England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
IN THE MATTER OF SPARTAN CAPITAL LIMITED
AND IN THE MATTER OF THE INSOLVANCY ACT 1986
BETWEEN:

KEA INVESTMENTS LIMITED

		21/12/2016

Mr Justice Nugee :

Introduction

1. This judgment is a postscript to my judgment arising out of a recent CMC, which I handed down on 16 December 2016 and which has the neutral citation [2016] EWHC 3259 (Ch). It deals with the third application there referred to, namely Novatrust's application for specific disclosure. This was argued before me by Mr Jamie Goldsmith for Novatrust, and Ms Jones QC for the claimants. There are two classes of documents still in dispute. The first, which I will call "the Roten communications", are all documentary communications in the period September to November 2011 (inclusive) between Sir Owen, on the one hand, and Mr Roten or Messrs Miller and Dickson on the other hand, containing discussion of whether Sir Owen could or would influence the Corona Trust or have any connection with it. The second class, which I will call "the Wyoming Trust communications", are all non privileged documentary communications in the period September 2011 to July 2012 (inclusive) which show that a reason why US/Wyoming Trusts were proposed to be established for Sir Owen's US based children and grandchildren was because of the changes to the entitlements of such persons under or in respect of the assets held by the Corona and/or Regency Trusts in September/October 2011. In each case it is accepted that the communications should not include any privileged documents; it is also accepted that the relevant documents do not include documents recording the content of any tax advice or of Sir Owen's intentions in setting up the Trust structures or assets being transferred to the Trusts in 2009 (and it is accepted that the documents may be redacted accordingly).
2. The principles are not in dispute. By CPR r 31.12 the Court may make an order for specific disclosure. Before making such an order the Court will need to satisfy itself that the documents are or have been in the parties' control and that the documents are relevant to the issues pleaded in the proceedings, or at least that there is a prima facie case that these requirements will be met: see White Book at note 31.12.2. Relevance is judged by reference to the pleadings. If these requirements are satisfied the Court has a discretion whether to order disclosure, and will exercise such discretion by taking account of all the circumstances of the case and in particular of the overriding objective.

The Roten communications

3. Mr Roten is a lawyer at Duane Morris, a firm of Los Angeles attorneys. He acted as a transaction lawyer in the sale of OTSLG, a company held by the Corona Trust. I was shown by Mr Goldsmith extracts from an e-mail chain. This is heavily redacted but its subject matter is the "revised SPA", which I take to be a reference to the agreement for the sale of OTSLG, and it consists of e-mails passing between Mr Roten and a Ms Annelize Taylor, a lawyer acting for the proposed purchaser. On 1 October 2011 Mr Roten wrote, under the heading "Side Letter":

"The concept of "Connected Person" is inapplicable here. In the irrevocable third party trust structure, Owen is neither a trustee nor a beneficiary. He has no ability to procure what a "Connected Person" might do. There is no connection between Owen & the trust; otherwise the trust would be considered a sham, which absolutely must be avoided. Owen is the person with the relevant competitive knowledge & skill, & he would be restricted by the non-competition covenants affecting him personally."

A reply dated 6 October 2011 from Ms Taylor said:

"We do not see that Mr Glenn would have no ability to procure the actions of a Connected Person, as we assume the structure arises only for tax planning and is not managed and benefiting people unconnected to him."

Mr Roten's reply dated 26 October 2011 said:

"He [Sir Owen] cannot compel the Trust to do anything or refrain from doing anything. The Trust is irrevocable. Mr Glenn's relationship to the Trust will not change. It is a non-negotiable point that nothing can be done in the proposed transaction that would cast doubt on the validity & sanctity of the Trust. Mr Glenn will provide the requested non-compete, &c, in the Side Letter, but he will not agree to do anything that could be seen, directly or indirectly, as influencing the trust.

Mr Glenn personally is the individual who built the company and is the key person to prevent competing with the acquirer. He is willing to sign such an agreement, but he will not act in any respect to influence the trust. Your assumption about the ownership structure apparently designed primarily for tax planning is not correct."

Ms Taylor replied on 21 November 2011 to the effect that the purchaser was prepared to accommodate the concern and had removed reference to Connected Persons.

