England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		03/02/2017

Chief Master Marsh:

1. On 21 September 2016 I heard an application made by the second defendant ("Mr Anstead") applying to strike out certain provisions in the particulars of claim pursuant to CPR 3.4(2)(a) on the basis they disclose no reasonable grounds for bringing a claim against him. It is common ground that the elements of the claim to which objection has been taken should not be struck out unless they are bound to fail. Mr Grantham, who appeared for the claimants, also submitted, relying on observations made in the Court of Appeal in Richards v Hughes [2004] EWCA Civ 266 that it is inappropriate to strike out a claim in an area of developing legal principles.
2. Prior to the hearing, the claimants issued an application seeking permission to amend the particulars of claim. The hearing proceeded on the basis that the claimant's case against Mr Anstead was that set out in the draft amended particulars of claim and on the basis that the facts relied upon by the Claimants (which I will summarise shortly) will be established.
3. Following the hearing, Mr Grantham provided a supplementary note concerning an issue that arose during the course of the hearing to which Mr Bennion-Pedley who appeared for the second defendant made a response. I need only say that these further submissions have added nothing to the determination made in this judgment.

The Claim

4. The claim arises in connection with the manufacture and sale of a limited number of motor vehicles based on Aston Martin's DB4 GT Zagato. It will be convenient when referring to these vehicles to describe them as "Zagatos".
5. The first claimant is engaged in a range of commercial business activities which includes the wholesale and retail sale of motor vehicle parts and accessories. The first defendant ("Evanta") is engaged in the design and manufacture of replicas of or vehicles inspired by British sports cars. Mr Anstead was at all material times a director and shareholder of Evanta.
6. The claimants' case is that on about 21 January 2014 an informal joint venture agreement ("the JV Agreement") came into being. It is said that the first claimant, the second claimant ("Antkahn") and Evanta were parties. Mr Anstead was not a party.
7. The JV Agreement is pleaded on the basis that there were a number of express and implied terms. Antkhan was incorporated on 7 January 2014 and the claimants' case is that Antkahn was intended to be operated as the corporate entity through which the joint venture was to be executed. For the purposes of this application, the relief sought by the claimants can be summarised in the following way:

i) As against Evanta, Antkahn seeks an account of all monies received arising out of or in anticipation of any sale or agreement to sell any Zagatos.

ii) As against Mr Anstead, Antkahn seeks an account of all monies received by or on behalf of him arising out of or in anticipation of any sale or agreement to sell any Zagatos procured by breach of fiduciary duty owed by Mr Anstead.

iii) As against Evanta and Mr Anstead, Antkahn seeks damages for conversion or, alternatively, an account of profits arising out of the sales or other dealings with the Zagatos. For the purposes of this element of the claim, Antkahn says that Evanta and Mr Anstead were joint tortfeasors.

8. The essential facts which are relevant to Mr Anstead's strike out application (taken from the claimants' summary) are:

i) Ankahn was incorporated with Mr Anstead's knowledge and involvement.

ii) Antkahn was a trading company.

iii) Mr Anstead was a director of Antkahn and remained such until 27 January 2015.

iv) Antkahn was incorporated to be the joint venture vehicle for the sale of Zagatos.

v) The Zagatos were to be manufactured by a third party company called Envisage pursuant to a contract with Antkahn.

vi) Property in the Zagatos vested in Antkahn pending sale.

vii) Evanta was entitled to sell Zagatos, but only as agent for Antkahn.

viii) Mr Anstead had no intention that either he or Evanta would account to Antkahn.

ix) Evanta has failed to account for any proceeds of sale arising from the sale of Zagatos. Evanta admits receiving £776,166.69 whereas Antkahn believes the minimum sum received was £1,076,500.

x) By October 2014 the claimants had requested information about sales but the Defendants had failed to provide any information.

