Scottish Court of Session Decisions

Pursuer: Ellis, Q.C.; Burness LLP

Defender: Hawkes; McLure Naismith LLP

25 March 2011

[1] This is a motion for interim decree against the second defender, which failing, summary decree, in the sum of £850,000. As a further fall back, the pursuer seeks payment of £733,793.36, in each case with interest from
2 August 2010 until payment.

Background Facts
[2] The facts are not in dispute. The pursuer ("Mr Barr") and the second defender ("Hawkhill") were parties to a joint venture, which may or may not have included the first defender ("Mr Gilchrist"). Mr Barr provided the joint venture with £1 million as a fifty per cent contribution to that venture which was established to purchase and resell Omne House, an office building at Riverside Business Park, Irvine. Mr Barr and Hawkhill entered into a short minute of agreement dated 7 September
2005 in which the parties agreed (i) to contribute equally to the purchase of the property, (ii) that the property would be sold on as advantageous terms as possible, and (iii) that the net profit on sale of the property would be divided equally between Mr Barr and Hawkhill.

[3] Mr Gilchrist, who is an architect, owned one hundred per cent of the shares in Hawkhill. He has had other dealings with companies under the control of Mr Barr. Certain disputes have arisen between entities controlled by Mr Gilchrist and those controlled by Mr Barr.

[4] The third defender ("Fearann") was incorporated in 1994. Its directors were Mr Gilchrist and his wife, who is the fourth defender ("Mrs Gilchrist"). By 2008, all of the shares in Fearann were held by Mrs Gilchrist. In about July 2010, Mr Gilchrist's shares in Hawkhill, were transferred to Fearann, which thereby became the parent company of Hawkhill in return for two hundred shares in Fearann. Thereafter, Mrs Gilchrist transferred her shares in Fearann to Mr Gilchrist, making him the sole shareholder in Fearann.

[5] In about August 2010, Hawkhill transferred the title to Omne House to Fearann for a consideration of £1,700,000. This reflected an independent valuation of the property at about that date. Fearann borrowed money from The Royal Bank of Scotland plc to fund the acquisition. Thus the property was transferred from the company, which was a party to the joint venture and was under the control of Mr Gilchrist, to another company in his control, which was not a party to the joint venture.

[6] The first to third defenders aver in Answer 9 of their defences:

"Explained and averred that the second defender has various claims for payment against Barr Heritable Limited (the pursuer's trading company) arising from other developments, which are the subject of separate proceedings in this court. At a meeting between the pursuer and the first defender before either proceedings were raised, the pursuer stated that these claims were not going to be paid. No reason was given. In light of the pursuer's stated position, the second defender, in an attempt to improve the position of the third defender in relation to the third defender's claim against the pursuer's trading company, Barr Heritable Limited, undertook the transfer of the property to the third defender."

[7] At a Preliminary Hearing in this action on 23 March 2011 Mr Hawkes accepted that, along with others, Hawkhill was liable to account to Mr Barr for a one-half share of the net value of the property and also for his share of the rental earned from the property since 2005, less disbursements which Hawkhill had made and fees which Hawkhill claimed were due.

The Pursuer's motion
[8] Mr Ellis explained that he sought interim decree or summary decree against Hawkhill in terms of his fifth plea-in-law which stated:

"The second defender having disposed of the trust property and the first and fourth defenders having knowingly effected and facilitated the sale are liable to the pursuer in the value of the property disposed of in breach of trust et separatim to make reparation for loss and damage sustained by the pursuer as a result."

[9] He submitted that the member of a joint venture, like a partner in a partnership, was a fiduciary in relation to the property of the joint venture and referred me to section 20(1) of the Partnership Act 1890 which provides:

"All property and rights and interests in property originally brought into the partnership stock or acquired, whether by purchase or otherwise, on account of the firm, or for the purposes and in the course of the partnership business, are called in this Act partnership property, and must be held and applied by the partners exclusively for the purposes of the partnership, and in accordance with the partnership agreement."

[10] Hawkhill had transferred the property which it held as a fiduciary to an entity which was equally in the control of Mr Gilchrist for purposes which were not connected with the interests of the joint venture. That was, Mr Ellis submitted, a breach of trust.

