Smalley v Bracken Partners Ltd. & Anor [2003] EWCA Civ 1875

Case No A3/2003/0826(A)[2003] EWCA Civ 1875
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
(MR PETER LEAVER QC) SITTING AS A DEPUTY
JUDGE OF THE HIGH COURT
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate Friday 19 th December 2003
Before
LORD JUSTICE PILLLORD JUSTICE MUMMERYLORD JUSTICE MANTELL
Between
SARIAH SMALLEYAppellant(1)BRACKEN PARTNERS LIMITEDRespondent(2) EYE GROUP LIMITEDRespondent
MR ROMIE TAGER QC & MR PHILIP KREMEN (instructed by Russell Jones & Walker) for AppellantMR G REGORY DENTON-COX (instructed by Halliwell Landau) for RespondentsHearing Hearing dates : 9 th December 2003
JUDGMENT
[1]This is an appeal by Ms Sariah Smalley, the wife of Mr Graham Gutteridge. Both of them were defendants in a derivative action brought by the claimant, Bracken Partners Ltd (Bracken), suing on its own behalf and on behalf of all the other shareholders in a company called Eye Group Ltd (EGL), except Mr Gutteridge, to ascertain the beneficial ownership of a house acquired in the name of Ms Smalley, but with the use of money not belonging to her.[2]EGL is only one of three relevant companies of which Mr Gutteridge is a director. All three companies were indirectly implicated in the acquisition of the house in the name of Ms Smalley. EGL, an insolvent private company under the control of Mr Gutteridge, was compulsorily wound up on 27 November 2002. It was joined as a defendant in the action brought on its behalf. The second company, which was owned and controlled by Mr Gutteridge, was GMG Management Ltd (GMG). It was also joined as a defendant. The third company was Non-League Media plc (NLM), a public listed company, of which Mr Gutteridge was Chairman. It has been in administration since 25 June 2002. It is not a party to the proceedings. Although it was aware of them, it has never sought to be joined as a party. Its position, as explained by the administrators in correspondence, was that it would be bound by the judgment of the court in the proceedings, but reserved its rights against EGL in respect of any claim which NLM might have to the sums recovered from the defendants by Bracken EGL. More recently the solicitors for the administrators of NLM have made it clear that the net proceeds of sale of the house, which have been paid into court (£212,000), are the property of NLM and that they intend to recover that sum as against Ms Smalley, who has admitted NLM’s claim.[3]The appeal is against the order of Mr Peter Leaver QC, sitting as a deputy High Court Judge in the Chancery Division. On 31 March 2003, on an application by Bracken for summary judgment, he made a declaration that EGL “ …is beneficially entitled to 39/40th of the equity of redemption in the house and property known as 52 Chatsworth Gardens London W3 9LW [the Property], held in the name of the Second Respondent [Ms Smalley] and that the Second Respondent is beneficially entitled to 1/40th of the equity of redemption in the Property.”[4]He made an order that “ The Second Respondent holds the Property on trust for Eye Group Limited and the Second Respondent in the aforesaid proportions.”[5]The Property was ordered to be sold. It has in fact been sold by a second mortgagee and the net proceeds of sale have been paid into court. Ms Smalley initially contended that she was the beneficial owner of the Property, claiming to have purchased it with the assistance of loans from EGL and from a building society. That contention pleaded in her defence was not pursued. Although she appeals against the declaration in paragraph 3 above, she accepts that she is only entitled to 1/40th of the net proceeds and that the Property was held by her on trust as to 39/40th . Her contention is that she in fact held the property upon trust, not for EGL, as stated in the declaration, but for NLM, which, as I have already mentioned, was not a party to the proceedings. EGL does not dispute that NLM is entitled to the specified share of 39/40th of the net proceeds in court.[6]One might well question the point of the appeal when there appears to be no dispute between the parties as to the beneficial entitlement to the net proceeds of sale. The clue is costs. Mr Romie Tager QC, appearing for Ms Smalley, contends that, contrary to the order made by the judge embodying the declaration and an order that Ms Smalley should pay the costs, the action should have been dismissed with costs, as EGL had no title to bring the action against her. It was the wrong claimant and was not therefore entitled to the declaration or to any other orders.

