by an administrative receiver?
"29 When a floating charge crystallises, it becomes a fixed charge attaching to all the assets of the company which fall within its terms. Thereafter the assets subject to the floating charge form a separate fund in which the debenture holder has a proprietary interest. For the purposes of paying off the secured debt, it is his fund. The company has only an equity of redemption; the right to retransfer of the assets when the debt secured by the floating charge has been paid off. It is this equity of redemption which forms part of the fund held on trust for the company's creditors which arises upon a winding up.
30 Putting aside any fixed charges, the position is therefore that if a company is in both administrative receivership and liquidation, its former assets are comprised in two quite separate funds. Those which were subject to the floating charge ("the debenture holder's fund") belong beneficially to the debenture holder. The company has only an equity of redemption. Those which were not subject to the floating charge ("the company's fund") are held in trust for unsecured creditors. In the usual case in which the whole of the company's assets and undertaking are subject to the floating charge, the company's fund will consist only of the equity of redemption in the debenture holder's fund."
i) Section 320 did not apply to a sale by a receiver at all, because a charged asset is not an asset of the company; and, consequently, a transferee of the asset does not acquire it "from the company";
ii) Alternatively, the company's only interest in a charged asset is its equity of redemption; and, consequently, it is necessary for the value of the equity of redemption to exceed the statutory minimum before section 320 can apply.
"This can only happen if the asset sold is also the company's asset (in the sense of beneficially belonging to it)."
"Where a company creates a charge over its assets, the only value the company has for itself in that asset is the value, if any, representing its equity of redemption remaining after the amount secured by it is fully provided for. On a sale by the receiver, its equity of redemption, if any, is transferred to the proceeds of sale remaining after the holder of the charge is fully paid. Thus, the equity of redemption is not disposed of by the receivership sale. It is the debenture holder's interest that has been disposed of."
Authorisation of a transaction
"In other words, I proceed upon the basis that where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be."
"For my part, however, I do not see why, at any rate where there has been a meeting attended by all those who were entitled to attend and vote at a general meeting and that meeting has considered the matter and has resolved, in terms, that the company shall enter into the particular transaction, the fact that the minute is headed 'board meeting' rather than 'general meeting' and was not convened on the notice proper for a general meeting and was attended by a director who does not hold shares, should make it impossible to regard s 320 as having been satisfied."
Does the doctrine of election apply?
"I agree that "voidable" is not the same as "void". However, Demite is entitled to avoid the sale and has elected to do so. In my judgment if the conditions for it to avoid the sale are present and the defences in section 322 (2) are not present I have no discretion. Demite has a statutory right and has exercised it." (Emphasis added)
Is restitution possible?
Remedies under section 322 where the transaction is not avoided
i) A director who enters into the arrangement;
ii) A person connected with such a director and
iii) Any other director who authorises the transaction.
i) A liability to account to the company "for any gain which he has made directly or indirectly by the arrangement or transaction"; and
ii) A liability (jointly and severally with any other person liable under the subsection) to indemnify the company for any loss or damage resulting from the arrangement or transaction.
Contracts with directors
The articles of association
"Subject to the provisions of the Act, and provided that he has disclosed to the directors the nature and extent of any material interest of his, a director notwithstanding his office—
(a) may be a party to, or otherwise interested in, any transaction or arrangement with the company or in which the company or in which the company is otherwise interested;
(b) may be a director or other officer of, or employed by, or a party to any transaction or arrangement with, or otherwise interested in, any body corporate promoted by the company or in which the company is otherwise interested; and
(c) shall not, by reason of his office, be accountable to the company for any benefit which he derives from any such office or employment or from any such transaction or arrangement or from any interest in any such body corporate and no such transaction or arrangement shall be liable to be avoided on the ground of any such interest or benefit."
Section 317
"(1) It is the duty of a director of a company who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the company to declare the nature of his interest at a meeting of the directors of the company.
(2) In the case of a proposed contract, the declaration shall be made –
(a) at the meeting of the directors at which the question of entering into the contract is first taken into consideration; or
(b) if the director was not at the date of that meeting interested in the proposed contract, at the next meeting of the directors held after he became so interested;
and, in a case where the director becomes interested in a contract after it is made, the declaration shall be made at the first meeting of the directors held after he became so interested."
Evidencing the declaration
"Any such minute, if purporting to be signed by the chairman of the meeting at which the proceedings were had, or by the chairman of the next succeeding meeting, is evidence of the proceedings."
Consequence of compliance
Consequences of non-compliance
"'It is not contended that section [317] in itself affects the contract. The section merely creates a statutory duty of disclosure and imposes a fine for non-compliance. But it has to be read in conjunction with article [85]. The first sentence of that article is obscure. If a director makes or is interested in a contract with the company, but fails duly to declare his interest, what happens to the contract? Is it void, or is it voidable at the option of the company, or is it still binding on both parties, or what? The article supplies no answer to these questions. I think the answer must be supplied by the general law, and the answer is that the contract is voidable at the option of the company, so that the company has a choice whether to affirm or avoid the contract, but the contract must be either totally affirmed or totally avoided and the right of avoidance will be lost if such time elapses or such events occur as to prevent rescission of the contract . . ."
How is a voidable contract affirmed?
Can a liquidator affirm?
Is a demand for payment enough?
"When a lessee commits a breach of covenant on which the lessor has a right of re-entry, he may elect to avoid or not to avoid the lease, and he may do so by deed or by word. If in that notice he says, under circumstances which bind him that he will not avoid the lease, or he does an act inconsistent with his avoiding as distraining the rent or demanding subsequent rent, he elects to not avoid the lease."
"When one looks at the authorities, it is, however, clear that a demand can operate as a waiver in the same way as an acceptance."
"In the present case the matter does arise for decision. My view, both on principle and on such persuasive authority as has been cited to me, is that an unambiguous demand for future rent in advance such as was made here does in law amount to an election and does constitute a waiver if, at the time when it is made, the landlord has sufficient knowledge of the facts to put him to his election. To my perhaps simple mind there is a fundamental inconsistency between contending that a lease has been determined and demanding rent on the basis of its future continuance."
"Though we have been referred to no authority binding on this court to this effect, I am also content for present purposes to assume, without finally deciding, that (as was held by Sachs J. in Segal Estates v. Thoseby) Mr. Neuberger is right in submitting that a demand for rent will, by itself, have the like effect."
RELIEF FROM LIABILITY
The statutory power
"If in any proceedings for negligence, default, breach of duty or breach of trust against an officer of a company or a person employed by a company as auditor (whether he is or is not an officer of the company) it appears to the court hearing the case that that officer or person is or may be liable in respect of the negligence, default, breach of duty or breach of trust, but that he has acted honestly and reasonably, and that having regard to all the circumstances of the case (including those connected with his appointment) he ought fairly to be excused for the negligence, default, breach of duty or breach of trust, that court may relieve him, either wholly or partly, from his liability on such terms as it thinks fit."
Relief against failure to declare an interest
"Mr. Ward had no right to remuneration without the authority of the board. Thus the claim by Guinness for repayment is unanswerable. If Mr. Ward acted honestly and reasonably and ought fairly to be excused for receiving £5.2m. without the authority of the board, he cannot be excused from paying it back. By invoking section 727 as a defence to the claim by Guinness for repayment, Mr. Ward seeks an order of the court which would entitle him to remuneration without the authority of the board."
"... if the judge was entitled to make findings of non-disclosure and non-declaration of interests that he did, the position is that each of the directors has failed to disclose formally at the board meeting an interest common to all the directors and, ex hypothesi, already known to all the directors. I would hesitate to hold that such apparently technical non-declaration of an interest in breach of s 317 has the inevitable result, as to which the court has no discretion, that the second management agreement is fundamentally flawed and must be set aside if Lee Lighting chooses to ask sufficiently promptly that it be set aside."
"Whatever may have been the strict legal requirements of the position, on the particular facts of this case I am perfectly satisfied that for the plaintiff to have made a specific declaration of interest before agreement of the variations here in question would have served no conceivable purpose. It would have been mere incantation."
"On the other hand it has been held that where the directors are all in fact sufficiently aware of the matter that should be formally disclosed, the absence of formal disclosure may not amount to more than a technical non-declaration of an interest."
"No amount of formal disclosure by each to the other would have increased the other's relevant knowledge."
TRACING
A process: not a remedy
"Following is the process of following the same asset as it moves from hand to hand. Tracing is the process of identifying a new asset as the substitute for the old. Where one asset is exchanged for another, a claimant can elect whether to follow the original asset into the hands of the new owner or to trace its value into the new asset in the hands of the same owner….
Tracing is thus neither a claim nor a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property. Tracing is also distinct from claiming. It identifies the traceable proceeds of the claimants' property. It enables the claimant to substitute the traceable proceeds for the original asset as the subject matter of his claim. But it does not affect or establish his claim."
"In truth tracing is a process of identifying assets: it belongs to the realm of evidence. It tells us nothing about legal or equitable rights to the assets traced."
"The tracing exercise once completed, it can then be asked what rights, if any, the plaintiff can, on his particular facts, assert. It is at that point that it becomes relevant to recall that on some facts those rights will be personal, on others proprietary, on some legal and on others equitable."
"Clearly, DH and Mr Murray can be regarded as trustees of the information and, clearly, Morbaine can be regarded as having been a knowing recipient of it. However, even assuming, first, that confidential information can be treated as property for this purpose and, secondly, that but for the disclosure of the information Morbaine would not have acquired the Brewery Street site, we find it impossible, in knowing receipt, to hold that there was a sufficient basis for subjecting the Brewery Street site to the constructive trust for which Satnam contends. The information cannot be traced into the site and there is no other sufficient nexus between the two."
The basic rule
"The simplest case is where a trustee wrongfully misappropriates trust property and uses it exclusively to acquire other property for his own benefit. In such a case the beneficiary is entitled at his option either to assert his beneficial ownership of the proceeds or to bring a personal claim against the trustee for breach of trust and enforce an equitable lien or charge on the proceeds to secure restoration of the trust fund….