9. Sub paragraph vii) above refers to Evanta's role as agent for Antkahn. It is an important part of the claimant's case that Evanta was only entitled to sell Zagatos as agent for Antkahn and on the basis that Evanta was bound to account to Antkahn in respect of the proceeds of sale. This is a part of the case which will require further analysis, as will the claim that neither Evanta nor Mr Anstead had any intention of accounting to Antkhan for sums received on the sale of vehicles.
10. Mr Anstead's application has to be considered against the case which has been pleaded against him. Following the issue of his application, further thought has been given by the claimants to the way in which their case is put and this is reflected in the draft amended particulars of claim. Where I set out passages from that document, I do not distinguish by underlining or otherwise between the old or new pleading.
11. The Claimants' case in conversion as against Evanta is put in the following way:

"62. Further and in the alternative, by selling or agreeing to sell the said Zagatos effectively as principal without accounting to the second Claimant for the proceeds of sale the first Defendant has wrongly converted and/or unlawfully interfered with the same. By way of clarification the Claimants will say that:

62.1. The first Defendant was only permitted to sell as agent for and on behalf of the second Claimant and that by selling the Zagatos on behalf on the first Defendant and with no intention of accounting to the second Claimant for the proceeds of sale the first Defendant acting by the second Defendant sold the Zagatos in breach of such permission and accordingly converted and/or wrongly interfered with the same.

62.2. In respect of those Zagatos that the first Defendant has not delivered to the purchasers thereof the Claimants will say that the first Defendant was in possession of such vehicles with apparent authority to sell the same and/or the second Claimant entrusted and/or permitted the first Defendant to have possession of the Zagatos together with tests and title documentation thereby clothing the first Defendant with apparent ownership. In the premises the first Defendant was able to pass property to the said purchasers notwithstanding the fact that property remained vested in the second Claimant."

12. The claim against Mr Anstead both as to breach of fiduciary duty and conversion is put in the following way:

"64 In breach of the second Defendant's fiduciary duties to exercise his powers for a proper purpose and/or to promote the success of the second Claimant and/or to avoid a conflict of interest he has failed as director of the second Claimant to require the first Defendant to sell the Zagatos as agent for and on behalf of the second claimant and/or to require the first Defendant to account to and/or himself to account to the second Claimant for the monies arising upon the sales of Zagatos. Further and in the alternative, the second Defendant failed to inform the second Claimant of his wrongful conduct in acting as aforesaid and/or in causing, permitting or suffering the first Defendant to sell the Zagatos with no intention of accounting to the second Defendant for the profit upon such sales.

65 [Deleted]

66 In the circumstances the second Defendant is liable to compensate the second Claimant in equity or pay damages to compensate the second Claimant for the losses which it has suffered by reason or the failure of the first Defendant to pay such monies to the second Claimant.

67 Further and in the alternative, the second Defendant is severally and/or jointly liable along with the first Defendant for wrongly converting or unlawfully interfering with the Zagatos. The second Claimant repeats paragraphs 62 and 63 hereof. By way of clarification the Claimants will say that the first Defendant acted at all times by the second Defendant and accordingly is personally liable in respect of his tortious conduct."

13. During the course of the hearing Mr Bennion-Pedley criticised the drafting of paragraph 64 and submitted that in relation to the allegation that Mr Anstead had failed to inform Antkahn of his wrongful conduct, no case on causation had been pleaded. Over the short adjournment, Mr Grantham formulated a proposed addition to paragraph 64 to be added at the end of that paragraph:

"Had the second Defendant informed the second Claimant that he intended to cause, permit or suffer the first Defendant to sell any Zagatos without accounting to the second Claimant for the proceeds of sale then the second Claimant would have taken such steps as were necessary to ensure the delivery up of the Zagatos to it including the application for an interim order for the delivery up of the Zagatos or alternatively applied for an interim injunction prohibiting the first Defendant from selling the Zagatos save on the basis that it account for all proceeds of sale to the second Claimant."