4. Mr Goldsmith says that what that e-mail chain appears to show is that the purchasers wished to have a covenant from Sir Owen not to compete with the business being sold; that Sir Owen was willing to give such a covenant himself; but Mr Roten was not willing that he should give a covenant in relation to the Trust not competing because of a concern that for him to do so might cast doubt on the proposition that he had no connection with the Trust; and he did not wish Sir Owen to enter into an agreement that could be seen directly or indirectly as suggesting that he was in a position to influence the Trust's actions. Mr Goldsmith says that the likelihood from the e-mail chain is that what Mr Roten said was approved by, or emanated from, Sir Owen himself. That, he says, is a reasonable inference; and if so, any communications indicating that Sir Owen knew that he could have no influence, direct or indirect, over the Trust would be relevant to his pleaded case, in support of the allegation that Mr Watson owed him personally a fiduciary duty, that he had a legitimate expectation of being consulted about investments of the Corona Trust; see response 1.3(d) of the response to the request for further information.
5. Ms Jones accepts that one of the issues is whether Sir Owen was entitled to be consulted or had a legitimate expectation of being consulted, and whether the trustees should have taken notice of what he said. She said that there was nothing in the e-mail chain, or any communications from Sir Owen to Mr Roten which might have formed the basis of the position that he was taking, which was relevant to that issue. In doing so she sought to draw a line between Sir Owen having any control over the trust (something which is neither the Claimants' case nor the Defendants') or having any influence over the trust, and him having a legitimate expectation of being consulted, and the trustees taking account of his views.
6. I am not persuaded that there is the sharp distinction that she seeks to draw. It does seem to me that the natural inference from the e-mail chain is that Mr Roten understood that there was an imperative need that Sir Owen should not be seen to have any right or ability to influence the actions of the trust. If, and I agree with Mr Goldsmith that this seems at least a reasonable supposition, that understanding was derived from communications emanating, directly or indirectly, from Sir Owen, the content of those communications would, it seems to me, shed light on the question whether Sir Owen did have an expectation of being consulted about the trust investments, and whether such expectation was a legitimate one. I accept that Sir Owen's case that he did have that expectation is in no way inconsistent with his case that he had no control over the trustees' actions; whether it is consistent with a position that he was to have no influence over their actions depends on quite what one means by influence, a word that Ms Jones herself said was an amorphous one. It does seem to me that what Sir Owen did or did not say, if anything, to Mr Roten, either directly or through Messrs Miller and Dickson, as to his understanding of what he could or could not do in relation to the Trust, is prima facie relevant to the pleaded issue that he had a legitimate expectation of being consulted and of the trustees taking notice of his views.
7. Ms Jones expressed concern that this was a fishing expedition, designed to embarrass Sir Owen. The Claimants' fears have been heightened by the disclosure of an e-mail trail between Mr Watson and others which appears to indicate that Mr Watson in 2013 thought that he could use a threat to expose the Trust as a sham to persuade Sir Owen to settle anticipated litigation. But that does not seem to me to be the purpose for which Mr Goldsmith was seeking the Roten communications. No party to these proceedings suggests that the Corona Trust was a sham. Rather the relevant issue in these proceedings is whether Mr Watson owed a fiduciary duty to Sir Owen personally, and relevant to that issue is, or may be, the extent of Sir Owen's connections with the Corona Trust. His understanding of the position in the autumn of 2011 at the time of Mr Roten's emails does seem to me to be potentially relevant to that issue. I also accept that it is prima facie probable that the communications with Mr Roten that are sought are likely to shed light on that issue. In those circumstances it does seem to me to be appropriate that the limited searches which are sought by the application should be made and that specific disclosure should be made of the documents as specified in paragraph 17 and 18 of the draft order put before me.