Both remedies are proprietary and depend on successfully tracing the trust property into its proceeds. A beneficiary's claim against a trustee for breach of trust is a personal claim. It does not entitle him to priority over the trustee's general creditors unless he can trace the trust property into its product and establish a proprietary interest in the proceeds. If the beneficiary is unable to trace the trust property into its proceeds, he still has a personal claim against the trustee, but his claim will be unsecured. The beneficiary's proprietary claims to the trust property or its traceable proceeds can be maintained against the wrongdoer and anyone who derives title from him except a bona fide purchaser for value without notice of the breach of trust. The same rules apply even where there have been numerous successive transactions, so long as the tracing exercise is successful and no bona fide purchaser for value without notice has intervened."
Mixed funds
"A more complicated case is where there is a mixed substitution. This occurs where the trust money represents only part of the cost of acquiring the new asset. As Ames pointed out in "Following Misappropriated Property into its Product" (1906) Harvard Law Review 511, consistency requires that, if a trustee buys property partly with his own money and partly with trust money, the beneficiary should have the option of taking a proportionate part of the new property or a lien upon it, as may be most for his advantage."
Summary
"Accordingly, I would state the basic rule as follows. Where a trustee wrongfully uses trust money to provide part of the cost of acquiring an asset, the beneficiary is entitled at his option either to claim a proportionate share of the asset or to enforce a lien upon it to secure his personal claim against the trustee for the amount of the misapplied money. It does not matter whether the trustee mixed the trust money with his own in a single fund before using it to acquire the asset, or made separate payments (whether simultaneously or sequentially) out of the differently owned funds to acquire a single asset."
Can profits be traced?
"The Claimants are entitled to trace all profits or gains of TBG and BCP for which they were or are liable to account into the property of BHU and K2 and BHU and K2 are liable to account to the Claimants for the same."
"Assume that a thief steals a car and uses it to run a taxi service, earning a large profit. There might be some way to claim that profit, perhaps by suing for the wrongful taking of the car and seeking a legal response measured not by the plaintiff's loss but rather by the defendant's gain. That, however, is an issue of the remedies available for that particular wrong, and nothing to do with tracing."
"Even if their company would not itself have benefited from the opportunity, equity treats the profits which the director, or former director, has made as property which he is under a duty to pay over to the company which he has betrayed by his disloyalty." (Emphasis added)
SECONDARY LIABILITY
Two types of liability
i) As a recipient of trust property or its traceable proceeds or
ii) As an accessory to the fiduciary's breach of duty.
Knowing receipt
"For this purpose the plaintiff must show, first a disposal of his assets in breach of fiduciary duty; secondly, the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff; and thirdly, knowledge on the part of the defendant that the assets are traceable to a breach of fiduciary duty."
Dishonest assistance
"Drawing the threads together, their Lordships' overall conclusion is that dishonesty is a necessary ingredient of accessory liability. It is also a sufficient ingredient. A liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust or fiduciary obligation. It is not necessary that, in addition, the trustee or fiduciary was acting dishonestly, although this will usually be so where the third party who is assisting him is acting dishonestly. "Knowingly" is better avoided as a defining ingredient of the principle, and in the context of this principle the Baden scale of knowledge is best forgotten."
i) The conduct complained of must be conduct which is dishonest by the standards of ordinary and reasonable people; and
ii) The Defendant must have realised that he was contravening those standards; and that ordinary and reasonable people would have regarded his conduct as dishonest.
Knowing participation
"In Australia, it has been suggested that a third party who knowingly participates in a breach of fiduciary duty is liable to account to the beneficiaries for any benefit that he has received as a result of such participation. It is thought that such a principle, which has features of both dishonest assistance and knowing receipt, but which complies with the requirements of neither, is too wide to be accepted in England."
Personal or proprietary liability?
Knowing receipt
"Liability for "knowing receipt" is receipt-based. It does not depend on fault. The cause of action is restitutionary and is available only where the defendant received or applied the money in breach of trust for his own use and benefit…"
What counts as trust property for the purposes of knowing receipt?
"The word "receipt" in the expression "knowing receipt" refers to the receipt by one person from another of assets. A person who enters into a binding contract acquires contractual rights that are created by the contract. There may be a "receipt" of assets when the contract is completed and the question whether there is "knowing receipt" may become a relevant question at that stage. But until then there is simply an executory contract which may or may not be enforceable. The creation by the contract of contractual rights does not constitute a "receipt" of assets in the sense that a "knowing receipt" involves a receipt of assets. The question whether an executory contract is enforceable is quite different from the question whether assets of which there has been a "knowing receipt" are recoverable from the recipient. To confuse these two questions is likely to lead, and in the present case has, in my opinion, led, to further confusion."
"If a company (A) enters into an agreement with B under which B acquires benefits from A, A's ability to recover these benefits from B depends essentially on whether the agreement is binding on A. If the directors of A were acting for an improper purpose when they entered into the agreement, A's ability to have the agreement set aside depends upon the application of familiar principles of agency and company law. If, applying these principles, the agreement is found to be valid and is therefore not set aside, questions of "knowing receipt" by B do not arise. So far as B is concerned there can be no question of A's assets having been misapplied. B acquired the assets from A, the legal and beneficial owner of the assets, under a valid agreement made between him and A. If, however, the agreement is set aside, B will be accountable for any benefits he may have received from A under the agreement. A will have a proprietary claim, if B still has the assets. Additionally, and irrespective of whether B still has the assets in question, A will have a personal claim against B for unjust enrichment, subject always to a defence of change of position. B's personal accountability will not be dependent upon proof of fault or "unconscionable" conduct on his part. B's accountability, in this regard, will be "strict"."
Dishonest assistance
"Within defined limits, proprietary rights, whether legal or equitable, endure against third parties who were unaware of their existence. But accessory liability is concerned with the liability of a person who has not received any property. His liability is not property-based. His only sin is that he interfered with the due performance by the trustee of the fiduciary obligations undertaken by the trustee. These are personal obligations. They are, in this respect, analogous to the personal obligations undertaken by the parties to a contract."
"The accessory's liability for having assisted in a breach of trust is quite different. It is fault-based, not receipt-based. The defendant is not charged with having received trust moneys for his own benefit, but with having acted as an accessory to a breach of trust. The action is not restitutionary; the claimant seeks compensation for wrongdoing. The cause of action is concerned with attributing liability for misdirected funds. Liability is not restricted to the person whose breach of trust or fiduciary duty caused their original diversion. His liability is strict. Nor is it limited to those who assist him in the original breach. It extends to everyone who consciously assists in the continuing diversion of the money. Most of the cases have been concerned, not with assisting in the original breach, but in covering it up afterwards by helping to launder the money."
When must the assistance be given?
Dishonesty
i) that what was done was dishonest by the standards of ordinary people and
ii) that the assistant knew that what he was doing was, by those standards, dishonest.
What must a dishonest assistant know?
".. the answer to this problem seems to lie in recognising that, for dishonest assistance, the defendant's dishonesty must have been towards the plaintiff in relation to property held or potentially held on trust or constructive trust, rather than the introduction of a separate criterion of knowledge of any such trust."
"Again, however, I do not think it need be knowledge of the whole design: that would be an impossibly high requirement in most cases. What is crucial is that the alleged constructive trustee should know that a design having the character of being fraudulent and dishonest was being perpetrated. Further he must know that his act assisted in the implementation of such design."
"I do not suggest that one cannot be dishonest without a full appreciation of the legal analysis of the transaction. A person may dishonestly assist in the commission of a breach of trust without any idea of what a trust means. The necessary dishonest state of mind may be found to exist simply on the fact that he knew perfectly well that he was helping to pay away money to which the recipient was not entitled."
"The other extreme possibility can also be rejected out of hand. This is the case where a third party deals with a trustee without knowing, or having any reason to suspect, that he is a trustee. Or the case where a third party is aware he is dealing with a trustee but has no reason to know or suspect that their transaction is inconsistent with the terms of the trust. The law has never gone so far as to give a beneficiary a remedy against a non-recipient third party in such circumstances." (Emphasis added)
What counts as dishonest assistance?
"… if there is no causative effect and therefore no assistance given by the person .. on whom it is sought to establish the liability as constructive trustee, for my part I cannot see that the requirements of conscience require any remedy at all."
REMEDIES
Introduction
"The question whether the remedy which the person to whom the duty is owed may obtain against the person who has violated the duty is proprietary or personal may sometimes be one of some difficulty. In some cases the fiduciary has been declared a trustee of the property which he has gained by his breach; in others he has been called upon to account for his profits and sometimes the distinction between the two remedies has not, it appears, been kept clearly in mind."
"If the plaintiff succeeds in tracing his property, whether in its original or in some changed form, into the hands of the defendant, and overcomes any defences which are put forward on the defendant's behalf, he is entitled to a remedy. The remedy will be fashioned to the circumstances. The plaintiff will generally be entitled to a personal remedy; if he seeks a proprietary remedy he must usually prove that the property to which he lays claim is still in the ownership of the defendant. If he succeeds in doing this the court will treat the defendant as holding the property on a constructive trust for the plaintiff and will order the defendant to transfer it in specie to the plaintiff. But this is only one of the proprietary remedies which are available to a court of equity. If the plaintiff's money has been applied by the defendant, for example, not in the acquisition of a landed property but in its improvement, then the court may treat the land as charged with the payment to the plaintiff of a sum representing the amount by which the value of the defendant's land has been enhanced by the use of the plaintiff's money. And if the plaintiff's money has been used to discharge a mortgage on the defendant's land, then the court may achieve a similar result by treating the land as subject to a charge by way of subrogation in favour of the plaintiff."
Liability to account
"Accordingly, the defendant's liability to account for more than six years before the issue of the writ in Nelson v Rye depended on whether he was, not merely a fiduciary (for every agent owes fiduciary duties to his principal), but a trustee, that is to say, on whether he owed fiduciary duties in relation to the money.
