Libertarian Investments Ltd v. Thomas Alexej Hall

CACV 54/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 54 OF 2011

(ON APPEAL FROM HCA NO. 2533 OF 2006)

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BETWEEN

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Before: Hon Tang VP, Kwan and Fok JJA in Court

Dates of Hearing: 17 & 18 January 2012

Date of Handing Down Judgment: 6 February 2012

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J U D G M E N T

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Hon Tang VP:

1.I agree with the judgment of Fok JA which I have had the advantage of reading in draft. I have nothing to add.

Hon Kwan JA:

2.I have had the benefit of reading in draft the judgment of Fok JA.  I agree the appeal and the cross-appeal should be dismissed for the reasons in his judgment.  I agree also with the costs order nisi.

Hon Fok JA:

Introduction

3.On 25 February 2011 Stone J gave judgment in favour of the plaintiff on its claim and ordered the defendant to pay the plaintiff a sum of £5,474,247.35 with interest and gave directions for the defendant to render an account and other ancillary matters.

4.From that Judgment, the defendant appeals, contending that the Judge should have dismissed the plaintiff’s action, and the plaintiff cross-appeals, contending that, instead of ordering an account, the Judge should have ordered the defendant to pay the plaintiff equitable compensation in the sum of £21,424,503.

The factual background

5.The Judge aptly described the case as being “hugely larded with detail”.  The following is a summary of the main facts by way of background.

6.The plaintiff is a company incorporated in Jersey, which was wholly owned by the late Mr Alan Woods, an astute and wealthy international investor and highly successful professional gambler, who was well-versed in the gambling and gaming world and in the field of online gaming investments.  In this context, he came to know the defendant, Mr Hall, a Hong Kong based businessman.

7.Mr Hall introduced Mr Woods to the idea of purchasing shares in a company called The Sporting Exchange Limited (“TSE”), a UK company which operated an online betting website called “Betfair”.

8.It was common ground that, in 2003, Mr Woods asked the defendant to acquire shares in TSE for his companies. The evidence was that Mr Woods was interested in acquiring 10% of TSE’s issued share capital.

9.It was intended that Mr Hall would acquire shares for Momentum Limited (“Momentum”), a company majority owned by Mr Woods (via the plaintiff) but in which shares were also held (via corporate vehicles) by a Mr Paul Longmuir (via Mental Refreshment Inc), and by Mr Hall and a Mr Christopher Parker (via InChina Limited).  These individuals signed a document dated 25 April 2003 outlining their intended acquisition of TSE shares which included the following provision:

“6. Momentum needs to provide a sum equivalent to the maximum number of shares we wish to acquire. [Mr Woods] has kindly agreed to put this money up. These funds will be placed in escrow at Sovereign Trust until the purchase is finalised and we know exactly how many shares Momentum is able to purchase. A sum equivalent to the allocated shares will automatically be transferred from escrow to the vendor. UK stamp duty will be paid at this time. The balance will be returned to [Mr Woods’] designated account.”

10.The acquisition was intended to be made by way of a general tender by Axdale Overseas Corporation (“Axdale”, a company wholly-owned by the defendant) to the shareholders of TSE.  It was originally intended that the funds for this would be deposited by Mr Woods in an account with Sovereign Trust but attempts to make the transfer were unsuccessful and so it was determined that the funds would be transferred to the solicitors handling the sale of the TSE shares.

11.Accordingly, on 13 May 2003, Mr Woods’ company Assanzon Development Corporation (“Assanzon”) transferred the sum of €50 million (equivalent to £35,790,980.67) into the trust account of the London solicitors, Berwin Leighton Paisner (“BLP”), under the reference “for Momentum Limited/Assanzon”.

12.BLP in fact designated the account as being held for Axdale.

13.A First General Tender for TSE shares in May 2003 was unsuccessful due to the exercise by the existing shareholders of certain pre-emption rights.

14.Following this unsuccessful tender, some of the funds that Mr Woods had caused to be paid into the BLP trust account were repaid to the plaintiff, namely: £1,261,359.36 on 27 May 2003 and £7,023,776.67 on 19 June 2003.

15.A Second General Tender for TSE shares followed in August 2003.  In anticipation of this, Mr Hall advised Mr Woods that further funds of £5.5 million would be required and so, on 11 September 2003, Mr Woods arranged for the sums of £3,499,994 and £2,500,000 to be transferred to the same trust account of BLP.  The sums transferred in fact exceeded the amount requested by Mr Hall by about £500,000 but it is common ground that, by this second injection of funds, an aggregate of £41,790,974.67 (i.e. the total of £35,790,980.67, £3,499,994 and £2,500,000) was remitted by Mr Woods to the BLP trust account.

16.In December 2003, 5,598,918 shares in TSE (representing 5.71% of the issued share capital) were allocated to Mr Hall’s company, Axdale, pursuant to the Second General Tender.  These were acquired for Momentum at a price of £3.10 per share, making a total outlay of £17,356,645.  This acquisition has been referred to as the second tranche acquisition because Mr Hall had earlier, in December 2002, acquired a first tranche acquisition of 125,000 TSE shares (which became 1,250,000 after a 10 for 1 split in 2003) through his wholly-owned company Jamesteer International Limited, which he then onsold to Growthline Limited (whose shareholders were the same as those of Momentum).

17.On 14 January 2004, Momentum entered into a Deed of Undertaking, referred to in these proceedings as the Momentum Undertaking, by which it undertook not to purchase any further shares in TSE which would result in Momentum holding more than 6.5% of the issued share capital of TSE without the prior approval of the TSE board.  The Momentum Undertaking included a representation that, at the date of the undertaking, neither Momentum, its subsidiary, its parent nor any subsidiary thereof, had any direct or indirect interest in any shares of TSE.