The Wyoming Trust communications

8. The background to this limb of the application is as follows. There were two relevant Trusts, the Corona Trust and the Regency Trust. Until the end of October 2011, the Corona Trust held, indirectly, OTSLG, the valuable business built up by Sir Owen; and the Regency Trust held the benefit of a loan note of some $82m, the debt being owed by a company held by the Corona Trust. The Corona Trust was irrevocable, but the Regency Trust was revocable by Sir Owen. On 31 October 2011 the assets of the Regency Trust were transferred to the Corona Trust, a transfer which has been referred to as "decanting" and which Sir Owen alleges was carried out without his knowledge. Until shortly before the decanting, Sir Owen's US-based children and grandchildren were beneficiaries of the Corona Trust and of the Regency Trust. In September 2011 the Corona Trust was amended to remove the US descendants as beneficiaries. Sir Owen's case is that he did not know about this either. The practical effect of (i) the exclusion of the US descendants as beneficiaries of the Corona Trust and (ii) the decanting of the assets of the Regency Trust into the Corona Trust was that the US beneficiaries could no longer benefit from either of these Trusts.
9. It appears from documents that have been disclosed that in the early part of 2012 Sir Owen was contemplating setting up new Wyoming based Trusts for his US descendants. This much is not disputed, so I need not go into the documentary evidence for this in any great detail, but will simply refer to some of the relevant documents which I was referred to. The earliest is an e-mail from Sir Owen dated 18 January 2012 in which he refers to requesting Russell (that is Mr Roten) if he would consider acting as a trustee over his USA based descendants. A subsequent e-mail of 23 June 2012 from Sir Owen to Mr Miller refers to Mr Miller not having sent the proposed deeds of the "Wyoming Trusts you are proposing for my USA domiciled children." In a letter of 4 November 2016, Farrers, the Claimants' solicitors, refer to the fact that Sir Owen did plan to set up Wyoming Trusts in connection with gifts to his US children following the OTS sale, but in the event decided not to proceed with them.
10. Mr Goldsmith pointed out that only a few months after Sir Owen's US based descendants had been effectively excluded from the existing Trusts, he was contemplating setting up new trusts for them. He says that it would be a remarkable coincidence if the two were unconnected, and the inference that he suggests can be drawn is that Sir Owen indeed must have known about the two steps taken in September and October 2011 which together had the effect that his US descendants could no longer benefit from the Corona and Regency Trusts. In those circumstances he wants the Claimants to review the documents relating to the establishment of the Wyoming Trusts between September 2011 and July 2012 to see if there are any documents which show that a reason why the Wyoming Trusts were proposed to be established for Sir Owen's US based descendants was because of the changes of the entitlements of such persons to assets held by the Corona and Regency Trusts. He made it clear in argument that all that the Defendants were seeking was a re-review to look for documents which indicate that this was the reason, or one of the reasons, why the Trusts were proposed to be set up. If on such a re-review the Claimants' solicitors came back and said "we have looked and there is nothing that shows that; it was for personal reasons that had nothing to do with this", then Mr Goldsmith accepted that the Defendants did not wish to see such documents.
11. Ms Jones objected to the disclosure. She made in effect three points. The first was that if the money from the sale of OSTLG was to be held in Corona the fact that Sir Owen was contemplating making gifts to his US based descendants (whether through the means of the Wyoming Trusts or any other way) indicated that he cannot have appreciated that the proceeds of sale of OTSLG in the Corona Trust would no longer be available for that purpose. Far from this proposal showing that Sir Owen knew about the changes in 2011, it showed completely the opposite. Mr Goldsmith's answer to that was that there was other evidence that Sir Owen expected to receive some money in other ways from the sale of OTSLG. I do not think I can on this application decide who is right about that.
12. Ms Jones' second point was that the Defendants could already invite the Court to draw the inference that they sought to be drawn, and could ask Sir Owen questions about it, and therefore they did not need any further disclosure. That again does not seem to me to be an answer to the application. Mr Goldsmith made it clear that, although they had their suspicions as to the reasons why the Wyoming Trusts were set up, what they wanted to see was whether there was any documentary support for that in the Claimants' documents. That seems to me to be the normal purpose of seeking disclosure, it being the case that it is a great deal easier for the Court to ascertain where the truth on such a question of fact lies if it has sight of relevant contemporaneous documents rather than having to rely on inferences. Indeed, one would have thought that this point cuts both ways. If the reality is, as the Claimants say, that there were other considerations entirely which prompted the proposal to establish the US Trusts, one would have thought it might have been in the Claimants' interests to search for, find, and put before the Court, documents demonstrating that the inference which the Defendants sought to draw was in fact ill-founded. I therefore do not find this second answer to the application persuasive either.
13. The third answer given by Ms Jones is that all that the Defendants could say was that there might be other documents and that meant that the application was a fishing expedition. By that I understand her to mean that the Defendants do not actually know if there are any documents which fall into the category which they seek, namely documents showing that one of the reasons why the Wyoming Trusts were established was because of the changes to the Corona and Regency Trusts. I do not think that this is a good answer to the application either. The way that I see it is this: the material that Mr Goldsmith showed me does make it prima facie likely that the Claimants have in their possession documents which shed light on the reasons for the proposed establishment of the Wyoming Trusts. For the reasons given by Mr Goldsmith, the reasons for the establishment of the Wyoming Trusts are potentially relevant to the issue whether Sir Owen did or did not know of the two steps taken in September and October 2011 which had the effect that his US descendants could no longer benefit from the Corona and Regency Trusts. In those circumstances it does seem to me to be appropriate for the Defendants to seek disclosure of documents which shed light on that question. The fact that Mr Goldsmith has confined his application to merely asking for such documents as show that one of the reasons was the changes of Sir Owen's US-based children and grandchildren to entitlement under the Corona and Regency Trusts does not, I think, affect the principle. It may mean that if the Claimants are right there will in fact be no documents which are responsive to this application. But it does seem to me that documents which shed light on the reasons why the Wyoming Trusts were proposed are potentially relevant to this question, and that the fact that Mr Goldsmith has said that the Defendants do not require to see such documents unless they support the inference which Novatrust will invite the Court to draw, does not materially affect the position.
14. I will therefore grant the application in the form of paragraphs 19 and 20 of the draft order put before me by Novatrust.