Whether he was in fact a trustee of the money may be open to doubt. Unless I have misunderstood the facts or they were very unusual it would appear that the defendant was entitled to pay receipts into his own account, mix them with his own money, use them for his own cash flow, deduct his own commission, and account for the balance to the plaintiff only at the end of the year. It is fundamental to the existence of a trust that the trustee is bound to keep the trust property separate from his own and apply it exclusively for the benefit of his beneficiary. Any right on the part of the defendant to mix the money which he received with his own and use it for his own cash flow would be inconsistent with the existence of a trust. So would a liability to account annually, for a trustee is obliged to account to his beneficiary and pay over the trust property on demand. The fact that the defendant was a fiduciary was irrelevant if he had no fiduciary or trust obligations in regard to the money. If this was the position, then the defendant was a fiduciary and subject to an equitable duty to account, but he was not a constructive trustee. His liability arose from his failure to account, not from his retention and use of the money for his own benefit, for this was something which he was entitled to do.
Unless the defendant was a trustee of the money which he received, however, the claim for an account was barred after six years. The fact that the defendant was a fiduciary did not make his failure to account a breach of fiduciary duty or make him liable to pay equitable compensation. His liability to account arose from his receipt of money in circumstances which made him an accounting party. It did not arise from any breach of duty, fiduciary or otherwise. The defendant was merely an accounting party who had failed to render an account."
Proprietary remedies
The principle
"Conversely, a plaintiff who brings an action like the present must show that the defendant is in receipt of property which belongs beneficially to him or its traceable proceeds, but he need not show that the defendant has been enriched by its receipt. He may, for example, have paid full value for the property, but he is still required to disgorge it if he received it with notice of the plaintiff's interest."
"If, as a result of tracing, it can be said that certain of the policy moneys are what now represent part of the assets subject to the trusts of the purchasers trust deed, then as a matter of English property law the purchasers have an absolute interest in such moneys. There is no discretion vested in the court. There is no room for any consideration whether, in the circumstances of this particular case, it is in a moral sense "equitable" for the purchasers to be so entitled. The rules establishing equitable proprietary interests and their enforceability against certain parties have been developed over the centuries and are an integral part of the property law of England. It is a fundamental error to think that, because certain property rights are equitable rather than legal, such rights are in some way discretionary. This case does not depend on whether it is fair, just and reasonable to give the purchasers an interest as a result of which the court in its discretion provides a remedy. It is a case of hard-nosed property rights."
What is included in the proprietary claim?
Software, programs, information and data
The system v the intellectual property rights
i) There is no pleaded allegation that the "system" had been appropriated; and
ii) You can only appropriate a "system" if the system is the subject of a protectable right, and the right itself has been taken (which is not the case here).
Businesses and business profits
"What, then, is the proper method of assessing the accountability? Counsel for the defendant submits that one must look to see what is pleaded and what has been proved at the trial. One must then take those assets of the estate, or the benefits which have been so pleaded and proved at the hearing to have flowed to the defendant by reason of her position as a trustee of the estate, and value those benefits. Counsel for the plaintiff says, on the other hand, that that would be an impossible inquiry and that one must make the defendant accountable for the whole business and its profits, making allowances for the time, energy and skill that the defendant has expended, the assets she has brought in, the testator's debts that she has paid, and, of course, her mother's annuity."
"The fiduciary's liability for gains is a liability as trustee and for trust property. It is, as will be seen, one which can give rise to personal actions against a fiduciary. It can give rise to actions in rem to recover extant trust property."
"(16) It is clear that the business had its genesis in the resources and facilities of TECO which were available to Anderson and Toy. It is also clear that they did take advantage of such resources and facilities so as to cause life to be breathed into the mere shell of Mallory Trading, bearing in mind that the business of Mallory Trading was built upon cash flow and sales. The whole substance of Mallory Trading as a viable business enterprise stemmed from the resources of TECO which were utilized in Mallory Trading. The outstanding features of the nurturing of Mallory Trading are that its executives were being paid by TECO, its customers were TECO customers, and its products were significantly derived from TECO products…..the whole of the TECO business (including, not only physical facilities such as telephones, motor cars and expense accounts) were used; but also its intangible elements such as marketing methods, knowledge of customers and goodwill were also resorted to in building up Mallory Trading. Another significant feature is that the inevitable result of the defendants using TECO as the vehicle to establish Mallory Trading as a going concern was that TECO was gravely harmed. It not only lost the orders that were misappropriated, but this in turn led to the loss of customers and substantial damage to its goodwill…..There can be no doubt that the creation and development of Mallory Trading dealt a crippling blow to the business of TECO.
(17) Every opportunity which Mallory Trading has received is directly traceable to resources and benefits provided by TECO, even of time and efforts expended by Anderson and Toy for which TECO was paying. Every advance made by Mallory Trading was also due to the advantages of the tangible and intangible resources and facilities provided from TECO. In truth, the business of Mallory Trading was carved out of the business of TECO, and thus ought to be treated as being, as at July 1977, held on trust for TECO."
"I regard the business carried on by Mallory Timber products as representing the trust property of which Mallory Trading was originally the trustee."
"The fact that the trustee carried on a business and improved it by its own exertions did not, in my view have the effect of extinguishing the trust property as so to terminate the trust. The business, as a trading enterprise, continued to subsist as an identifiable item of property. The fact that the business may have been enhanced through the efforts of the trustee cannot affect the continued existence of the trust."
"too limited a view of the extent of the benefit represented by the existence of the business of Mallory Trading as a going concern. While its attributes included the connection with former TECO customers, it also had the inherent capacity as an established business to expand the range of its customers and products."
"(25) It seems to me that the present case falls within the second example stated by Upjohn J [in Re Jarvis], namely that the Mallory companies are accountable as constructive trustees of the business. The contribution of skill and industry by all the defendants to the continued carrying on of the business can be adequately provided for by the making of proper allowances, as indicated by Upjohn J. I consider that, in determining the form of relief to be granted, not only is Upjohn J's first example inappropriate to the facts of the case, but also that justice can be done, in the circumstances of this case, by making the declaration of trust as to the business on the footing of all just allowances.
(26) … The trust property remains identifiable in the hands of the trustee, and TECO is entitled to have the benefit of it, subject to the efforts of the defendants being duly remunerated.
(27) Additionally, although there is no evidence at present, the defendants may be able to establish upon the taking of accounts of profits, that assets comprised in the business have been contributed by them from sources other than those generated by the business itself. If so, it may further be possible to show that consequently a proportionate interest in the business exists in favour of the defendants, or that they are entitled to a specific item of property, or to a charge upon the trust property as a whole."
"The outcome in cases of this kind will depend upon a number of factors. They include the nature of the property, the relevant powers and obligations of the fiduciary and the relationship between the profit made and the powers and obligations of the fiduciary. Thus, according to the rule in Keech v. Sanford, a trustee of a tenancy who obtains for himself the renewal of a lease holds the new lease as a constructive trustee, even though the landlord is unwilling to grant it to the trust. … A similar approach will be adopted in a case in which a fiduciary acquires for himself a specific asset which falls within the scope and ambit of his fiduciary responsibilities, even if the asset is acquired by means of the skill and expertise of the fiduciary and would not otherwise have been available to the person to whom the fiduciary duty is owed.
But a distinction should be drawn between cases in which a specific asset is acquired and cases in which a business is acquired and operated. Such a distinction was drawn by Upjohn J in In re Jarvis (decd) in the context of considering a defence of laches, acquiescence and delay. However, in our view, the distinction is also relevant in the context of the fiduciary's liability to account for profits."
"In the case of a business it may well be inappropriate and inequitable to compel the errant fiduciary to account for the whole of the profit of his conduct of the business or his exploitation of the principal's goodwill over an indefinite period of time. In such a case, it may be appropriate to allow the fiduciary a proportion of the profits, depending upon the particular circumstances. That may well be the case when it appears that a significant proportion of an increase in profits has been generated by the skill, efforts, property and resources of the fiduciary, the capital which he has introduced and the risks he has taken, so long as they are not risks to which the principal's property has been exposed. Then it may be said that the relevant proportion of the increased profits is not the product or consequence of the plaintiff's property but the product of the fiduciary's skill, efforts, property and resources. This is not to say that the liability of a fiduciary to account should be governed by the doctrine of unjust enrichment, though that doctrine may well have a useful part to play; it is simply to say that the stringent rule requiring a fiduciary to account for profits can be carried to extremes and that in cases outside the realm of specific assets, the liability of the fiduciary should not be transformed into a vehicle for the unjust enrichment of the plaintiff."
Remedies against the fiduciary himself
Compensation
"that a trustee in breach of trust must restore or pay to the trust estate either the assets which have been lost to the estate by reason of the breach or compensation for such loss. Courts of Equity did not award damages but, acting in personam, ordered the defaulting trustee to restore the trust estate. If specific restitution of the trust property is not possible, then the liability of the trustee is to pay sufficient compensation to the trust estate to put it back to what it would have been had the breach not been committed:"
For what profits is a fiduciary liable to account?
"Their Lordships have throughout referred to the claim as one against the defendants G. S. Deeks, G. M. Deeks, and T. R. Hinds. But it was not, and it could not be, disputed that the Dominion Construction Company acquired the rights of these defendants with full knowledge of all the facts, and the account must be directed in form as an account in favour of the Toronto Company against all the other defendants."
"The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account."
"no part of the moneys went into Gulliver's pocket or into his account. In these circumstances, and bearing in mind that Gulliver's evidence was accepted, it is clear that he made no profits for which he is liable to account."