18.Notwithstanding the Momentum Undertaking, as a result of Mr Hall’s efforts on behalf of Mr Woods, the latter had by that stage already become the indirect owner of approximately 6.998% of the total issued share capital of TSE.

19.Further sums from the funds that Mr Woods had caused to be paid into the BLP trust account were repaid to the plaintiff, namely £6,000,000 on 9 March 2004, £5,000,000 on 16 March 2004 and £155,369 on 15 June 2004.

20.The present litigation does not concern the first or second tranche acquisitions.  However, claims were made in respect of those acquisitions:

(1)   by Mr Woods, the plaintiff, Mr Longmuir and his company through whom he had an interest in Momentum against Mr Hall for repayment of the alleged difference between the price paid by them for 120,000 TSE shares acquired by Growthline (viz. £29.20 per share) and the price allegedly paid by Mr Hall for the shares (viz. £17 per share), namely £1,464,000 and interest; and

(2)   by Mr Woods, the plaintiff, Mr Longmuir, his company through whom he had an interest in Momentum and Momentum against Mr Hall for repayment of the alleged difference between the price paid by them for 5,523,918 TSE shares (viz. £3.10 per share) and the price allegedly paid by Mr Hall for the shares (viz. £2.71 per share), namely £2,154,328 and interest.

21.Those claims were settled by a Deed of Settlement entered into on or about 28 November 2007.

22.The focus of this litigation has been a further parcel of 1,777,700 TSE shares, referred to as the third tranche acquisition. In early 2004, Mr Hall informed Mr Woods that he had acquired these shares and sent a note indicating that this number of shares “in Samos and Caledonian Holding Co’s are held by Momentum Limited by way of Davies Family Settlement.”

23.As at January 2004, the share register of TSE showed that 1,777,700 shares were held by Samos Investments Limited and Caledonian Heritable Investments Limited.

24.Documents provided to Mr Woods by Mr Hall in March and June 2004 recorded the allocation of 1,777,700 shares in TSE to the plaintiff at a price per share of £3.11 and payment for them of £5,546,424 plus £27,732.12 in respect of stamp duty (a total of £5,574,156.12).

25.By July 2004, Momentum was wholly-owned by Mr Woods and hence, its TSE shares and those held for it were ultimately held for the plaintiff.

26.In 2005, the previously amicable and mutually trusting relationship between Mr Woods and Mr Hall began progressively to break down.

27.Since early 2005, Mr Woods had been asking Mr Hall for clarification of the plaintiff’s holding of the 1,777,700 TSE shares.  In late 2005, Mr Woods asked Mr Timothy Levene, formerly an executive with TSE but then working for companies owned by Mr Woods, to intercede with Mr Hall and to instruct Mr Hall to cause the registered shareholders of those shares to make them available for sale into a general open cash offer for shares in TSE that had been made by a Japanese company, Softbank Corporation, at the price of £13.2005 per share.  The cash offer was to remain open for acceptance until 31 March 2006.

28.The Softbank offer was over-subscribed and as a result Softbank acquired 42% of the TSE shares offered for sale.  On this basis, the plaintiff contends that if the sale of the entire third tranche of 1,777,700 TSE shares had been attempted, a total of 746,634 shares (42% thereof) would have been sold at the offer price, yielding proceeds of £9,855,942.10.

29.However, in the course of without prejudice correspondence between the parties, the plaintiff’s solicitor was informed in mid-August 2006 that only 414,700 of the TSE shares had been sold to Softbank at the offer price, yielding proceeds of £5,474,247.35, which funds Mr Hall stated were available to be returned to the plaintiff, and that 1,355,300 TSE shares remained (although it will be apparent that this results in an aggregate of 1,770,000 rather than 1,777,700 shares).  The admissibility of the contents of the without prejudice correspondence was an issue before the Judge and it will be necessary to return to this issue later in this Judgment.

30.The £5,474,247.35 sale proceeds of the 414,700 TSE shares were never remitted to the plaintiff by Mr Hall.  Furthermore, according to the TSE share register, as at 31 August 2006, 1,587,700 shares were held by Samos and Caledonian and the only change in their respective shareholdings is that Samos’ shareholding had decreased by 190,000.

31.In around February 2006, Mr Hall informed Mr Levene that he had established, as settlor, an irrevocable Channel Islands trust called “the Hall of Fame Trust”, said to own a company called Hoflim Limited, which in turn wholly owned the beneficial entitlements to the TSE shares by virtue of irrevocable declarations of trust made in favour of Hoflim by Samos and Caledonian.

32.On 30 July 2006, the plaintiff obtained a copy of the ledger of the BLP trust account, which stated that sums totalling £13,646,718.18 had been transferred on the instructions of Mr Hall to the Swiss bank account of Axdale as follows:

(1)   £7,110,758.97 and £404,919.57 on 15 May 2003;

(2)   £5,463,508.46 on 14 October 2003; and

(3)   £667,521.18 on 20 April 2004.

33.The plaintiff contends that these three transfers were unauthorised, as well as two other transfers out of the BLP trust account, namely £158,000 on 20 August 2003 and £600,000 on 28 August 2003, although the destination of those transfers is not known.

The Judgment below

34.In the course of the trial below, which lasted 9 days, the Judge read three affidavits of the late Mr Woods sworn on behalf of the plaintiff.  He also heard evidence for the plaintiff from Mr Levene and two of the plaintiff’s legal team, Mr John McClellan and Mr Patrick Rattigan.  In the course of Mr McClellan’s evidence the issue of the admissibility of certain without prejudice correspondence arose.  The Judge ruled this correspondence admissible.

35.The Judge also heard evidence from the defendant.

36.In his Judgment, the Judge expressed surprise that the case had found its way to the completion of a hard-fought 9-day trial in the light of what struck him as the “overwhelming merit” of the plaintiff’s case.  He accepted the evidence of the plaintiff virtually in its entirety: although Mr Woods was not available for cross-examination, he considered that the content of his extensive affidavit evidence was fundamentally true.  He accepted the evidence of Mr McClellan and Mr Rattigan as well as that of Mr Levene, whom the Judge considered an impressive witness.