The Facts

[7]The Property was transferred into the name of Ms Smalley. The sources of the purchase price of £499,500 were as follows:(1) On 25 August 2000 the sum of £272,000 was transferred from the bank account of NLM (a) to the bank account of EGL, then (b) to the bank account of GMG and then (c) to the solicitors acting for Ms Smalley. The transfers were arranged by Mr Gutteridge, who controlled EGL and GMG. Ms Smalley accepts and asserts that the sum was misappropriated by Mr Gutteridge from the bank account of NLM and was used to purchase the Property. The proper claimant was, she contends, NLM: only it, and not EGL, was entitled to an equitable interest in the Property. EGL only ever had a bare title to the money for an instant, holding it on a resulting or constructive trust for NLM. GMG held it on a constructive trust for NLM, as did Ms Smalley. EGL had no beneficial interest in the money. NLM remained the beneficial owner throughout. EGL was not therefore entitled to any beneficial interest in the Property. The deputy judge ought to have dismissed the action and this court should allow the appeal.(2) The sum of £220,000 was provided by way of a loan by Woolwich plc secured by a mortgage on the Property.(3) The balance of £7,500 was provided by Ms Smalley from her own funds.

The Judgment

[8]The judge concluded that EGL was entitled to the declaration that Ms Smalley held the Property on trust for herself and EGL. In dealing with the objection raised that EGL never acquired any interest in the money or in the Property the deputy judge held that “29…When the money was misappropriated from NLM’s account a trustarose in favour of NLM in respect of that money. When the money arrived in EGL’s account it became mixed with the monies in that account. We are not here considering a specific asset, such as a bag of coins, but a transfer of funds from one account into another account. Once mixed in EGL’s account, the money, as it is described, became an asset of EGL, no matter how short a time it spent in that account. EGL was under an obligation to account to NLM in respect of that money, as it had no right to it. EGL held the money on trust for NLM. 30. The same reasoning will apply to the subsequent transfers of the money until it was paid over to the vendor of the Property. The vendor was under no obligation to account or as trustee. However, as between NLM, EGL, GMG and Ms Smalley, each prior recipient has a better title or claim to the money, and to an account for it, than the subsequent recipient, and each recipient is required to account toprior recipient for it.”[9]The deputy judge continued “32. There can be no doubt that NLM’s equity takes priority over that of EGL. However, if Ms Smalley has any interest in the Property it is a later interest than that of EGL. Consequently, EGL’s interest takes priority over any interest that Mrs Smalley may have. As between NLM and EGL, NLM has consented to EGL taking these proceedings in priority to it.”

The Appellant’s Submissions

[10]Mr Tager contended that the action had been brought to establish a proprietary interest in the Property; that only NLM could assert such a claim against Ms Smalley, as the sum of £272,000 had been misappropriated from the bank account of NLM; that EGL received that sum as a knowing recipient and assistant to its misappropriation, giving rise to a trust (resulting or constructive) in favour of NLM, with EGL having only a bare legal title; that the money was never an asset of EGL; that when the money was transferred to GMG with full knowledge of the relevant facts, that gave rise to a constructive trust also in favour of NLM; that a similar situation arose when Ms Smalley received the money from GMG; and that nothing occurred at any stage which could have given rise to a claim by EGL to a beneficial interest under a resulting or constructive trust. NLM remained throughout the only beneficiary under a trust of the money and alone had the right in equity to enforce against Ms Smalley a proprietary interest in the Property.[11]Mr Tager cited a number of recent authorities in support of his analysis: Westdeutsche Landesbank v. Islington BC [1996] AC 669; Twinsectra Ltd v. Yardley [2002] 2 AC 164; Foskett v. Mc Keown [2001] AC 102; and J Harrison (Properties) Ltd v. Harrison (2000) BCC 729. He submitted that the judge had wrongly applied to the field of equitable proprietary interests the doctrine of relative title, which properly belonged to the law of title to land and chattels, and not to the field of equitable interests in property. EGL simply had no right to bring the action against Ms Smalley for a proprietary right and should be liable to pay all the costs.

