Independent Trustee Services Ltd v GP Noble Trustees Ltd & Ors [2012] EWCA Civ 195

“61. I am satisfied that the disclosure made by the husband was deliberately and materially deficient. I am also satisfied that, if he had made proper disclosure the court, on the facts available to me today, would have been very unlikely – or I think I can go as far as to say – would not have made the order which was made, because the wife would have had, applying the law pursuant to the recent House of Lords decisions of White v. White and Miller v. Miller, an expectation that she would receive up to or approaching half of the total family wealth. The total wealth, including the sum paid in April 2007, was of the order of £16m. 62. I appreciate that arguments might be deployed as to the extent to which some of that wealth accrued after the date of separation. However, I have no doubt at all in concluding that the court would have made an order which was very materially or substantially different from the terms of the consent order made by District Judge Black. 63. So, in conclusion, I propose to give the wife permission to apply to set aside the order of District Judge Black, notwithstanding the fact that her application was not issued until 1 February 2008. I also propose to set aside the consent order of District Judge Black.”

“The order of District Judge Black dated the 11th February 2007 be set aside save to the extent that the provision therein for periodical payments of maintenance do remain in force on an interim basis until the final hearing, and there shall be a rehearing of the Petitioner’s application dated the 15th September 2005, together with her application dated the 4th February 2008 for variation of periodical payments.”

“2. Any ancillary relief order that the Court may make on the rehearing of the Wife’s ancillary relief application of 15 September 2005 (“the Ancillary Relief Order”) currently due for final hearing on the 13th January 2010 is to be made on the following bases:- (a) As between the Wife and the Husband, the Husband is not entitled to take credit for the payment to the Wife of the lump sum payment of £1,481,920.53 (“the Lump Sum Payment”) made on or around 14 July 2008 pursuant to the order of District Judge Black dated 11 February 2007; (b) The Wife will not seek to contend that any of the assets to which ITS has asserted proprietary claims in the Chancery Proceedings at the date of the Ancillary Relief Order form part of the financial resources of the Husband for the purposes of Part II of the Matrimonial Causes Act 1973; and (c) As between the Wife and ITS, the Ancillary Relief Order will be made without prejudice to the contentions of either of those two parties as to who is beneficially entitled to the Lump Sum Payment. 3. The injunction contained in paragraph 7 of the order dated 7 October 2009 is discharged with immediate effect on the 13th January 2010. 4. In the event that the Wife succeeds in enforcing against the Husband the full amount awarded to her, and becoming the full beneficial owner thereof, under the Ancillary Relief Order together with satisfaction of all orders for costs made in these proceedings in her favour, she will forthwith pay the amount of the Lump Sum Payment into Court to the credit of the Chancery Proceedings (with the intention that in that event the entitlement as between ITS and the Husband to the Lump Sum Payment should be determined in the Chancery Proceedings). 5. Each of the Wife and ITS shall have liberty to apply to either the Chancery Division or the Family Division of the High Court in relation to the determination of which of them is beneficially entitled to the Lump Sum Payment, provided that such application shall not be made by the Wife if she has succeeded in enforcing against the Husband the full amount awarded to her under the Ancillary Relief Order, and becoming the full beneficial owner thereof, or by ITS if its solicitors have been informed in writing by her that she has so succeeded and complied with Paragraph 4 above. 6. In the event that it is determined in the Chancery Proceedings that the Lump Sum Payment paid to the Wife did not comprise trust assets to which ITS would have had a proprietary claim, then as between the Wife and the Husband, the Husband shall be entitled to claim appropriate credit for the payment of the Lump Sum Payment to her (whether in diminution of his outstanding liability to the Wife or with the effect that the Wife is required to make a repayment to the Husband). The amount of such credit shall either be determined as part of the Order made in the substantive proceedings for ancillary relief by this Court or deferred for further consideration by this Court (or agreement of the parties) in the event that any entitlement to credit pursuant to this Paragraph later arises.”