37.On the other hand, he formed a wholly negative impression of the defendant’s evidence.  It suffices to cite two passages from the Judgment to illustrate this:

“106. Notwithstanding a certain insouciant and, if I may say so, a degree of personal charm, Mr Hall struck me essentially as a ‘chancer’, who whilst probably not setting out to be dishonest, clearly permitted himself to do as he wished with the considerable amounts of money with which he was entrusted in response to his personal circumstances at any given time: his treatment of the money placed in the BLP trust account, for example, smacked of ‘teeming and lading’ in as much as when Mr Hall faced monetary requirements, in my judgment he allowed the obvious trust initially reposed in him, and the opportunities created thereby, to yield to the temptation to use these funds for his own purposes; indeed, as earlier observed, even now I am far from sure that the true story about all that has happened properly has emerged, and Mr Hall’s own evidence - upon which he strenuously and effectively was cross-examined - pointedly did not reveal the whole truth about the sequence of events which thus far have been discovered to have occurred, consequent upon the attempts by the plaintiff accurately to ‘piece together’ a complex financial jigsaw puzzle without necessarily being in possession of all the relevant pieces.

…

113. In short, I regret to say that in my judgment Mr Hall – who evidently has accumulated not inconsiderable wealth in his own right as a result of his presence in and around the fringes of the business of international gambling, and whose keen eye for the ‘main chance’ coupled with a superficially appealing personal manner clearly to-date has provided a measure of personal success – did not tell the truth to this court.  I regret to say that in my view he continually ‘bobbed and weaved’, evaded and dissembled, and in terms of any internal cohesion within his version of events, unsatisfactorily at that.”

38.On the facts, the Judge found that there could be no doubt that the defendant made wholly unauthorised transfers from the BLP trust account into the Axdale Swiss account, amongst others, and he rejected the defendant’s suggestion that any such transfers were effected with Mr Woods’ consent.  He held that the trust initially reposed by Mr Woods in the defendant, coupled with Mr Woods’ apparent lack of interest in mechanics, enabled the defendant:

“…effectively and, I am driven to say, ultimately dishonestly, to do as he wished when he wished with significant funds which were at his practical disposal, absent any material degree of oversight by Mr Woods, who no doubt assumed that Mr Hall would do his best to effect his wishes regarding the acquisition, and subsequent holding, of the TSE shares.” (Judgment §114)

39.The Judge held:

“115. It is clear (and I so find) that the contemporaneous documentation amply demonstrates that, consequent upon Mr Hall’s falsified and misleading reports as to what was happening, Mr Woods was operating under the understanding that the purchases of TSE shares either were to be conducted through Momentum, for the benefit of the plaintiff, or through a similar trust structure to the Growthline/Levene Settlement (regarding the “first tranche” of TSE shares) for the benefit of the plaintiff.

116. I also do not find, as was suggested, that there was any voluntary assumption of risk by Mr Woods or the plaintiff, and that by transferring funds to the BLP client account for Momentum/Assanzon – both [of] which Mr Woods controlled – that somehow Mr Woods/the plaintiff was aware that they would be dealing with Axdale as vendor; in fact, I am driven by the evidence to the finding that Axdale fraudulently was interposed in the sequence of events in order to hide Mr Hall’s wrongful and unauthorized activities/secret profits; in other words, as a convenient (and perhaps initially plausible) cover for Mr Hall’s illegitimate activities, and it is equally evident that Mr Hall never at any time disclosed to Mr Woods Axdale’s true role in the transactions with which this case is concerned.”

40.Various legal defences were advanced on behalf of the defendant, on whose behalf it was contended that equitable principles were inapplicable because this was simply a mere commercial dispute in which the plaintiff should be limited to common law remedies, if any.  The Judge considered each of the defences (wrong plaintiff, wrong defendant and the Momentum Undertaking/effect of TSE articles) and rejected them.

41.On the substantive defence of the legal status of the defendant, the Judge accepted the plaintiff’s case that the defendant was a trustee of the monies paid into the BLP trust account by Mr Woods for the plaintiff.  He concluded:

“154. In my view on the accumulated evidence before the court - and I so find - Mr Hall misappropriated funds of the plaintiff/Mr Woods, through the five unauthorized payments in breach of trust and/or fiduciary duty, for which the plaintiff has an equitable remedy, suggested ‘juridical constraints’ upon the Commercial Court notwithstanding.”

42.On the question of remedies, the Judge declined (at §159 of the Judgment) the plaintiff’s invitation to order equitable compensation on the basis that the defendant was liable:

“… to compensate the plaintiff by providing restitution for Mr Hall’s inability to restore the trust by paying the value of that which the plaintiff would have received but for the defendant’s default; this sum apparently is comprised of the £9,855,942.11 which should have been generated from the sale of TSE shares to Softbank, plus the sum of £11,568,560 that should have accrued from the sale of the apparently remaining 1,031,066 TSE shares, even with a 15% discount to the Softbank price - which latter percentage derives from Mr McClellan’s evidence wherein Mr Hall, through his solicitors, had stated that he was negotiating with the registered shareholders of the remaining TSE Trust Shares for them to purchase those shares at a discount of 10 to 15% of the price paid by Softbank Corporation, namely £11.88 or £11.22 per TSE share.”