[11] He referred me to Rule of Court 21, which empowered the court to grant summary decree for part of an action if satisfied that there was no defence to that part. He also referred me to Watson Powers Ltd v MacPhail 1986 SLT 617 and Daks Simpson Group Plc v Kuiper 1994 SLT 689 as examples of the court exercising such a power. See, in particular, in the latter case Lord Sutherland at page 691D-F.

[12] In support of the summary decree motion, he submitted that there were no disputed issues of fact to be resolved. He referred to the speech of Lord Rodger of Earlsferry in Henderson v 3052775 Nova Scotia Ltd 2006 SC (HL) 85 in which he stated (at paragraph 19):

"The judge can grant summary decree if he is satisfied, first, that there is no issue raised by the defender which can be properly resolved only at proof and, secondly, that, on the facts which have been clarified in this way, the defender has no defence to all, or any part, of the action. In other words, before he grants summary decree, the judge has to be satisfied that, even if the defender succeeds in proving the substance of his defence as it has been clarified, his case must fail."

The defenders' reply

[13] Mr Hawkes accepted the existence of the fiduciary duty and the facts which I have stated above. He explained that the first to third defenders had not admitted breach of trust and submitted that interim decree was therefore inappropriate.

[14] In opposing the motion for summary decree, Mr Hawkes referred me to the Stair Memorial Encyclopaedia, volume 12 in the section on trusts where at paragraph 177 it is stated:

"Purchase of trust property by relatives, companies etc

A sale to the wife or other close relative of a trustee is not automatically a breach of fiduciary duty; the circumstances must be examined, and it is only when the wife or other relative can be regarded as the alter ego of the trustee that there will be a breach of duty. Any sale to an agent or nominee of the trustee will obviously give rise to a breach of duty. A sale to a company in which the trustee has an interest, either as a shareholder or as a director, may be set aside, but it appears that such a transaction is not an automatic breach of fiduciary duty; instead, the court must investigate the nature and circumstances of the sale and determine whether it was in fact fair."

Mr Gilchrist had had control of Hawkhill; he also has control of Fearann and thereby retains control of Hawkhill. Mr Hawkes questioned whether in circumstances there was a breach of trust. He also referred me to Dunn v Chambers (1897) 25 R 247 in support of the view that there could be circumstances in which there would need to be an enquiry into the facts where a transaction appeared to be a breach of trust. However, when pressed whether there were any facts which were relevant to the transaction and which he considered needed to be ascertained at a proof in this case, he candidly accepted that there were not.

Decision
[15] I am satisfied that Hawkhill is clearly in breach of trust and that it has no defence to Mr Barr's claim for payment of £850,000 and interest. The joint venture is a species of partnership: Mair v Wood 1948 SC 83, Lord President Cooper at p.86. It was not disputed that Hawkhill owed fiduciary duties to the joint venture and to Mr Barr. Hawkhill's transfer of the property to Fearann for the reason which the defenders averred and which I have quoted in paragraph [6] above was not an application of the property for the purposes of the joint venture and amounted to a breach of fiduciary duty.

[16] Mr Barr is prepared to accept the independent valuation of the property to which I referred in paragraph [5] above. There are no averments that Hawkhill incurred expense in the transfer of the property to Fearann. There are therefore no deductions to be made from the £1.7 million sale proceeds. Accordingly, Mr Barr's claim for his one-half share of the property is valued at £850,000.

[17] Hawkhill claims that it is entitled to deduct in any accounting about £232,413 in respect of disbursements on the property and a fee for having acted as the managing agent. That claim was pleaded against Mr Barr's claims. But Mr Barr has claims both for the capital value of the property and also for his one-half share of the rental of £186,500 per annum which Hawkhill has received between 2005 and 2010. The first and third defenders, as I have said, admit liability to account for that rental income net of costs. Hawkhill's claim, if established, falls to be set off against its obligation to account for the rental which it has received in that period.

[18] In the circumstances, Hawkhill has no defence to the pursuer's fifth conclusion for payment of £850,000.

Conclusion
[19] I therefore sustain the pursuer's fifth plea-in-law and award summary decree against Hawkhill for £850,000 with interest thereon from
2 August 2010 at the judicial rate.