Breach of fiduciary duty claims

14. It seems to me it is helpful to start a consideration of the claims made against Mr Anstead for breach of fiduciary duty by recognising that at the time Antkahn was formed and subsequently the joint venture agreement was entered into, he was, and had been for some time, a director of Evanta. Self-evidently he owed fiduciary duties to Evanta. By accepting an appointment as a director of Antkahn, he became subject of fiduciary duties to that company. However, the parties chose to regulate their business relationship by reference to the JV Agreement, albeit that its terms were not recorded formally in an agreement.
15. Paragraph 64 of the draft amended particulars of claim relies on three different types of fiduciary duty arising respectively from section 171, section 172 and section 175 of the Companies Act 2006. It is necessary to deal with them in turn.
16. The complaint arising from section 171 is that Mr Anstead failed to comply with section 171(b) which required him only to exercise powers for the purposes for which they were conferred. The claim, however, is put on the basis not that he improperly used powers but that he failed, as a director of Antkahn, to require Evanta to sell the Zagatos as agent for and behalf of Antkahn. Two points arise from this pleading. First, the claimants positively assert that Evanta sold the Zagatos as agent for Ant Kahn, not that it failed to do so. Secondly, the only basis upon which Evanta could act was by Mr Anstead, as its director, taking steps on behalf of Evanta in accordance with his fiduciary duties to that company (not Antkahn). The agency agreement was between Antkahn and Evanta and the implementation of that agency agreement by selling Zagatos could only have been undertaken by Evanta acting through Mr Anstead.
17. The duty under section 172 is to promote the success of the company acting in good faith having regard to the matters set out in section 172(1). It is not clear to me how the pleading in paragraph 64 relies upon what is said to be a breach of the duties arising under that section. The way it was put by Mr Grantham at the hearing is that Antkahn was a trading company the success of which was to be measured by reference to the sale of Zagatos by its agent Evanta. It is said that no reasonable director of Antkahn could reasonably have thought that acting as Mr Anstead did was in the best interests of Antkahn. Rather, Mr Anstead was acting in the best interests of Evanta.
18. The complaint however, is that Mr Anstead failed to require Evanta to account to Antkahn for the monies arising from the sale Zagatos. Mr Bennion-Pedley submitted that this conflates the remedy with the breach. Mr Anstead had, himself, no duty to account either as a director of Antkahn or as a director of Evanta and therefore could not be in breach of that duty.
19. It seems to me, in any event, that the element of paragraph 64 asserting a failure by Mr Anstead to account must be struck out.
20. Under section 175(1) a director must avoid a situation in which, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. This general duty is subject to:

i) subsection (3) which makes it clear that a duty does apply to a conflict of interest arising in relation to a transaction or arrangement with the company;

ii) subsection (4) the situation cannot reasonably have been regarded as likely to give rise to a conflict of interest or the matter has been authorised by the directors (in accordance with subsections (5) and (6)).

iii) subsection (7) which provides that a reference to a conflict of interest includes a conflict of interest and duty and a conflict of duties.