43.Instead, the Judge noted that on the question of primary liability, he had decided that:

“166. …

(a) a trust/fiduciary relationship has been established;

(b) that to-date the defendant manifestly has failed to provide any or any true statement of account for the trust assets, which initially took the form of the funds transferred to the BLP account;

(c) that the plaintiff’s allegations of misappropriation of such trust funds, and the diversion of those funds from their intended and designated purpose, have been made out; and

(d) that the [defendant] now must render a true and correct account, which upon the taking of such account may include an order that the trust be restored to the position that it would have been in absent the defendant’s dishonest and wilful breaches of trust.”[1]

44.As to the appropriate order, the Judge said:

“170. In this connection I have not overlooked the fact that, on the defendant’s own case, the sum of £5,474,247.35 represents funds which were and are available to return to the plaintiff, and which have not been so returned, and that a total of 1,355,300 TSE shares still remain (vide paragraph 51 above), albeit I am bound to observe that I presently have no idea of the veracity/accuracy of this latter number.”

45.Accordingly, he ordered the defendant to pay to the plaintiff the sum of £5,474,247.35 with compound interest thereon and further ordered, pursuant to RHC Order 43, that the defendant do render to the plaintiff:

“… a true and proper account upon a wilful default basis for the trust property, and in particular for the plaintiff’s funds as transferred on the instructions of the defendant from the BLP trust account and/or the beneficial entitlements to the 1,777,700 TSE Trust Shares (or such TSE shares as may remain) as purchased with the plaintiff’s funds and/or all property now representing the trust property, including any dividends which have accrued on the TSE Trust Shares and/or other profits which have accrued upon the trust property”.

46.On the taking of that account, if and insofar as monies are found to be due to the plaintiff from the defendant, then credit is to be given for the repayment (if such payment has been effected) of the sum of £5,474,247.35 and any accrued interest.[2]

The Issues arising on this appeal and cross-appeal

47.As I have noted above, as against the Judgment, the defendant appeals, contending that the Judge should have dismissed the plaintiff’s action, and the plaintiff cross-appeals, contending that, instead of ordering an account, the Judge should have ordered the defendant to pay the plaintiff equitable compensation in the sum of £21,424,503.

48.In resolving the appeal and cross-appeal, the following issues fall to be determined (and their resolution will dispose of the parties’ respective submissions):

(1)   In respect of the £41,790,974.67 admittedly received by BLP from Mr Woods:

(a)   Does the plaintiff have locus to sue?

(b)   If so, is the defendant an accounting party? If so, why?

(c)   Has the defendant accounted?

(d)   If not, what are the proper remedies?

(2)   Whether 1,777,700 shares of TSE were bought for or paid for by the plaintiff?

(a)   If so, whether part of these shares were sold to Softbank?

(b)   How many were sold and for how much?

(c)   What is the basis for the Judge’s order that the defendant pay £5,474,247.35 to the plaintiff?

(d)   What are the appropriate remedies?

Does the plaintiff have locus?

49.Mr Colin Wright, counsel for the defendant, submitted that the plaintiff was not the owner of the funds transferred to the BLP account.  The basis of this submission was the proposition of law, supported by cases such as Libyan Arab Foreign Bank v Bankers Trust Co [1989] 1 QB 728 at 748 and Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co. (Bahamas) Ltd [1986] 1 WLR 1072 at 1073, that a customer does not own any money in a bank account and instead merely acquires a chose in action, namely the right to request payment by the bank of the sum standing to the credit of the account.

50.Mr Wright also submitted that the only client of the recipient of the funds, BLP, into whose client account the funds were transferred, was Axdale so that the chose in action acquired by BLP was held for the benefit of Axdale and no other party.

51.With respect, those submissions miss the point. If the defendant is liable as an accounting party in respect of the funds transferred to the BLP client account by Mr Woods (an issue addressed below), the question is whether the plaintiff company is owed any relevant duties in respect of those funds.  Whether the plaintiff is owed any such duties will, in part, depend on the question of whether, in transferring those funds to BLP, Mr Woods was doing so on behalf of the plaintiff as opposed to himself or some other entity.

52.The argument that the plaintiff was the wrong plaintiff was raised below and roundly rejected by the Judge, in my view correctly, who held:

“122. Since the fact is that the funds in question in this case were transferred by Assanzon to the BLP trust account, it is now said that Assanzon is the correct (and only plaintiff), rather than the current plaintiff, Libertarian.

123. It is not in question – indeed, I fail to see how legitimately it can be doubted – but that Mr Woods wholly owned both companies, and that he caused Assanzon to transfer the funds in question to the BLP trust account for and on behalf of the plaintiff, Libertarian; indeed this seems to have been expressly recognized by Mr Hall, who in his witness statement acknowledges: ‘I understood that Assanzon was one of Alan Woods’ companies’.

124. I accept the contention by the plaintiff that the uncontroverted evidence, was both to the mass of documentary evidence and, in fact, in Mr Hall’s oral evidence, was that the funds belonged to the plaintiff, and it seems to me, with respect, that this ‘defence’ is scraping the forensic barrel.  I reject it.”

Is the defendant an accounting party and, if so, why?

53.On this issue, which is the principal issue on liability, Mr Wright advanced a number of submissions.  He submitted that the Judge was wrong to hold that the defendant was a trustee of the funds deposited in the BLP account.  It was his contention that the transfer of funds to the BLP account was in the nature of a loan to Axdale to enable it to acquire shares in TSE.  This was a purely commercial arrangement in which there was no room for equitable principles.  Any claim should be against Axdale (and not the defendant) and should further, he maintained, be limited to a common law claim for repayment of a debt.  There was, in short, no duty to account.

54.As to the wrong defendant argument, this was succinctly disposed of by the Judge who held:

“126. Mr Barlow points out that in the original version of the defendant’s witness statement dated 3 March 2009, the defendant refers to the BLP trust account as being ‘my client account with BLP in the name of Axdale’, which position pointedly (and unashamedly) was changed at trial at the eleventh hour, by amendment to Mr Hall’s witness statement prior to its formal adoption into evidence, to ‘…the account with BLP in the name of Axdale…’ and consequent deletion of the word ‘my’.