"The plaintiff alleges, among other matters, that the defendants formulated a common plan for the purpose of converting the plaintiff's opportunity to obtain such a contract for their own personal benefit. It is claimed they had undertaken as directors or officers of the plaintiff to procure such contracts for it and had engaged in extensive work towards such end at considerable expense to the plaintiff and that such conversion was in conflict with the duties that such defendants owed to the plaintiff company because of their fiduciary relationship with it. The plaintiff's claim as to damages is confined only to those that flow from the loss of the contract in question." (p. 6)
"The plaintiff alleges that the three personal defendants conspired with each other to use knowledge and information acquired by them in their capacities with Canaero in breach of their fiduciary duties by incorporating Terra for the purpose of acquiring for it the Guyana contract and precluding the plaintiff from acquiring the same, and that subsequent to the incorporation of Terra it joined in such conspiracy with the three personal defendants." (p. 28)
"There remains the question of the appropriate relief against O'Malley and Zarzycki, and against Terra through which they acted in breach of fiduciary duty. In fixing the damages at $125,000, the trial Judge based himself on a claim for damages related only to the loss of the contract for the Guyana project, this being the extent of Canaero's claim as he understood it. No claim for a different amount or for relief on a different basis, as, for example, to hold Terra as constructive trustee for Canaero in respect of the execution of the Guyana contract, was made in this court….
Liability of O'Malley and Zarzycki for breach of fiduciary duty does not depend upon proof by Canaero that, but for their intervention, it would have obtained the Guyana contract; nor is it a condition of the recovery of damages that Canaero establish what its profit would have been or what it has lost by failing to realize the corporate opportunity in question. It is entitled to compel the faithless fiduciaries to answer for their default according to their gain. Whether the damages awarded here be viewed as an accounting of profits or, what amounts to the same thing, as based on unjust enrichment, I would not interfere with the quantum."
When is the fiduciary personally liable to account for profits made by a company?
"But the trustee cannot avoid the rules concerning accountability for profits by arranging for the profit to be taken by his company (or a company in which he has a substantial interest) which is a mere cloak for the trustee or the alter ego of the trustee. In such a case the trustee will be personally accountable for the full amount of the profit, not merely a part proportionate to his interest in the company. The company will be personally accountable for the full amount of the profit obtained by it and will hold the profit on constructive trust for the beneficiaries."
"22. The second proposition also appears to me to be too widely stated unless used in conjunction with the first. Companies are often involved in improprieties. Indeed there was some suggestion to that effect in Saloman v Saloman & Co. Ltd [1897] AC 22. But it would make undue inroads into the principle of Saloman v Saloman & Co. Ltd if an impropriety not linked to the use of the company structure to avoid or conceal liability for that impropriety was enough.
23. In my judgment the court is entitled to "pierce the corporate veil" and recognise the receipt of the company as that of the individual(s) in control of it if the company was used as a device or façade to conceal the true facts thereby avoiding or concealing any liability of those individual(s)."
"Where the business is put into a company which is established by the directors who have wrongfully taken advantage of the corporate opportunity, it was held in Cook v Deeks [1916] 1 AC 554, (PC) that both the directors and the company are liable to account for profits."
"it was clearly no impediment to the liability of the directors to account for profits that the contract was obtained by a company which they had formed to exploit the opportunity."
"102 Neither Cook v Deeks nor Canadian Aero Service Ltd v O'Malley was treated as a case of piercing or lifting the corporate veil. The directors and their company were each liable to account. Some cases have held the director liable to account on the basis that he was to be identified with the company on a piercing or lifting the corporate veil rationale. In Gencor ACP Ltd v Dalby [2000] 2 BCLC 734, Rimer J held a director liable for the dishonest diversion of business opportunities which had been channelled into an offshore company which was wholly owned and controlled by him, and which was no more than a shell. It was simply a creature company and was to be identified in equity with the director. So also an Australian court treated a company into which contracts had been channelled as the alter ego of the director (see Green v Bestobell Industries Pty Ltd (No 2) [1984] WAR 32 at 40)."
"But I do not think that it is necessary to resort to piercing or lifting the corporate veil, since Cook v Deeks shows clearly (as does Canadian Aero Service Ltd v O'Malley) that the directors are equally liable with the corporate vehicle formed by them to take unlawful advantage of the business opportunities. The reason is that they have jointly participated in the breach of trust.
104 Nor in my judgment does it make a difference whether the business is taken up by the corporate vehicle directly, or is first taken up by the directors and then transferred to a company. Imperial Mercantile Credit Association v Coleman and Cook v Deeks show that a director who places the benefit of the business opportunities in a partnership or a company will be liable for the whole profit, and also make it clear that a director who is the active agent in a breach of fiduciary duty cannot evade responsibility by transferring the benefit to others. I do not consider that the liability of the directors in Cook v Deeks would have been in any way different if they had procured their new company to enter into the contract directly, rather than (as they did) enter into it themselves and then transfer the benefit of the contract to a new company. Alternatively (although it is in my view rather artificial to so treat it) the company may be liable to account for profits on the basis of knowing receipt of trust property (including profit deriving from a breach of trust: see Lewin on Trusts (17th edn, 2000) para 42-24), and the director/shareholders who set it up will be liable as principal wrongdoers. Whatever the analysis they will be constructive trustees of the profits and liable to account.
105 Consequently I do not consider that Mr Simonet can derive any assistance from one aspect of Regal (Hastings) Ltd v Gulliver on which Mr Croxford relied. As I have indicated, in Regal (Hastings) Ltd v Gulliver the chairman, Mr Gulliver, who had instigated the whole scheme, was held not to be liable. In particular it was held that he had not profited from the scheme notwithstanding that he held minority interests in two companies which had subscribed for shares in Amalgamated. There was no finding at trial that the shares in Amalgamated belonged to him, and there was no evidence that he had made a profit from his shares in the two companies. This is not authority for the proposition that where a director puts the profit into a company in which he has an interest he is not accountable for profits. First, one of the striking features of Regal (Hastings) Ltd v Gulliver is that the directors were held to have acted in good faith. Second, Mr Gulliver did not establish the companies to take the benefit of the shares in Amalgamated. Third, there was no evidence that the companies in which Mr Gulliver had an interest knew of the matters which made the actions of the directors a breach of fiduciary duty. Fourth, Mr Gulliver had only a minority interest, and there was an express finding that he had made no profit from the companies."
"[131] Mr Simonet put the benefit of the contracts or business opportunities in the partnership Millennium, and then he and Mr Patterson transferred the business without any consideration (other than perhaps the issue of shares) to Blue. Mr Simonet cannot escape the consequences of his own breach of fiduciary duty by transferring the fruits of that breach to a company. He remains the person principally liable. In this case Millennium was a partnership and the facts are directly comparable to the position in Imperial Mercantile Credit Association v Coleman, and the transfer of the benefit of the contracts and the business opportunities to a company owned and controlled by Mr Simonet and Mr Patterson is precisely what happened in Cook v Deeks and cannot relieve them of liability. Mr Simonet is responsible for breach of fiduciary duty, and is accountable for profits emanating from the property which he put into the partnership and then transferred to Blue. I would have come to the same conclusion if he had diverted the contracts and business opportunities directly to Blue."
i) Acting in good faith. The directors in Regal (Hastings) Ltd v Gulliver were potentially primarily liable as fiduciaries (rather than secondarily liable as knowing recipients or dishonest assistants) so their good faith cannot have had any bearing on the appropriate remedy. The "no profit rule" applies to a fiduciary acting in good faith;
ii) Company not established to take the benefit. The fact that Mr Gulliver did not establish the companies to take the shares is undoubtedly true, but it did not form part of the reasoning of the House of Lords;
iii) No evidence that the companies knew of the breach of duty. Mr Gulliver was a director of one of the companies which subscribed for the shares; and the managing director of the other. In those circumstances, one might have thought that his knowledge (although not his actions) might readily have been attributed to the two companies. I do not therefore agree that there was no evidence that the companies (of which he was a director) had no knowledge of the facts. But the House of Lords did not discuss this question at all, presumably because it was legally irrelevant;
iv) Minority interest. It is true also that Mr Gulliver had only a minority interest in the two companies, but this fact, too, played no part in the reasoning of the House of Lords. The finding that he made no profit was a finding that he personally made no profit; and that is why he escaped liability.
Remedies against the knowing recipient
"63. It must be borne in mind, however, that Trustor's restititutionary remedies are restitutionary. There can be no double recovery. The form of order made should be such as to ensure that there is no double recovery. I do not think there is any particular difficulty in devising an order which would prevent any double recovery. Let me try and illustrate what I have in mind.
64. Introcom receives £20 million, say, from Trustor. It holds that £20 million as constructive trustee and is accountable to Trustor for it. Introcom pays £10 million of the £20 million to A, £5 million to B and £5 million to C. Each of A, B and C has notice that it is Trustor's money, is a constructive trustee of the sum he has received, and is accountable to Trustor accordingly. In these circumstances Trustor is, in my view, entitled:
(a) to an order against Introcom and A for the repayment of £10 million;
(b) to an order against Introcom and B for the repayment of £5 million; and
(c) to an order against Introcom and C for the repayment of £5 million."
Fashioning the account
"What the judge found was that some at least of the information was confidential at the time that it was disclosed, in that its disclosure to a rival developer would or might be detrimental to Satnam. However, even assuming that but for the disclosure Morbaine would not have acquired the Brewery Street site, it does not follow that it would be a proportionate response to hold it liable for an account of profits. All the circumstances must be considered. The information, though confidential, was not of the same degree of confidentiality as the information in the Spycatcher case and in Schering Chemicals Ltd v Falkman Ltd. All of it was either already available to Morbaine or would have been available to it on reasonable inquiry once, as was inevitable, the news of Satnam's receivership became known. There being no other basis of recovery available, it would in our view be inequitable and contrary to commercial good sense to allow Satnam to recover simply on the basis that there was a degree of confidentiality in the information at the time that it was disclosed to Morbaine."
"In each case the form of inquiry to be directed is that which will reflect as accurately as possible the true measure of the profit or benefit obtained by the fiduciary in breach of duty."