21. The way the case is put against Mr Anstead is that he failed to inform Antkahn of his wrongful conduct. It is not entirely clear to me what wrongful conduct is being referred to: "as aforesaid" could refer to a number of different allegations and it may be a hangover from earlier drafting which has been removed. In any event, it is positively asserted that there was wrongful conduct by Mr Anstead "in causing, permitting or suffering [Evanta] to sell the Zagatos with no intention of accounting to [Antkahn] for the profits upon such sales." There then follows the additional wording seeking to make out a case on causation based on the steps the claimants would have taken had they been so informed.
22. As I indicated at the hearing, I find the addition "with no intention of accounting" troubling. They also appear in paragraph 62.1 in the conversion claim made against Evanta. Mr Bennion-Pedley submitted that the claimants must show Mr Anstead's conduct was wrongful in relation to Antkahn, that there was a duty to inform and that a case can be made to show a causal link between a failure to inform and loss sustained by Antkahn. This requires a degree of analysis.
23. The starting point, as it seems to me, is that the claimants positively assert that Evanta, as agent for Antkahn, was under an obligation to sell Zagatos. Thus the sale of such vehicles fulfilled a duty, rather than amounted to a breach. Any step taken by Mr Anstead to promote sales of Zagatos by Evanta acting as agent for AntKahn could not be complained about. The claimants seek to get round this difficulty by pleading that sales of Zagatos took place with Evanta having no intention of accounting for the proceeds of sale. This is a curious way of putting the claimants' case. Even assuming against Mr Anstead the accuracy of the assertion made against him, it seems to me that the claimants have attempted to conflate the sale, or sales, with the duty to account. It is almost as if the claimants are, in reality, seeking to say that Evanta and Mr Anstead conspired together to cause loss to Ant Kahn but that is not the way in which the claim is pleaded. It is confusing to put together an objective act, namely a sale, with what is said to be a subjective state of mind. The two do not sit easily together.
24. The claimants rely upon the decision of the Court of Appeal in Item Software (UK) Ltd v Fassihi and others [2004] EWCA CIV 1244 as authority for the proposition that a director is under a duty to disclose his own misconduct. For the purposes of this application, I accept that, in general terms, the claimants will be able to establish that such a duty exists. However, the difficulty for the claimants is that a duty to disclose misconduct arises after the misconduct has occurred. There is no authority for the proposition that a director who is thinking about acting improperly, or even with a firm intention to act improperly, must give notice of that intention in advance. The way in which the claim has been put, with the link between the sale and Mr Anstead's intention, has difficulty. Even if at the time the sales took place, Mr Anstead was intending not to account for them, until the failure to account had occurred, he was not in breach of any duty.
25. As to the case on causation which was developed by the claimants during the course of the hearing, it relies upon Mr Anstead informing Antkahn he was intending to fail to account for the proceeds of sale. It is therefore reliant upon their duty which, to my mind, does not exist. It follows that the additional pleading does not assist the claimants.
26. It also seems to me that there is a high degree of artificiality about the conflict of interest case. As I indicated at the outset of this judgment, it was known to Antkahn at the time the joint venture agreement came into being that Mr Anstead was a director of Evanta and, inevitably, there would be instances where his duties to Evanta would conflict with duties to Antkahn. It seems to me that the commercial reality of the arrangement made between the parties is that they recognised the conflict of interest (albeit tacitly) and catered for the obligations arising between the two principal entities, Antkahn and Evanta by the terms of the joint venture agreement. It is completely artificial, to my mind, to impose fiduciary duties arising from a conflict of interest upon those contractual obligations given that Mr Anstead was at all times under an obligation to act in the best interests of Evanta.
27. For the reasons I have given it appears to me that the allegations made against Mr Anstead in respect of breach of his fiduciary duties owed to Antkahn are bound to fail and must be struck out.

Joint liability for conversion

28. The central factual points are that Evanta was appointed as agent for Antkahn and sales took place by Evanta acting in accordance with that agency. The way the case is put is that by selling the Zagatos as agent on behalf of Antkahn, with no intention of accounting, Evanta was acting outside the scope of its authority and is accordingly liable in conversion. In relation to sales in respect of which Evanta has not delivered the vehicles to purchasers, the claimants rely on the somewhat convoluted pleading in paragraph 62.2.
29. Mr Bennion-Pedley relies upon two extracts from Clerk & Lindsell on Torts 21^st Ed. At paragraph 17-08 the authors say that it is not possible to categorise exhaustively all modes of conversion and then set a number of occasions when a conversion will arise. They go on to say:

"It goes without saying that an act cannot be "wrongful" for these purposes if done with the actual permission of the owner. Where the owner intends to transfer dominion to the defendant or otherwise to sanction the Defendant's action, there is no conversion, and this remains so even though the Defendant or some party is guilty of fraud."

30. In support of this proposition reference is made to a Canadian case: Toronto-Dominion Bank v Carotenuto (1998) 154 DLR (4^th) 627. There is apparently no English authority on this point.
31. In relation to conversion by delivery, at paragraph 17-16 the authors say:

"… A person who without authority actually delivers another's goods to a third party by way of sale or gift, or otherwise in a manner adverse to the right of the person really entitled, is treated differently and is presumptively guilty of a conversion."

32. In a footnote referring to acting in a manner adverse to the right of the person really entitled the authors observe:

"This requirement is important. If the owner has in any way consented to delivery it is not contrary to his rights and hence there can be no conversion. For an example, see the Canadian decision in Lloydminster Credit Union Ltd v 324007 Alberta Ltd [2011] SKCA 93 …".