127. I note also that both parties plead that the funds in the BLP trust account were under the control of the defendant through his control of Axdale, …

…

129. For my part, I see no merit whatever in the obviously self-serving amendments as so belatedly made to the witness statements of Mr Hall, and in the circumstances of this case I reject as firmly as I may the notion that Mr Hall is the incorrect defendant.”

55.Mr Wright’s more substantive argument was that there was no trust in respect of the BLP funds since there was no indication that those funds were to be beneficially owned by the plaintiff. He relied in this context on the proposition, derived from Henry v Hammond [1913] 2 KB 515 at 521, that if a recipient of a bank transfer is not bound to keep the money separate, but is entitled to mix it with his own money and deal with it as he pleases, and when called upon to hand over an equivalent sum of money, then he is not a trustee of the money but merely a debtor.  Furthermore, Mr Wright submitted that there was no basis for imposing trust liability on the defendant since the funds in the BLP account were not vested in the defendant, it being of the essence of a trust that the property is vested in the trustee: see Chief Commissioner of Stamp Duties v ISPT Pty Ltd (1999) ITELR 1 at 15.

56.With respect, these submissions confuse the requirements of a formal express trust with those necessary to found liability to account or claims for other equitable remedies on the basis of a breach of fiduciary duties.  As Millett LJ (as he then was) held in Bristol and West Building Society v Mothew [1998] Ch 1 at 18:

“This leaves those duties which are special to fiduciaries and which attract those remedies which are peculiar to the equitable jurisdiction and are primarily restitutionary or restorative rather than compensatory. A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. As Dr. Finn pointed out in his classic work Fiduciary Obligations (1977), p.2, he is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary.”

57.In the present case, on the Judge’s findings, it is clear that the defendant undertook to act for the plaintiff to acquire shares of TSE in circumstances giving rise to a relationship of trust and confidence.  Here, the defendant plainly owed fiduciary duties to the plaintiff to use the BLP funds, over which he had control since BLP looked to him for instructions for the disposition of those funds, for the purpose of acquiring shares in TSE and for that purpose only.  As such, he owed fiduciary duties to, and was therefore in the position of a fiduciary as regards, the plaintiff.

58.Mr Wright contended that since the transaction was no more than a pure commercial one and that, applying authorities such as Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 97, a fiduciary relationship cannot be superimposed upon a contract in such a way as to alter the operation which the contract was intended to have.  He argued that the monies transferred into the BLP account represented a loan by the plaintiff to the defendant and that, insofar as the monies were paid to the defendant as the plaintiff’s agent, it was intended that the money should form part of the assets of the agent (as was held to be the case in Peter Cox Investments Pty Ltd v IATA [1999] 161 ALR 105).  In the circumstances, a trust could only be created when money was paid by way of loan only if the mutual intention was that the money paid would not become part of the assets of the recipient: see Compass Resources Ltd v Sherman [2010] WASC 41 at §60.

59.Again with respect to this argument, this is an unrealistic contention in the circumstances of this case.  The defendant’s role as agent for the plaintiff to acquire the TSE shares was clearly pleaded (see §11 of the Re-Re-Amended Statement of Claim).  On the other hand, the contentions that the monies were advanced merely as a loan and that it was intended the monies should form part of the defendant’s assets were not pleaded, nor are they supported by the evidence or the Judge’s findings of fact.  In short, this was not a purely commercial transaction in which the plaintiff should be limited to common law remedies.  This was not a case where the relationship was merely one of debtor and creditor.  As the Judge held (and I respectfully agree):

“150. With respect to Mr Wright’s argument, it seems to me to be tolerably clear that when one party trusts and remits to a business associate funds for the specific purpose of buying certain shares (in this case the “third tranche” of 1,777,700 TSE shares), which funds, unknown to the remitting party, are promptly deposited in a solicitor’s trust account not in the name of the donor but in the name of the associate’s own company, and thereafter, together with other funds, wrongfully and dishonestly are abstracted into the associate’s Swiss bank account held in the name of that associate’s own company, once again entirely without notice to, and absent the consent of the remitting party, in my view it does not represent a huge juridical leap (or, for that matter, a misplaced infringement of the ‘accepted’ confines of commercial law) to find, as I do, that the actions of such associate amount to breach of trust and/or fiduciary duty.”

60.Below, the Judge also noted the submission advanced by Mr Barlow SC, leading counsel for the plaintiff, that the factual matrix created a Quistclose trust[3]: see Judgment §146.  It is not clear whether the Judge accepted this submission but, insofar as he did, it was strictly not necessary for him to do so.

61.A Quistclose trust arises where money is lent or paid over pursuant to an arrangement in which a trust or fiduciary obligations would not normally arise in respect of that payment (e.g. a loan) but, since it is agreed the money is to be used for a particular purpose and not to form part of the general assets of the payee, to that extent the arrangements will give rise to a trust in favour of the payer if the purpose for which the monies were paid fails.[4]  Thus, if the monies paid or lent are used for the specified purpose, they will have been so used as the payee’s own funds and will merely create a debt as between the payer and the payee.[5]  However, if the purpose fails, then a trust arises in favour of the payer and the monies do not become available to the payee’s creditors.

62.Here, the transfer of funds into the BLP account by Mr Woods on behalf of the plaintiff was made on the basis that they would be available to the defendant, as agent for the plaintiff, to enable the defendant to acquire shares of TSE for the plaintiff.  The defendant was subject to fiduciary duties as the plaintiff’s agent from the outset and his dealings with those funds transferred into the BLP account, and the shares acquired with those funds, were always subject to those duties.  There was therefore no need to rely on a Quistclose trust in the present case in order to found liability on the part of the defendant to account for those funds.

Has the defendant accounted?