"In the case of a business it may well be inappropriate and inequitable to compel the errant fiduciary to account for the whole of the profit of his conduct of the business or his exploitation of the principal's goodwill over an indefinite period of time. In such a case, it may be appropriate to allow the fiduciary a proportion of the profits, depending upon the particular circumstances. That may well be the case when it appears that a significant proportion of an increase in profits has been generated by the skill, efforts, property and resources of the fiduciary, the capital which he has introduced and the risks he has taken, so long as they are not risks to which the principal's property has been exposed. Then it may be said that the relevant proportion of the increased profits is not the product or consequence of the plaintiff's property but the product of the fiduciary's skill, efforts, property and resources. This is not to say that the liability of a fiduciary to account should be governed by the doctrine of unjust enrichment, though that doctrine may well have a useful part to play; it is simply to say that the stringent rule requiring a fiduciary to account for profits can be carried to extremes and that in cases outside the realm of specific assets, the liability of the fiduciary should not be transformed into a vehicle for the unjust enrichment of the plaintiff.
It is for the defendant to establish that it is inequitable to order an account of the entire profits. If the defendant does not establish that that would be so, then the defendant must bear the consequences of mingling the profits attributable to the defendant's breach of fiduciary duty and the profits attributable to those earned by the defendant's efforts and investment, in the same way that a trustee of a mixed fund bears the onus of distinguishing what is his own.
Whether it is appropriate to allow an errant fiduciary a proportion of profits or to make an allowance in respect of skill, expertise and other expenses is a matter of judgment which will depend on the facts of the given case. However, as a general rule, in conformity with the principle that a fiduciary must not profit from a breach of fiduciary duty, a court will not apportion profits in the absence of an antecedent arrangement for profit-sharing but will make allowance for skill, expertise and other expenses."
"The fiduciary is liable for the whole of the profit. There are no firm rules for determining which is the relevant profit: see Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 110 per Mason J. Where, as here, the business (to use a neutral term, not distinguishing between Mr Simonet and Blue) is not restricted exclusively to the performance of contracts which were obtained from CMSD, the fiduciary should be accountable for the profits properly attributable to the breach of fiduciary duty, taking into account the expenses connected with those profits and a reasonable allowance for overheads (but not necessarily salary for the wrongdoer), together with a sum to take account of other benefits derived from those contracts. For example, other contracts might not have been won, or profits made on them, without (for example) the opportunity or cash-flow benefit which flowed from contracts unlawfully obtained. There must, however, be some reasonable connection between the breach of duty and the profits for which the fiduciary is accountable."
i) The fundamental rule is that a fiduciary must not make an unauthorised profit out of his fiduciary position;
ii) The fashioning of an account should not be allowed to operate as the unjust enrichment of the claimant;
iii) The profits for which an account is ordered must bear a reasonable relationship to the breach of duty proved;
iv) It is important to establish exactly what has been acquired;
v) Subject to that, the fashioning of the account depends on the facts. In some cases it will be appropriate to order an account limited in time; or limited to profits derived from particular assets or particular customers; or to order an account of all the profits of a business subject to all just allowances for the fiduciary's skill, labour and assumption of business risk. In some cases it may be appropriate to order the making of a payment representing the capital value of the advantage in question, either in place of or in addition to an account of profits.
Remedies against a dishonest assistant
"If the third party dishonestly assists or induces a breach of duty by receiving information and making the profit, then the third party will, subject to one qualification, be accountable for the profit on the ground of dishonest assistance. The qualification is that a possible requirement of liability for dishonest assistance is that the breach must relate to the misapplication of trust property....... In cases of dishonest assistance the accountability of the third parties will not be confined to the profit which he has made. The third parties making the profit will be jointly and severally liable for the whole and so the profit made by an absent trustee can be recovered from a third party against whom the action is brought."
"If the maintenance of a very high standard of conduct on the part of fiduciaries is the purpose of the rule it would seem equally necessary to deter other persons from knowingly assisting those in a fiduciary position to violate their duties. If, on the other hand, the rule is to be explained simply because it would be contrary to equitable principles to allow a person to retain a benefit that he had gained from a breach of his fiduciary duty, it would appear equally inequitable that one who knowingly took part in the breach should retain a benefit that resulted therefrom. I therefore conclude, on principle, that a person who knowingly participates in a breach of fiduciary duty is liable to account to the person to whom the duty was owed for any benefit he has received as a result of such participation."
"According to Seatrade's argument, in relation to the remedy of an account of profits there is a critical difference between the positions of the person bribed and the briber. The fiduciary owes a personal obligation to his principal not to make a secret profit from his position and for that reason must account for any such profit to the principal. By contrast, the dishonest intruder owes no such personal obligation to the principal. If he causes the principal loss he should recompense him, but if he makes a profit for himself beyond the loss suffered by the principal he is entitled to retain it. He can only be required to account to the principal if he receives the principal's property.
The contrary argument is that, although the dishonest intruder owes no personal obligation of loyalty to the injured party, it is unconscionable for him dishonestly to suborn the loyalty of the agent and equally unconscionable for him to keep benefits which he has obtained by dishonestly abusing to his own advantage the position of the agent whose duty was to his principal."
"The defendants must account to the plaintiff not only for the profits which they made .. but additionally for the profits made by their co-conspirator Raley. The liability is, as among them, not joint but joint and several."
"Counsel for the defendants contend that the liability of constructive trustees is several and not joint and several. I do not so read the authorities. The defendants must be held liable for the profits made by Raley [and others]."
i) None of the authorities cited by Manson J in his first judgment deal with the question of joint and several liability. Indeed in his first judgment he cites no authority in support of his conclusion;
ii) Manson J did not, in his second judgment, identify the authorities on which he relied;
iii) The conclusion that the defendants became constructive trustees as a result of their acquisition of the shares does not distinguish between the two classes of constructive trustee that Lord Millett has taught us to recognise;
iv) Canadian law is readier to impose a remedial constructive trust, which does not form part of English law;
v) Lewin (para 39-52) points out that an express trustee is not liable for the acts or defaults of his co-trustees; and that this principle is given statutory force by section 30 (2) of the Trustee Act 1925; so that a blanket statement that the liability of co-trustees is joint and several is itself suspect;
vi) As Elliott and Mitchell point out in their article "Remedies for Dishonest Assistance" (2004) 67 (1) MLR 16-47, to which Mr Hochhauser referred me:
"Holding the dishonest assistant liable to account for profits made by a wrongdoing fiduciary may certainly serve as a powerful disincentive to deter third parties from meddling in the fiduciary relationship, but it is open to question whether it is needed in addition to the compensatory liabilities which dishonest assistants also owe. If not, then it begins to look like a punitive measure."
"Mr Wilson submitted that neither he nor Mr Coker had personally received any part of the profit in relation to transactions 17 and 18. He submitted that therefore they should not be held liable to account for those profits. He made the same submission in relation to the profit made on transactions 19 and 20. So far as transactions 17 and 18 are concerned, the submission misses the point. As a result of the breach by Mr Coker of his fiduciary duty owed to Comax, in which breach Mr Wilson knowingly assisted, they were in a position to receive the proceeds of the sales to Lombard in respect of transactions 17 and 18. They chose so to arrange their affairs, that they did not receive those proceeds themselves, but those proceeds were received first by Copease UK Ltd and then, as to the vast majority, by Nemesis. They cannot by so arranging their affairs avoid the liability which otherwise rests upon them."
"This Court is not a Court of penal jurisdiction. It compels restitution of property unconscientiously withheld; it gives full compensation for any loss or damage through failure of some equitable duty; but it has no power of punishing any one. In fact, it is not by way of punishment that the Court ever charges a trustee with more than he actually received, or ought to have received, and the appropriate interest thereon. It is simply on the ground that the Court finds that he actually made more, constituting moneys in his hands "had and received to the use" of the cestui que trust."
WAS MR FIELDING A SHADOW OR DE FACTO DIRECTOR OF NORTHSTAR OR SEAQUEST AND, IF SO, WHEN?
The pleaded case
i) Mr Fielding would attend meetings of the board of Northstar and Seaquest held at Burnden Works;
ii) In October 1998 Mr Fielding told Mr Naden and Mr Birkett that he wanted to move Seaquest to Burnden Works, split up Northstar roof fabrication from components and distribute components from Burnden Works;
iii) Mr Fielding's accountant, Mr Hindley, was responsible for monitoring the financial affairs of Northstar and Seaquest and controlling the day to day cash flow and liaising on behalf of Northstar and Seaquest with the tax authorities;
iv) On about 1 November 1998 Mr Naden notified Companies House that the registered office of Seaquest was being transferred to Burnden Works and that Mr Fielding should be contacted at that address if there were any query;
v) In November 1998 Mr Fielding directed Mr Sheffield to co-ordinate the separation of the accounts functions of Northstar and Seaquest and separate the roof fabrication from component distribution;
vi) Mr Fielding directed Mr Birkett and Mr Naden to grant the Seaquest and Northstar debentures, and they did so on 6 and 17 November 1998 respectively;
vii) Mr Fielding arranged for Seaquest to have a bank account and a VAT registration. When the bank account was finally set up on 6 November 1998, Mr Fielding was the sole signatory;
viii) In about November 1998 Mr Fielding, Mr Naden and Mr Birkett began transferring the operations of Northstar and Seaquest to Burnden Works;
ix) Mr Fielding charged Northstar a commission of 2.5 per cent on supplies of aluminium from November 1998
x) Component distributions and stock of components were moved to Burnden Works in January 1999;
xi) The computerised nominal ledger accounting records of both Northstar and Seaquest were moved to Burnden Works in January 1999;
xii) On 4 February 1999 Mr Fielding became the company secretary of Seaquest.
xiii) Kesterwood Extrusions has supplied Northstar, Seaquest and customers of Seaquest with extrusions;
xiv) Dearward has supplied Northstar and Seaquest with extrusions supplied by Alumax;
xv) Dearward Profiles has supplied Northstar, Seaquest and customers of Seaquest with UPVC extrusions;
xvi) BCP has supplied components to Seaquest;
xvii) TBG has supplied components to Seaquest;
xviii) Mr Fielding charged rent or licence fees to Northstar and Seaquest at a rate far in excess of that which Northstar and/or Seaquest had paid for their occupation of their previous premises;
xix) On 20 May 1999 Mr Fielding procured Northstar to sell to Seaquest certain fixed assets;
xx) As from June 1999 Mr Fielding caused the manufacture and/or sourcing, and sale of the components for and/or roofs in accordance with the System to be undertaken by TBG rather than, or in addition to, BCP.