Conclusion

[12]In my judgment, EGL was entitled to bring the action against Ms Smalley and to obtain relief, though the declaration made requires some modification to reflect the agreed position as to the location of the beneficial interest in the Property and the net proceeds of sale.[13]There is no dispute that the sum of £272,000 was misappropriated by Mr Gutteridge from NLM’s bank account; that it was misapplied by the payments into and out of the accounts of EGL and GMG; that it can be traced through the bank accounts of EGL, GMG and Ms Smalley’s solicitors into the Property acquired in the name of Ms Smalley with the use of that sum; and that a proprietary claim could be made against Ms Smalley, who held the Property upon trust. There was plainly a separation of the legal title to the Property, which was vested in Ms Smalley, and the beneficial interest, which was located elsewhere.[14]It is also clear that everyone in the chain of payments, except the vendor of the Property, who was a bona fide purchaser for value without notice, was a volunteer with knowledge (via Mr Gutteridge) that the money received was paid out of NLM’s bank account other than for the purposes of the company and in breach of Mr Gutteridge’s fiduciary duties. So EGL, GMG and Ms Smalley had no right to retain that sum as against NLM. The payments of that sum out of the bank accounts of EGL and then GMG were misappropriations of the sums in their respective bank accounts made on the direction of Mr Gutteridge for purposes other than those of each company (i.e. for the personal benefit of Ms Smalley and himself) and therefore in breach of fiduciary duty.[15]In those circumstances, EGL had a sufficient interest to support proceedings against Ms Smalley to establish that she was not, as she originally claimed to be, the sole beneficial owner of the Property and for a declaration as to the beneficial interests in it. In my judgment, issues as to relative title and the law governing the availability of proprietary and personal claims, tracing and priority are unnecessary complications of a plain case. They do not arise for decision, it being agreed that Ms Smalley held the Property on trust and that NLM was ultimately entitled to a 39/40th beneficial interest in it.[16]The case turns simply on issue of EGL’s standing to bring the proceedings against Ms Smalley. That issue is now only relevant to the question of the costs of the action. The deputy judge was correct in treating this as a case suitable for summary treatment. EGL had sufficient standing to bring the proceedings because the circumstances in which it received the sum of £272,000 from NLM and then paid it to GMG made it personally liable to NLM for the equitable wrongs of dishonest participation in breaches of fiduciary duty by Mr Gutteridge’s misapplication of NLM’s funds and accordingly accountable to it in equity. In these circumstances EGL had a real and legitimate interest(a) in securing a declaration from the court that Ms Smalley held the property on trust and(b) in enabling the beneficial interest in it to be restored to its rightful owner.[17]The result is that the appeal should be dismissed. Ms Smalley has not succeeded in the object of her appeal, which was to have the application for summary judgment dismissed and to be given unconditional leave to defend the proceedings (see Section 9 of the Appellants Notice) on the ground that only NLM, as beneficial owner, had title to sue her in respect of a proprietary interest in the Property and that EGL had no title to sue after the sum was paid out of its bank account to GMG and therefore had no cause of action against Ms Smalley. I would, however, amend the declaration to make it clear that, as EGL accepted, the Property was ultimately held on trust for the benefit of NLM. It should be declared that the beneficial interest in 39/40th was held upon trust for NLM.[18]I find myself broadly in agreement with the outcome proposed by Mummery LJ though for rather different reasons. However, before embarking on explanations I ought to say that I gratefully adopt his account of the background facts.[19]Insofar as material, Eye Group claims against Mrs Smalley a declaration that “all sums caused to be transferred from EGL to…(Mrs Smalley)…in breach of trust (and/or any property or assets derived from or representing such sums) are held for EGL upon constructive trust”. It is accepted that the sums referred to are the net proceeds of sale.[20]Eye Group also claims “an order that…Mrs Smalley do account to EGL in respect of all such monies or assets”, that is the net proceeds of sale.[21]By her defence Mrs Smalley appears to admit the claim “but only to the extent that a detailed account of the financial situation between all the relevant parties discloses that such a payment from (Mrs Smalley) is due and owing.”