33. As an initial observation, it strikes me that the claim in conversion is a surprising addition to this claim. The essence of the claimant's case is that there was a joint venture and that Antkahn was the joint venture vehicle. The joint venture was subject to the JV Agreement pursuant to which Evanta was appointed as agent for the purpose of selling Zagatos. Paragraph 62 of the draft amended particulars of claim is based upon the premise that Evanta and Mr Anstead, as joint tortfeasors, converted the Zagatos, not the proceeds of sale of the vehicles. However, Evanta was given authority to sell the vehicles and by doing so it was performing its obligation under the JV Agreement.
34. The way in which the claimants have sought to get round this difficulty is by including an assertion that Evanta sold the vehicles with no intention of accounting to Ant Kahn for proceeds of sale. The purpose behind this additional averment is to turn what was would otherwise have been a lawful act into an unlawful act. To my mind, there is a high degree of artificiality attached to it and it is not effective in law to achieve the claimant's objectives.
35. For the reasons given earlier in this judgment, it seems to me that it is muddled to combine the objective act of sale, which was lawful, with a subjective state of mind. The draft amended particulars of claim give no details of what it is said amounted to a sale in each case. To be fair to the claimants they may not have this information. However, there must have been a contract entered into by Evanta with the customer for sale with the contract being executed by delivery of the vehicle and the receipt of payment for it. The duty to account could only arise upon receipt of payment pursuant to the contract and it does not seem to me that Mr Anstead's alleged state of mind at the point of sale, when the contract was entered into, can be said to render unlawful a sale which was otherwise lawful. Put another way, the consent given to Evanta under the JV Agreement to sell Zagatos was not negated by the subsequent failure to account and the alleged state of mind at the point of sale, concerning accounting for the proceeds, equally does not negative consent. What might be described as an unlawful state of mind when performing what is otherwise a lawful act does not necessarily render that act unlawful. Such an investigation may be necessary in connection with, say, a claim in conspiracy, but it is not relevant to a claim in conversion where the focus is upon the acts undertaken, not the subjective state of mind.
36. Mr Grantham draws attention to the fact that the authors of Clerk & Lindsell rely on Canadian authorities for the two propositions set out above. He makes the obvious point that these authorities are not binding upon this court. To my mind, it is not necessary to examine the facts of either case which are put forward in Clerk and Lindsell as examples to support the propositions they put forward. There is, I think, a useful touchstone in paragraph 17-07 in Clerk & Lindsell where conversion is described in the following way:

"… conversion is an act of deliberate dealing with a chattel in a manner inconsistent with another's right whereby that other is deprived of the use and possession of it. As will appear, the Defendant need not intend to question or deny the Claimant's rights; it is enough that his conduct is inconsistent with those rights."

37. At the time Evanta sold the Zagatos it was, on the Claimants' case, authorised to conduct sales as agent for AntKahn. It is wrong to see the act of sale as being inconsistent with Ant Kahn's rights. Rather, Evanta was performing a contractual obligation placed upon it under the JV Agreement and I do not consider that there can be liability on the part of Evanta in conversion.
38. The claim against Mr Anstead stands or falls with the claim in conversion against Evanta. Curiously, in paragraph 67 it is asserted that Mr Anstead is severally liable with Evanta for the acts of conversion. As amended it is now asserted there is joint liability. Were the claim in conversion to go forward, there might be further work for the claimants to undertake in relation to the way in which paragraph 67 is pleaded to make out joint liability but the point is academic and does not require further discussion.

Conclusion

39. For the reasons given in this judgment I consider that the claimants have no prospect of success in relation to the claims made against Mr Anstead for breach of fiduciary duties and in conversion. I do not consider that in either case it can be said a strike out is inappropriate because they are areas of law with developing principles. I will therefore make an order striking out those elements of the particulars of claim which put forward a claim against Mr Anstead, refuse permission to amend the particulars of claim and make an order removing Mr Anstead as second Defendant. There will need to be an amendment to the claim form consequential upon this order and the claimants will need to amend the particulars of claim. I will hear counsel when this judgment is handed down as to the terms of the order to be made and deal with any consequential issue which arise including dealing with the timetable of steps between now and the trial and any effect this order may have upon the trial time estimate.

Postscript

Shortly following the hearing it emerged that Evanta had gone into administration although neither the court not the claimants were aware of this. I infer that Mr Bennion-Pedley was not aware either. As a consequence of the information coming to light I notified the parties that I intended to delay delivering the judgment until the position was clarified. It was not until 14^th December 2016 it became clear that all the parties agreed the judgment should be delivered. It has taken rather longer than I would have hoped since that date to finalise the judgment.