General statements
"I have been advised that, in consequence of my increasingly close involvement in the affairs of Northstar and Seaquest, I might be regarded as a de facto or shadow director."
"As I explained on the telephone, I am now running the company."
"fortunately from, I think, the beginning of September 1998, Gary had started to take a more active role in the business of both Northstar and Seaquest."
Cumulative effect
The factors
Meetings
Mr Hindley
Seaquest's registered office
Separation of the businesses and the move of the accounts
The Seaquest and Northstar debentures
Seaquest's bank account
Accounts
Component stock and distribution
Company secretaryship
Supply of products
The leases
Sale of assets
Supply of components by TBG
Conclusions
Northstar
Seaquest
THE IMPUGNED TRANSACTIONS
The Northstar and Seaquest debentures
The pleaded case
i) The debentures were authorised by Mr Naden and Mr Birkett for the improper purpose of preventing the Trustees gaining control of Northstar and Seaquest and the businesses and assets thereof through their claim to the beneficial ownership of the existing issued share capital of the companies and the debentures are invalid and should be set aside (para 8.3. (1))
ii) Mr Naden and Mr Birkett granted the debentures otherwise than bona fide in the interests of, respectively, Seaquest and Northstar and preferred the interests of Mr Fielding to those of the company in breach of fiduciary duty (para 8.3 (2));
iii) Mr Naden and Mr Birkett exercised their powers as directors to grant Mr Fielding debentures at the direction of Mr Fielding in breach of their duty as a director of, respectively, Seaquest and Northstar (para 8.3 (3)).
The Northstar debenture
"The commercial justification put forward for the Northstar debenture was the alleged need for Mr Fielding to purchase Northstar's aluminium supplies on account of Alumax's concerns over whether set-off would be allowed under the terms of the Court order being sought by the Trustees. The matter was raised with the Trustees who were agreeable to it. There was no need for Mr Fielding to be given a debenture. There was also no need for Northstar to grant a debenture since payments could have been routed through Seaquest, which is exactly what Mr Fielding did once he had got his debenture from Northstar. Mr Fielding had to provide a guarantee, so it is not clear why Mr Fielding would not have guaranteed the supply to Northstar – or to Northstar through Seaquest - if he thought he owned Northstar and Seaquest.
Indeed, a debenture seems wholly unnecessary since there was no suggestion that Mr Fielding was going to leave the cost of the aluminium outstanding. Without more he could have expected payment and Northstar should have declined to grant a debenture in light of that fact. It is not without significance that the only supplies that Mr Fielding did not receive payment for were the supplies to Northstar the subject of is first invoice for supplies…All his subsequent invoices were paid. The reason is because that invoice had to remain outstanding since it was the justification he relied on for his Northstar debenture."
"Mr Naden and Mr Birkett (and, of course, Mr Fielding) were acting to try to keep the business and assets from Mr Davies' Trustees. They were not acting bona fide in the interests of the company since they were not acting bona fide in the interests of the shareholders of the company as a whole. It cannot be acting in the interests of the company to deny the beneficial owner his rights, nor can debentures properly be granted with a view to putting the assets and business of the company under the control of a non-shareholder in order to prevent the shareholders, once they have shown themselves to be such, from taking control of the company's business and assets."
Conclusion
The Seaquest debenture
Conclusion
The change of components supplier
The pleaded case
"Mr Fielding dishonestly took advantage of [the] delay [in establishing the trustees' entitlement to the shares] and the breaches of fiduciary duty by Mr Naden and Mr Birkett [in issuing shares to Mr Fielding and supporting his claim] which he had engineered (as Mr Naden and Mr Birkett had intended) to take control of Northstar and Seaquest and then to use his control of Northstar and Seaquest to appropriate their assets and business as hereinafter set out."
Northstar's position
i) Commission payable to Seaquest at 34 per cent;
ii) The wages of some fourteen employees engaged in the packaging of components and
iii) The rent and other overheads associated with the storage facility at Wilton Street.
Seaquest's position
Conclusion
The sale of stock
i) Mr Fielding was not a director of either Northstar or Seaquest;
ii) Neither Northstar nor Seaquest was "associated" with him; since he did not have (and never did have) any valid shareholding in either company; and could not have exercised voting rights at a general meeting of either company;
iii) Although Mr Naden was a director of both Northstar and Seaquest, he had no shareholding in Seaquest and had no voting rights. Seaquest was not, therefore, "associated" with Mr Naden.
Conclusion
Administration charges
Aluminium
Relief
i) Mr Fielding himself accepted that the commission charges were inflated, in that they were double counted;
ii) Although a commission charge on a supply to Northstar might have been justifiable, there was no reason for Seaquest to agree to pay for any supply of aluminium. Its business was not that of roof fabrication;
iii) Despite the fact that the commission charge was evident on the face of the invoice and was not, therefore, a "secret" profit, there was no real evidence of any actual agreement to it by the de jure directors of Seaquest.
Conclusion
Supplies of uPVC
Conclusion
The sale by the receiver
The pleaded case
Sale at undervalue
"The apparent differences between the various listings of assets are not surprising in these circumstances. I would not consider them to be significant in the context of these proceedings."
Section 320
The no profit rule
i) The sale was not at an undervalue and consequently it does not appear that any profit was made;
ii) The purchaser was not Mr Fielding (who had residual fiduciary duties to Northstar as a de facto director, albeit that the administrative receiver had taken control of all its assets) but TBG;
iii) TBG had already equipped (at its own expense) Burnden Works with the tools necessary for the fabrication of roofs; so that it is not apparent that it made any profit out of the use of the tools sold to it by the Receiver;
iv) There is no evidence to suggest that the reason why the sale was made to TBG was Mr Fielding's position as de facto director of Northstar.
Conclusion
Supply contracts
The pleaded case
"(2) Kesterwood Extrusions has supplied Northstar, Seaquest and customers of Seaquest with extrusions;
(3) Dearward has supplied Northstar and Seaquest with extrusions supplied by Alumax;
(4) Dearward Profiles has supplied Northstar, Seaquest and customers of Seaquest with UPVC extrusions;
(5) BCP has supplied components to Seaquest;
(6) TBG has supplied components to Seaquest."
Kesterwood Extrusions
Dearward
Dearward Profiles
Management charges
The pleaded case
i) As in such transactions Mr Fielding was in a position of a conflict of interest Mr Fielding, Kesterwood Extrusions, Dearward, Dearward Profiles, BCP and TBG are liable to account to Northstar and/or Seaquest for all profits received from such transactions from 1 November 1998 onwards (paragraph 14.5);
ii) Mr Naden (until his resignation as a director of Seaquest on 7th January 2000) and Mr Birkett (until his resignation as a director on 4th February 1999) permitted such transactions on terms unfavourable to Northstar and Seaquest in breach of their fiduciary duties as directors of Northstar, as Mr Fielding and (through Mr Fielding) Kesterwood Extrusions, Dearward, Dearward Profiles, BCP and TBG knew (paragraph 14.6);
iii) Mr Fielding was in breach of his duties as a shadow director and/or de facto director (paragraph 14.7 (1));
iv) Kesterwood Extrusions, Dearward, Dearward Profiles, BCP and TBG have knowingly received property of Northstar and Seaquest (namely money) as a result of such breaches of fiduciary duty (paragraph 14.7 (2));
v) The profits of Mr Fielding and of Kesterwood Extrusions, Dearward, Dearward Profiles, BCP and TBG derived from such transactions are held on trust for Northstar and/or Seaquest and Mr Fielding, BCP, and TBG (both directly and as successor-in-title to Kesterwood Extrusions, Dearward and Dearward Profiles) are liable to account to Northstar and/or Seaquest for the same (paragraph 14.7 (3));
vi) The levying of the management charges was an arrangement for the acquisition of a non-cash asset of the requisite value which required to be approved by Seaquest under section 320 of the Companies Act, but was not (paragraph 14.8);
vii) The breaches of fiduciary duty caused loss to Seaquest for which Seaquest is entitled to equitable compensation (paragraph 14.10).
The charge
"On Howard Roche's advice Northstar also started to charge Seaquest management charges for the services it was provided. I can remember a meeting but not the details. I can't remember anything about any other management charges or commission payments being paid. I didn't deal with the company's accounts."
| Staff member | Period (months) | Monthly charge rate | Amount (£) |
| Richard Williams | 4 | 3658 x 25% | 3,678 |
| Jim Sheffield | 11 | 2,961 | 32,571 |
| Jeff Naden | 6 ½ | 3,057 x 75% | 14,902 |
| Peter Gray | 9 | 2,796 x 50% | 12,582 |
| Sally Fielding | Nil | ||
| Sharon Owen | 5 ½ | 2,846 | 15,653 |
| Adrian Cooper | 3 | 2,571 x 25% | 1,928 |
| Mike Smith | 5 ½ | 3,498 | 19,239 |
| Jonathan Roche | 6 | 2,205 | 13,230 |
| Martin Read | 9 | 3,593 | 32,337 |
| Mike Wordsall | 8 | 1,428 | 11,424 |
| Danny McManus | 6 ½ | 3,097 | 20,130 |
| Wendy Ball | 9 | 1,541 | 13,869 |
| Casual staff | 720 |
Mr Sheffield
"Following the move of its accounting function to Burnden Works [Seaquest] continued to receive and place orders and to receive commission, which was really all it did. I provided some assistance to Seaquest in seeing customers but otherwise had little involvement."