63.Although various grounds in the notice of appeal[6] sought to challenge the Judge’s finding (in §114 of the Judgment) that the plaintiff had established that transfers from the BLP account to Axdale’s Swiss bank account were unauthorised and that, instead, the Judge should have found that Mr Woods knew of Axdale’s interposition in the TSE share transactions, these grounds were not addressed by Mr Wright in either his skeleton or oral submissions on this appeal.  Nor were submissions made in support of the contention[7] that the Judge erred in not drawing the inference that Mr Woods consented to the transfer of funds to Axdale’s Swiss bank account to allow a higher rate of interest or to a different account in Axdale’s name under the defendant’s control.

64.In my view there is no basis for these contentions.  The findings actually made were based on the Judge’s reading of the contemporaneous documents and his assessment of the credibility of the evidence of Mr Woods and Mr Levene, on the one hand, and the defendant on the other hand.  There is no room for the inference sought to be drawn.  The evidence showed that Mr Woods was concerned to receive regular updates and to see that the funds were promptly returned to the plaintiff if the acquisition of the third tranche acquisition did not proceed.  It also showed that Mr Woods chased the defendant for a proper account of the BLP funds (by, e.g., his e-mail dated 16 March 2004).

65.Ultimately, the Judge made a specific finding that, instead of using the funds in the BLP account for the purposes of the plaintiff and, specifically, for the agreed purpose of acquiring TSE shares, the defendant wrongfully abstracted and used those funds for his own entirely unauthorised purposes, absent the knowledge and consent of the plaintiff.[8]  He also held:

“154. In my view on the accumulated evidence before the court – and I so find – Mr Hall misappropriated funds of the plaintiff/Mr Woods, through the five unauthorized payments in breach of trust and/or fiduciary duty, for which the plaintiff has an equitable remedy, suggested ‘juridical constraints’ upon the Commercial Court notwithstanding.”

66.The question then arises as to how much of the plaintiff’s funds in the BLP account the defendant has failed to account for, which falls to be determined in the context of examining the proper remedies for breach of fiduciary duty.

If not, what are the proper remedies?

67.Since the question of proper remedies arises also in respect of the 1,777,700 TSE shares, which I shall next address, I shall deal with this issue together with the issue of proper remedies in that context.

Whether 1,777,700 shares of TSE were bought for or paid for by the plaintiff?

68.The Judge noted in respect of this:

“49. The evidence, which I accept, was that on 24 November 2005, Mr Levene had met with the Mr Hall specifically to discuss this third tranche of 1,777,7000 [sic] TSE shares, and that at that meeting Mr Hall had asserted for Mr Levene that, by reason of the ‘Momentum Undertaking’, the plaintiff was precluded from becoming a registered TSE shareholder, and that for that reason the defendant had been made sole beneficiary of a formal written trust whereby the TSE shares were held on trust for the plaintiff, but that the relevant trust documents had not yet formally been completed.”

69.It was not, however, the defendant’s case at trial that these were successfully acquired for the plaintiff in this manner. As the Judge observed:

“110. Initially he had reported to the plaintiff that he had set up the trust company/structure to hold the beneficial entitlements to the TSE Trust Shares, but this position subsequently moved to the allegation that, after receipt of payment in full, Samos and Caledonian were not prepared to complete the transaction and that, as a consequence, no beneficial ownership of the tranche of 1,777,700 shares was acquired for the plaintiff.”

70.Insofar as the defendant informed Mr Levene that he had established, as settlor, a trust which owned Hoflim Limited, which in turn wholly owned the beneficial entitlements to those TSE shares by virtue of irrevocable declarations of trust made in favour of Hoflim by Samos and Caledonian, the defendant admitted that Samos and Caledonian had not in fact executed any declaration of trust declaring that they held the TSE shares for anyone.[9]

71.Furthermore, the Judge was minded to accept the hearsay evidence from Samos and Caledonian and also affidavit evidence from Mr Mark Davies on behalf of the Davies Family Settlement all of which was to the effect that these parties had not sold shares in TSE to the defendant and had not had any dealings with Mr Schultz (whom the defendant had maintained was the nominee of Samos and Caledonian to whom the payment from the BLP account of £5,463,508.46 had been made for the purpose of acquiring the 1,777,700 TSE shares).

72.In the circumstances, although the Judge disbelieved the defendant’s evidence so that the veracity of the defendant’s case must be in doubt, there is no specific finding in the Judgment that the 1,777,700 shares of TSE were acquired by the plaintiff whether directly or by the defendant on its behalf.

73.I would add, in this context, that the defendant sought leave to amend his notice of appeal to add a ground of appeal raising the argument that the Judge erred in holding that the plaintiff was not prevented by the Momentum Undertaking or the effect of TSE articles from acquiring further shares in TSE.  However, this ground was not addressed in either the skeleton arguments or the oral submissions before us.  Since this was not a new argument, I would give leave to amend the notice of appeal accordingly but I do not think there is any substance in the ground.  In my view, the Judge was correct in holding that the plaintiff was not so prevented from acquiring further shares in TSE for the reasons he gave.[10]

If so, whether part of these shares were sold to Softbank?

74.As I have noted above (in §29), the evidence that part of the 1,777,700 TSE shares were sold to Softbank derives from e-mail correspondence which the defendant maintained was without prejudice.  That correspondence was before the Judge (and read by him de bene esse) and was before this Court as bundle D of the appeal bundles.

75.This correspondence is also significant for two other reasons: first, because it was the source of the defendant’s admission that £5,474,247.35 (the sum the Judge ordered the defendant to pay to the plaintiff pending the taking of the account) were funds of the plaintiff available to be returned to it; and secondly, because it was the source of the plaintiff’s case that the defendant accepted that, had he done as the plaintiff instructed him, 746,634 of the 1,777,700 TSE shares would have been sold to Softbank for a total price of £9,855,942.10.