[22]The application before the judge was for summary judgment under CPR 25.6 or alternatively an interim payment under the same rule.[23]In giving judgment for Eye Group, interalia, the judge declared that: “Eye Group Ltd is beneficially entitled to 39/40ths of the equity of redemption in the house and property known as 52 Chatsworth Gardens London W3 9LW (“the property”) presently held in the name of (Mrs Smalley) and that (Mrs Smalley) is beneficially entitled to 1/40th of the equity of redemption in the property”.[24]The judge went on to order that the property be sold and the net proceeds distributed to Eye Group and Mrs Smalley in the above proportions.[25]A declaration in those terms is not as asked for and not as the parties have come to agree it ought to have been framed.[26]It now seems to be agreed that any declaration should be to the effect that N. L. M. is the beneficial owner of the property and/or proceeds of sale and any payment of 39/40 of the proceeds to Eye Group must be for Eye Group to hold on trust for NLM.[27]No argument has been addressed to the court how what is now perceived to be the proper result could have been achieved on the pleadings as they stood at the time of the application before the judge or, for that matter, on the appeal.[28]For my part, however, I would consider it wrong to allow technicalities of that sort to stand in the way of what is now considered to be an acceptable if not strictly correct result. I simply remark that it is greatest pity that this very expensive and unnecessary litigation has been allowed to proceed to the point of judgment in the Court of Appeal before a measure of commonsense was permitted to make a contribution.[29]I take the little I know about tracing from the speeches in Foskett v. McKeown [2001] 1AC 102 and in particular from the speech of Lord Millett at p.128:
“Tracing is thus neither a claim nor a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property. Tracing is also distinct from claiming. It identifies the traceable proceeds of the claimant’s property. It enables the claimant to substitute the traceable proceeds for the original asset as the subject matter of his claim. But it does not affect or establish his claim. That will depend on a number of factors including the nature of his interest in the original asset. He will normally be able to maintain the same claim to the substituted asset as he could have maintained to the original asset. If he held only a security interest in the original asset, he cannot claim more than a security interest in the proceeds. But his claim may also be exposed to potential defences as a result of intervening transactions. Even if the plaintiffs could demonstrate what the bank had done with their money, for example, and could thus identify its traceable proceeds in the hands of the bank, any claim by them to assert ownership of those proceeds would be defeated by the bona fide purchaser defence. The successful completion of a tracing exercise may be preliminary to a personal claim (as in El Ajou v Dollar LandHoldings plc [1993] 3 All ER 717) or a proprietary one, to the enforcement of a legal right (as in Trustees of the Property of F C Jones & Sons v Jones [1997] Ch 159) or an equitable one. Given its nature, there is nothing inherently legal or equitable about the tracing exercise. There is thus no sense in maintaining different rules for tracing at law and in equity. One set of tracing rules is enough.”
[30]It is beyond argument that the equitable proprietary interest in the money was at all times vested in NLM. It never passed to Eye Group, or to the intermediary or to Mrs Smalley. All that did pass was the legal title to be held at each stage on trust for NLM. Since from the passage in Lord Millett’s speech cited above a claimant “will normally be able to maintain the same claim to the substituted asset as he could have maintained to the original asset” the most that Eye Group could justify would be a claim to legal title. Eye Group never had any beneficial interest in the money either in its original or substituted form and had no standing to claim a beneficial interest in its own behalf. Any standing it might have would be as trustee of the money and as such liable to account to NLM. Hence the most that Eye Group could hope to achieve by its claim would be a declaration and order as is now agreed to be appropriate.[31]Accordingly and putting technical difficulties on one side I would be prepared to substitute the above declaration and order for those made by the judge. In my view that amounts to allowing the appeal though where that leads on the question of costs has yet to be argued.[32]I agree with Mummery LJ that the appeal should be dismissed for the reasons, and on the basis, he has stated.