Mr Naden
Mr Gray
Mr Read
Other employees
Conclusion
"Of course the principal objection to the management charges is that any work that was being done by the employees of TBG/BCP was not being done for Seaquest. This is self-evident from the fact that the same charge was levied in January – when, Mr Fielding says, the components business was being transferred from Northstar to Seaquest - as in March – when the components business was BCP – as in December – when Seaquest was not trading at all. The management charges were simply a device for extracting money and were imposed on Seaquest by Mr Fielding in breach of his fiduciary duties as de facto director of Seaquest."
Consequences
Rent and service charges
The complaints
Conflict of interest
"After the move to Burnden Works in 1999, and as I understood the situation, in order to avoid a repeat of the problems with Groby Road and to give Seaquest some security, formal leases were drawn up. To me this seemed like good business sense. There was nothing improper about them as far as I was concerned."
Section 320: approval in general meeting
Rent unreasonably high
Lack of need
Unit G3
Unit LG3
Unit G1
Service charges
Relief of Mr Fielding
Mr Naden
Conclusion
The loan agreement
The pleaded case
"Mr Fielding sought to improve his position by having Mr Naden agree … a Loan Agreement dated 22nd December 1999 … which purported to formalise Seaquest's alleged indebtedness to him of £330,360. Obviously the Loan Agreement could not legitimately improve his position and was granted in breach of fiduciary duty: see ¶18 of the RAPCs in the New Action."
Why the loan agreement was made
Conclusion
The intellectual property rights licence to BCP
The pleaded case
i) The directors of Seaquest were in breach of their duties as directors in procuring its grant because:
a) They were favouring the interests of Mr Fielding over those of Seaquest; and
b) The licence was entered into for an improper purpose, namely to prevent Seaquest being able to stop BCP from exploiting the intellectual property rights;
ii) It was a non-cash asset the acquisition of which ought to have been approved in general meeting, but was not;
iii) If the licence was not a non-cash asset, it was nevertheless a contract in which a director had an indirect interest. The grant of the licence was not preceded, as it should have been, by a board meeting of Seaquest's board at which Mr Fielding declared his interest.
Improper purpose
Non-cash asset
Contract with a director
Affirmation
Accounting for gain
Relief
i) A written declaration of interest was recorded in the minutes of the meeting that approved the licence;
ii) A fuller declaration would not have added to Mr Naden's knowledge and would not have altered the decision to enter into the licence;
iii) It is not suggested that the consideration for the licence was too low, and consequently Seaquest has suffered no loss as a result of the grant of the licence;
iv) Seaquest's liquidator did not assert a claim to rescind the licence until three years after its grant;
v) In the interim BCP and TBG had expended a considerable amount of money in exploiting and improving the system, relying on the validity of the licence.
Conclusion
Failure to require payment of commission
The pleaded case
i) From 22 April 1999 onwards Kesterwood Extrusions and/or Dearward Profiles and/or Dearward and/or BCP and/or TBG manufactured and sold products which were infringing copies of designs some or most of the rights in which Laddie J held to belong to Northstar and/or which they had previously been prepared to pay a commission to Seaquest for manufacturing and selling; and without being required to make payment for such privilege to Northstar and/or Seaquest either at all or in an amount representing an arm's length consideration (paragraph 14.11).
ii) In not requiring or seeking such payment from such companies for the manufacture and sale of such products:
a) Mr Naden as a director of Northstar and Seaquest acted in breach of fiduciary duty;
b) Mr Fielding, and through him his companies, knew and dishonestly participated in that breach;
c) Mr Fielding as a de facto director of Northstar and Seaquest acted in breach of fiduciary duty, and through him his companies knew and dishonestly participated in that breach (paragraph 14.12)
April 1999 to November 1999
After November 1999
Failure to require payment of licence fee
The pleaded case
"Although by the Licence Agreement Seaquest purported to dispose of a major asset of substance and BCP only paid the first quarterly payment of £48,000, Mr Fielding and Mr Naden as directors of Seaquest failed to take any or any sufficient steps to compel BCP to pay any further instalments. BCP thereby acquired Seaquest's claim to the design rights for the System for no or no proper consideration."
The correct legal analysis
The facts
Conclusion
Tooling
The pleaded case
i) With the approval of Mr Naden, Mr Fielding has caused his companies to retain and exploit tooling belonging to Seaquest;
ii) That amounts to a breach of fiduciary duty by both Mr Naden and Mr Fielding;
iii) Mr Fielding also claims that he and his companies own uPVC extrusion tooling belonging to Seaquest;
iv) Mr Fielding claims that he or TBG own any intellectual property rights resulting from any changes made to the uPVC extrusion tooling;
v) These claims amount to breaches of fiduciary duty by Mr Fielding; and Mr Naden's acquiescence in these claims amount to breaches of fiduciary duty by him;
vi) In laying claims to ownership of tooling, Mr Fielding and his companies "dishonestly participated" in a breach of fiduciary duty by Mr Fielding and Mr Naden;
vii) "In the premises any tooling or intellectual property rights owned by Mr Fielding and/or his companies are held on trust for Seaquest and he and/or they must account to Seaquest for the same."
Conclusion
THE CASE AGAINST MRS FIELDING
The pleaded case
"22. 1 At all material times Mrs Fielding played a major role in the conduct of the affairs of Mr Fielding's companies, including BCP and TBG.
22.2 With her husband Mrs Fielding directed the acquisition of the business and assets from Northstar and Seaquest as a going concern by TBG and BCP.
22.3 Given her joint role in the affairs of TBG and BCP and her position as a wife active in her husband's business affairs Mrs Fielding would have known from Mr Fielding (and did know) that:-
(1) Mr Fielding was a de facto and/or shadow director of Northstar and Seaquest;
(2) such transfer of the business and assets of Northstar and Seaquest was at Mr Fielding's direction;
(3) such transfer of the business and assets of Northstar and Seaquest was not in the interests of Northstar and Seaquest;
(4) in causing the business and assets of Northstar and Seaquest to be so transferred the directors of Northstar and Seaquest were acting in breach of their fiduciary duties as directors of those companies.
(5) such transfer of the business and assets of Northstar and Seaquest was not for consideration or any adequate consideration;
(6) such transfer of the business and assets of Northstar and Seaquest was made possible by her husband's dishonest assertion and maintenance of control of Northstar and Seaquest as herein particularised.
22.4 In the premises
(1) Mrs Fielding dishonestly participated with her husband in the breach of the fiduciary duties of Mr Birkett and Mr Naden pleaded in paragraph 21.1 above.
(2) Mrs Fielding dishonestly participated in the breach of fiduciary duty of the directors and de facto and/or shadow director of Northstar and Seaquest as pleaded in paragraph 21.1 above.
(3) Mrs Fielding is liable as a constructive trustee to account for all profits received and/or pay equitable compensation for the resulting loss, particulars of which are given in paragraph 21.6 above."
Dishonest assistance
i) Mr Fielding said that he shared business decisions with his wife;
ii) Mrs Fielding had an active executive role at Dearward, where she was the sales director;
iii) As a representative of Dearward she was prepared to sign a letter saying that Dearward was the supplier of uPVC extrusions at a time when she knew that it was not. This demonstrated that she was prepared to act dishonestly;
iv) Her joint acquisition of Burnden Works, together with her husband required the mortgaging of the family home, thus demonstrating that she was an active participant in Mr Fielding's business activities;
v) She was prepared to help (and did help) Mr Fielding in procuring members of her family to hold shares in Kesterwood Extrusions and Kesterwood Plastic Processors as nominees;
vi) She sold her own home in order to invest in TBG;
vii) She signed the letter of 16 November 1998 on behalf of her husband, which was part of the justification for the Northstar debenture;
viii) She was a senior figure in the new management of Northstar and Seaquest from October 1998;
ix) Between 24 February 2000 and 31 March 2000 she acted as the company secretary of Seaquest;
x) She was prepared to mislead the court in giving her evidence, thus demonstrating that she is prepared to assist Mr Fielding in his dishonest schemes.
Assistance
Sharing business decisions
"Q. You and your wife, as I understand the evidence, work together in business as well as having a married life, is that right?
A. We do, but we manage to get by, by very rarely coming across each other at work or in business.
Q. Yes, but as I read your evidence, when important business decisions are made in relation to your business life, that is something that you share with your wife, is it not?
A. Yes, I would say so, yes.
Q. And that you seek her advice in relation to such important decisions, do you not?
A. No.
Q. Do you not?
A. I do not.
Q. Do you not take her advice at all?
A. If I had taken her advice on some things, I would have had more money than I have now, but I generally go my own way."
Dearward and Kesterwood
Burnden Works and investment in TBG
The letter of 16 November
Management of Northstar and Seaquest
Misleading evidence
BCP
Dishonesty
"For Mrs Fielding to be liable as a knowing assistant, it is not necessary for her to have known every detail of what her husband was doing and how he was doing it. It is sufficient that she knew that what he was doing, and what she was helping him do, was dishonest. The evidence amply justifies this conclusion."
i) For Mr Fielding to persuade (or procure) Seaquest to change the identity of the supplier of components from Northstar to BCP;
ii) For BCP to supply components in place of Northstar;
iii) For Mr Fielding to have called in his loan to Northstar and to have appointed an administrative receiver when it failed to pay;
iv) For BCP to have taken the intellectual property rights licence from Seaquest; and
v) For Mr Fielding to have called in his loan to Seaquest and to have appointed an administrative receiver when it, too, failed to pay.