76.The Judge ruled that this correspondence was admissible notwithstanding the defendant’s objections on one of two bases argued by Mr Barlow SC below.  First, it was argued that the claim that the correspondence was all without prejudice was an indiscriminate “blanket” claim since 54 e-mails were exchanged between the parties’ solicitors in the period between 14 June 2006 and 28 September 2006 of which only 8 were actually marked without prejudice.  Secondly, it was argued that the correspondence should not be privileged by reason of the “fraud exception” whereby no privilege comes into existence regarding communications made to get advice for the purpose of carrying out a fraud.

77.There was no dispute between the parties as to the rationale for the rule precluding the admission into evidence of the contents of without prejudice communications between parties and that the rule is that statements made in the course of bona fide negotiations for a settlement of a dispute may not afterwards be given in evidence without the consent of both parties.

78.So far as the argument that the defendant’s objection to the admissibility of the material was indiscriminate, I do not consider, with respect to the Judge, that this is a valid basis for permitting the plaintiff to rely on statements in that correspondence in support of its case.  Although not every item of the correspondence in question is marked “without prejudice”, it is well-established that it is not necessary that a communication be expressly so marked to prevent reliance on statements contained in it: see Rush & Tompkins Ltd v Greater London Council [1989] 1 AC 1280 at 1299 applied by Kwan J (as she then was) in Re Jinro (HK) International Ltd [2002] 4 HKC 90 at §13.  Having reviewed the correspondence in bundle D, I am satisfied that each of the communications is part of an ongoing attempt to settle, amongst other issues, the dispute between the parties regarding the 1,777,700 TSE shares.  The correspondence not marked without prejudice clearly follows correspondence which is so marked and is part and parcel of an ongoing series of correspondence addressing the subject matter of settlement.

79.Mr Barlow submitted that the negotiations were not part of a bona fide attempt on the part of the defendant to settle the dispute between the parties.  This was based on the defendant’s evidence at trial that, at the time of the negotiations, he was seeking to stall and was not immediately in a position to satisfy the settlement terms being proposed.  However, notwithstanding those passages in the evidence relied upon, I do not consider that this demonstrates that the without prejudice communications were not part of a bona fide attempt to settle the dispute concerning the 1,777,700 TSE shares.  A party may not be in a position to satisfy a contract at the time he is negotiating its terms but it does not follow that, if the contract is concluded, he will not put himself in such a position to do so.  The plaintiff did not dispute that the defendant was a man of means: indeed, it was the plaintiff’s case that the defendant had enriched himself by using the plaintiff’s funds.  There is therefore no sound basis, in my view, for disregarding the without prejudice correspondence on the basis the negotiations in that correspondence were merely a pretence or sham.

80.I turn to the fraud exception relied upon by Mr Barlow in support of which he cited O’Rourke v Darbishire [1920] AC 581 at p. 604, Crescent Farm (Sidcup) Sports Ltd v Sterling Offices Ltd [1972] 1 Ch 553 at p. 565, Buttes Gas & Oil v Hammer (No. 3) [1981] 1 QB 223 at p. 246 and Williams v Quebrada Railway, Land and Copper Company [1895] 2 Ch 751 at p. 755.

81.Each of those cases was concerned, however, with the proposition that no privilege comes into existence with regard to communications made in order to get advice for the purpose of carrying out a fraud.  The principle is not concerned with the admissibility of evidence (with which the without prejudice rule is concerned) but with the obligation to produce a document on discovery (to which privilege may be claimed to absolve the party of the need to disclose the document).  In short, it is not a principle that applies in respect of correspondence undertaken pursuant to a bona fide attempt to settle a dispute.

82.Mr Barlow pointed to the apparent reluctance on the part of the defendant to accept a settlement agreement that included a recital to the effect that he was a trustee over the 1,777,700 TSE shares and submitted that this was part of the defendant’s fraud being a concealment of his true role as such.  However, since the Judge made no such finding there is no sufficient basis on which to assert that fraud on the part of the defendant had been established.

83.Therefore, and with respect to the Judge, although there may be circumstances in which the contents of without prejudice correspondence may be referred to notwithstanding one party’s objections, I do not agree with his conclusion that the plaintiff is entitled to rely on the contents of the without prejudice correspondence under the fraud exception relied upon by Mr Barlow.

84.Mr Barlow also sought to rely on a waiver argument based on correspondence, which he labelled “open” correspondence having referred back to the earlier without prejudice correspondence.  However, the so-called open correspondence was in fact part of the series of e-mails in bundle D, which I have already held to form part of the same ongoing series of negotiations.  That correspondence, albeit not expressly marked without prejudice, cannot therefore be relied upon in support of a waiver argument, since it is itself part and parcel of the ongoing negotiations and therefore to be treated as without prejudice.

How many were sold and for how much?

85.The source of the information that only 414,700 of the 1,777,700 TSE shares were sold to Softbank yielding proceeds of £5,474,247.35 was an inter-solicitor communication in the course of the without prejudice correspondence (see §29 above).  Similarly, that is also the source of the information that 1,355,300 shares remain from the 1,777,700 TSE shares (although as I have pointed out above, this in fact results in an unexplained shortfall of 7,700 shares).

86.Since the evidence relating to the number of shares out of the 1,777,700 TSE shares sold and the price achieved for such sale comes from the without prejudice communications, which for the above reasons should not have been admitted into evidence at the trial, it follows that such evidence is not admissible in support of the plaintiff’s claim and should be disregarded.

87.If that evidence is disregarded, there is no other reliable basis on which to determine how many of the 1,777,700 TSE shares were sold and for what price.

88.In any event, as noted above, there is no specific finding in the Judgment that the 1,777,700 TSE shares were acquired for the benefit of the plaintiff and, as to the alleged balance of 1,355,300 shares, as I have noted above, the Judge observed that he had “no idea of the veracity/accuracy of this latter number”.