Conclusion
THE CASE AGAINST MR NADEN
i) The grant of the Seaquest debenture was a genuine transaction which the directors of Seaquest believed was in the best interests of that company. Mr Naden was not guilty of any breach of fiduciary duty;
ii) The grant of the Northstar debenture was a genuine transaction which the directors of Northstar believed was in the best interests of that company. Mr Naden was not guilty of any breach of fiduciary duty;
iii) No claim for breach of fiduciary duty is pleaded against Mr Naden in relation to the change of components supplier;
iv) There was no breach of fiduciary duty in connection with the grant of the leases, and even if the rent was too high, that was a case of a fiduciary loyally doing his incompetent best;
v) Mr Naden abdicated his responsibility in relation to the imposition of management charges, which were exaggerated; but he did not himself profit from the charges;
vi) Mr Naden was not guilty of a breach of fiduciary duty in relation to the grant by Seaquest of the intellectual property rights licence; and no claim against him has been made under section 320;
vii) The allegations of failure to require payment of commission, and failure to require payment of the licence fee, fail on the facts;
viii) There was no breach of fiduciary duty in not making a charge (over and above the liability to pay commission) for the use of the tools;
Conclusion
THE CASE AGAINST MR CLAYTON
"When one looks at the totality of the evidence, Mr Clayton's role in the conspiracy is clear. From the beginning of 1998 he is a 'patsy' or 'front', someone who is willing to lend his name to whatever account or document, which is required to assist Mr Davies or Mr Fielding. He was prepared:-
(1) to act as nominee shareholder of both Northstar and Seaquest for Mr Davies;
(2) to permit his name to be substituted for Mr Davies on the Northstar Loan Account;
(3) to let his company, Bespoke Windows and Conservatories Limited, be used as a means of siphoning money, which would otherwise have gone to Northstar to Mr Davies, at a time when he was bankrupt;
(4) to sign back-dated documents in order to advance a dishonest plan."
Conclusion
THE CASE AGAINST BCP AND TBG
The pleaded case
"BCP and/or TBG are liable to account for any profits or gain which they have made directly or indirectly from
(1) the Licence Agreement (and any earlier arrangement by which Seaquest informally licensed BCP to exploit the design rights in the System) and the Sub-Licence (or any earlier arrangement by which BCP informally sub-licensed TBG to exploit the design rights in the System) as pleaded in paragraphs 17.8 and 19.8 above;
(2) the non-arms length transactions as pleaded in paragraph 14 above;
(3) the sale by Mr Long as pleaded in paragraph 16.8 above;
(4) the tooling and intellectual property rights (or claims thereto) as pleaded in paragraph 20.6 above;
(5) the transfer of the components business and the appropriation of the business, and assets of Northstar and Seaquest as pleaded in paragraphs 14, 15.6,16.8 20.6 and 21 above."
The licence agreement
Non arms length transactions
Sale by the receiver
Tooling and intellectual property rights
Transfer of the component business
i) That Northstar was not entitled to insist on remaining Seaquest's supplier of components;
ii) Northstar was struggling to cope with the volume of business and administration throughout 1998;
iii) Northstar's dual role as supplier of components and fabricator of roofs was causing dissatisfaction among Seaquest's dealers;
iv) It is likely that Northstar would have become insolvent anyway some time during 1999.
The roof fabrication business
Seaquest's business
i) That Seaquest would have struggled financially to service its dealers once Alumax decided that it was not prepared to continue with the "direct from the mill" business model, and without more borrowings, is unlikely to have survived;
ii) That between Glassex 2000 and Glassex 2001 the key components of the system were substantially redesigned;
iii) There has been major investment in new and better tooling, beginning in December 1999;
iv) The marketing and presentation of "K2" is of a far higher quality and standard than any marketing by Seaquest.
THE CASE AGAINST THE REMAINING CORPORATE DEFENDANTS
The pleaded case
"It should be inferred from the financial statements of BHU, TBG and K2 for year ended 30 June 2003 that the vast majority of sales are now going through K2 rather than TBG and that the conservatory roof business of TBG has substantially been diverted by Mr and Mrs Fielding from TBG to K2."
"The Claimants are entitled to trace all profits or gains of TBG and BCP for which they were or are liable to account into the property of BHU and K2 and BHU and K2 are liable to account to the Claimants for the same."
"… the entire business and assets of BCP and TBG (save to the extent that BCP and TBG prove that such business and assets were not derived from Northstar and Seaquest nor related to the business and assets of Northstar and Seaquest), were and are held on trust for the Claimants."
Diversion of business
Tracing profits
Distribution of property
Business held on trust
Conclusion
THE CONTRIBUTION CLAIM AGAINST MR BIRKETT
HOW MUCH DOES NORTHSTAR OWE MR FIELDING?
Mr Fielding's claim
| Date | Details | Amount £ |
| 27 January 1998 | Cash loan | 10,000 |
| 4 February 1998 | Cash loan | 10,000 |
| 11 February 1998 | Cash loan | 10,000 |
| 11 March 1998 | Cash loan | 50,000 |
| 21 November 1998 | Transfer of liability from Northstar to Seaquest | (40,000) |
| 30 November 1998 | Purchase of aluminium | 28,600.11 |
| Total | 68,600.11 |
The cash loan
The aluminium purchase
Conclusion
HOW MUCH DOES SEAQUEST OWE MR FIELDING?
Mr Fielding's claim
| Date | Details | Amount £ |
| 21 November 1998 | Transfer of debt from Northstar to Seaquest | 40,000 |
| 25 November 1998 | Transfer from Mr Fielding's bank account | 70,000 |
| 8 April 1999 | Cheque from Mr Fielding | 20,000 |
| 23 April 1999 | Cash paid to Northstar employee | 360 |
| 2 June 1999 | Cheque from Mr Fielding | 150,000 |
| 16 June 1999 | Cheque from Mr Fielding | 50,000 |
| Total | 330,360 |
Conclusions on the claim
Conclusion
Deduction of the payment of 28 January 1999
THE BIG PICTURE
THE NEW IP ACTION
The pleaded case
i) They have controlled, directed procured and have been personally responsible for the infringements carried out by TBG; alternatively
ii) They were party to a design common to themselves and TBG pursuant to which the infringements were carried out.
Mr and Mrs Fielding's personal liability
i) a director will not be treated as liable with the company as a joint tortfeasor if he does no more than carry out his constitutional role in the governance of the company--that is to say, by voting at board meetings.
ii) there is no reason why a person who happens to be a director or controlling shareholder of a company should not be liable with the company as a joint tortfeasor if he is not exercising control though the constitutional organs of the company and the circumstances are such that he would be so liable if he were not a director or controlling shareholder. In other words, if, in relation to the wrongful acts which are the subject of complaint, the liability of the individual as a joint tortfeasor with the company arises from his participation or involvement in ways which go beyond the exercise of constitutional control, then there is no reason why the individual should escape liability because he could have procured those same acts through the exercise of constitutional control.
iii) liability as a joint tortfeasor may arise where the individual "intends and procures and shares a common design that the infringement takes place".
iv) whether or not there is a separate tort of procuring an infringement of a statutory right, actionable at common law, an individual who does "intend, procure and share a common design" that the infringement should take place may be liable as a joint tortfeasor.
Redesigns
"I do not regard the commencement of this second action for infringement of the Patent as just a "procedural inconvenience" to Sandtoft; it amounts to an abuse of process. Proper pleading requires the timely identification of every type of infringement alleged. And, on that understanding, a defendant should know by the end of the trial (and normally well before trial) where it stands. In relation to Sandtoft's angled ridge tiles, that did not happen. This application succeeds and the second action will therefore be struck out."
After the expiry of the licences
Result
Counterclaim
THE BURNDEN ACTION
The pleaded case
i) Passing off;
ii) Conversion of tooling;
iii) Conversion of design documentation; and
iv) Knowing receipt of property transferred in breach of fiduciary duty.
Passing off
i) The goodwill did not belong to QCL but to an earlier "Quickfit" company;
ii) When QCL went into liquidation, and the liquidator decided not to sell it as a going concern, it abandoned its goodwill;
iii) The claim is barred by limitation, acquiescence or laches.
Conversion of tooling
i) 6 uPVC extrusion tools which QCL had commissioned from Nenplas between January 1994 and its liquidation in December 1995;
ii) 4 aluminium extrusion tools which QCL had commissioned from Kaye Aluminium Extrusions Ltd and which were subsequently held by Alumax.
Conversion of design drawings
Knowing receipt
i) Mr Davies was a de jure director of QCL, and consequently owed it fiduciary duties;
ii) Those fiduciary duties continued after QCL went into liquidation, at least to the extent that Mr Davies owed QCL a duty to identify all its assets, and to deliver up to the liquidator all QCL's assets that were under his control;
iii) As trustee of the design right he owed a duty to QCL to prevent infringement of that right.
iv) Mr Davies was also a de facto director of Northstar, with the consequence that his knowledge must be attributed to Northstar.
v) Thus when Northstar received property that had formerly belonged to QCL, it knew that that property had been diverted from the control of the liquidator by Mr Davies in breach of fiduciary duty.
Goodwill and passing off
The law
i) Goodwill;
ii) A misrepresentation; and
iii) Damage.
i) Was any goodwill that it owned abandoned when it went into liquidation; and
ii) Did any goodwill that it generated accrue to the benefit of an earlier "Quickfit" company?
"The better view is that if a business is deliberately abandoned in circumstances which are inconsistent with its ever being recommenced then the goodwill in it is destroyed unless contemporaneously assigned to a new owner."
"Purilite until …November 1990 promoted further (albeit illegitimately) knowledge and acceptance in China of Ronson's get-up: the goodwill attached in law to Ronson, not the tortfeasor…."
Conversion of tooling
Conversion of design documents
Knowing receipt
Limitation
" One may conclude that the effect of an order to wind up is to convert the contractual rights of the creditors into proprietary rights under a trust. It may still be necessary and appropriate for a creditor to bring an action after the liquidation for the purpose of elucidating his original contractual rights, for which purpose he would have to get leave; but it is not necessary for the purpose of stopping time running against him in relation to his erstwhile contractual rights."
Infringement of design right
Common ground
i) The finial on trust for NIS;
ii) The ogee gutter bracket on trust for QCL and
iii) The wallplate also on trust for QCL.
Consent
SUMMARY
The New Action
The New IP Action
The Burnden Action
ENVOI
i) the order that I should make;
ii) questions of the costs both of the three actions I have tried and the costs of the Leeds Consolidated Action;
iii) any applications for permission to appeal against this judgment.
Ü