What is the basis for the Judge’s order that the defendant pay £5,474,247.35

to the plaintiff?

89.It is clear that the Judge’s order that the defendant pay £5,474,247.35 to the plaintiff was based on the evidence derived from the without prejudice negotiations that this was the amount realised by the defendant on the sale of 414,700 of the TSE shares (see §170 of the Judgment cross-referring to §51 of the Judgment).

90.That evidence not being admissible, it will be necessary to determine what other figure, if any, is the appropriate sum to be ordered to be paid by the defendant to the plaintiff, which is a question subsumed in the next issue.

What are the appropriate remedies?

91.Mr Barlow submitted that it is well-established that, under the restoration principle, the proper remedy for breach of trust or fiduciary duty is an order requiring the trustee or fiduciary to restore the trust to the position it would have been in but for the breach of duty: see Nocton v Lord Ashburton [1914] AC 932 at p. 952.

92.On this basis, he submitted that it was open to the plaintiff to elect between the remedies of account and equitable compensation. The basis on which the plaintiff’s claim for equitable compensation is calculated is recorded in the Judgment (at §159).

93.So far as election is concerned, Mr Barlow submitted, referring to Tang Man Sit v Capacious Investments Ltd [1996] 1 AC 514 at p. 521, that, faced with alternative and inconsistent remedies, a plaintiff is entitled to elect which of the two remedies better suits his requirements.

94.The principle of a plaintiff’s entitlement to elect between two alternative and inconsistent remedies is not controversial.  The right to make such election, however, presupposes that a court has made such findings of fact and rulings of law in his favour as may be necessary to give rise to the choice between the two remedies.  It is only where that has occurred that a plaintiff has an actual election to make between the remedies.

95.In the present case, the Judge simply did not make the necessary findings of fact that would enable the plaintiff to recover equitable compensation in the amount of £21,424,503 as sought.  It has yet to be determined if in fact the defendant did actually acquire the 1,777,700 TSE shares for the plaintiff.  And if so, how many of those shares were sold either to Softbank or to any other party and for how much.  In any event, as is clear from the plaintiff’s skeleton submissions in support of the cross-appeal, the only material on which the plaintiff can rely in order to advance its claim for this sum is derived from the without prejudice communications which should not have been admitted in evidence.[11]

96.For these reasons, I consider that the Judge was correct in concluding that the appropriate remedy at this stage is for the defendant to render an account to the plaintiff of the BLP funds and, upon such account being taken, such further orders for payment as may be justified can then be made.  We were informed by Mr Barlow that the taking of the account has been transferred to be heard by a Judge of the Court of First Instance.  The taking of the account will enable the plaintiff to seek orders for repayment that reflect the equitable basis of compensation, including the disgorgement of any secret profits made by the defendant in breach of his fiduciary duty, since the plaintiff’s claim is not a mere claim for damages: see Imageview Management Ltd v Jack [2009] 1 Lloyd’s LR 436 at §50.

97.In the meantime, the question remains as to whether it was demonstrated that there was a sum of money to which the plaintiff was undoubtedly entitled which the Judge could and should have ordered the defendant to pay on an interim basis pending the taking of the account.  The Judge thought the sum of £5,474,247.35 was justified but, since that figure is not supported by admissible evidence, the order for the payment of that sum is not justified and it remains to be seen if some other figure can be supported.

98.Mr Barlow submitted that the correct figure should, in any event, be more than £5,474,247.35.  By reference to five particular payments made out of the BLP trust account, he calculates the amount of the defendant’s misappropriations as being £8,024,590 (Annex D of the plaintiff’s closing submissions below) to which compound interest should be added, making a total (as at the conclusion of the trial) of £12,304,787.48 (Annex E of the plaintiff’s closing submissions below).  It will be remembered that the Judge found that the five payments making up this total were unauthorised payments made in breach of trust and/or fiduciary duty.

99.For his part, Mr Wright submits that the correct figure should be £4,823,768.51, calculated by deducting from the aggregate sum of £41,790,974.67 admittedly received by BLP from Mr Woods the various repayments made to the plaintiff and fees and stamp duty properly deducted as well as giving credit for the settlement of the Momentum claim.

100.Although Mr Wright’s approach does not necessarily produce a wholly accurate figure (for example, the plaintiff is credited with the full amount of the settlement amount for the Momentum claim even though other parties shared in that settlement amount), I think for present purposes that his calculation should be used rather than that of Mr Barlow.  That is because, although Mr Barlow’s Annex D identifies unauthorised payments out of the BLP account, it does not give any credit for the sums transferred back to the plaintiff as evidenced by the various money transfer contract notes advising the payment of those sums to credit of the plaintiff’s account.  Further, and in any event, the amount we are presently concerned with is an interim payment amount so that it is only such sum as is obviously due to the plaintiff that should be ordered to be paid over at this stage.

101.It remains to be seen, of course, what the defendant did with the unauthorised transfers of funds from the BLP account, which facts will be the subject of the inquiry when the account that has been ordered is taken.  Depending on the inferences drawn and findings made, the defendant’s liability may be considerably greater than this interim amount.

Conclusion and costs

102.For the reasons set out above, save that the amount which the defendant should be ordered to pay to the plaintiff is varied from £5,474,247.35 to £4,823,768.51, the appeal is dismissed and the cross-appeal is also dismissed.

103.As to costs, since the plaintiff is substantially the successful party before this Court, I would make an order nisi that the defendant pay two-thirds of the plaintiff’s costs to be taxed if not agreed, with a certificate for two counsel.

Mr Barrie Barlow SC & Mr Chan Pat Lun, instructed by Haldanes, for the Plaintiff/Respondent

Mr Colin Wright, instructed by Kennedys, for the Defendant/Appellant

Please refer to FACV14/2012 and FACV16/2012 for the relevant appeal(s) to the Court of Final Appeal.