“33. The order was finally made by consent of all parties – except of course the husband, who was neither present nor represented. It is complex but nevertheless, I hope, self-explanatory when read with care. The factual basis of the order dated 13 January 2010 is as follows. It is not alleged by the SFO or ITS that there was any criminal offending or misappropriation of pension funds before August 2007. Neither of them suggests that any of the assets owned by the parties during or at the end of the marriage are in any way tainted by crime. Neither of them suggests that the sums totalling £14·9 million which the husband received from the JVK Settlement in 2006 and April 2007 are in any way tainted by crime. Neither of them suggest that the wife (who was by then divorced) had any knowledge of, or was in any way involved or implicated in, the alleged misappropriation in 2007 and 2008. But the SFO and ITS do both say that the actual money with which the husband paid the sum of £1,481,920·53 to the wife in July 2008 is directly traceable as part of the alleged misappropriated pension funds. 34. Since the consent order pursuant to which the sum was paid has been set aside, ITS submit that the sum of £1,481,920·53 which was paid to the wife and which, although unbeknown to her, was the directly traceable proceeds of crime, is now recoverable by ITS from the wife. The SFO submit that it could now be expressly the subject of the restraint order, although a judge at the Central Criminal Court recently declined to vary the restraint order on the discretionary basis that there is no evidence of any intention on the part of the wife to dissipate it. 35. It has accordingly been agreed, and now ordered by me, that that sum of £1,481,920·53 (the £1·481 million) should, as it were, be carved out of the assets for consideration at the present hearing and notionally put to one side. The outcome in relation to that sum (still held within the assets, including her new home, of the wife) will be decided within the Chancery proceedings and any further proceedings in relation to the restraint order. 36. Paragraph 6 of the order of 13 January 2010 then makes provision that in the event that it is determined in the Chancery proceedings that that sum did not comprise trust assets to which ITS would have had a proprietary claim, then as between the husband and wife, the husband shall be entitled to claim credit for the payment of that sum; the amount of such credit to be either determined as part of the order I make at this hearing, or deferred for further consideration by this court in the event that any entitlement to credit does actually arise. 37. I was very grateful to Mr. Spearman QC for his very constructive approach and proposals on 26 November 2009, for if he had not made them it is difficult to see how the wife, who has already suffered grievously, could have made further progress with her claim for ancillary relief until, at the earliest, the conclusion of the Chancery proceedings.”

“54. I do not consider that it was intended by those observations to suggest that title to assets received by the innocent party from the wrongdoer re-vested in the wrongdoer. Take the present case. If one supposes that ITS was not involved and the claim was against Mr Morris but he was made bankrupt I would find the idea that Mrs Morris would have to disgorge the Lump Sum Order to the trustee because of a proposition that she had rescinded the Consent Order untenable. 55. The reality is in my view that upon seeking rescission of a contract for fraudulent misrepresentation the victim may have a right to assert some kind of proprietary right in the assets he transferred to the wrongdoer for the purpose of a tracing or other proprietary claim but as regards benefits he received it seems to me that they have to be brought into account only when the court has finally adjudicated on the claim to rescind the contract. By that time there may be other intervening events. Bankruptcy is an example as I have set out above. There are other examples. As Rimer J pointed out in paragraph 126 of his judgment (when dealing with the case of in re Goldcorp Exchange Ltd [1995] 1 AC 74):- “it is no part of the philosophy of the re-vesting theory that all intermediate transactions occurring prior to the rescission can be undone. Until rescission the property is vested in the representor and if it is disposed of to a good faith purchaser that purchaser will obtain a title which will be unimpeachable after any rescissions.” 56. Mrs Morris’ position is entirely the same in my view. All Moylan J did was to set aside the order for the Lump Sum Payment. He was exercising his powers as a matrimonial Judge in that behalf given to him under the Matrimonial Causes Act 1973 (to which I will refer further in this judgment). In my judgment the final reckoning on a claim for rescission of the contract would only take place when the reconstituted hearing of Mrs Morris’ claim for financial provision was heard. This is the right which she seeks to reassert by reason of the fraudulent misrepresentation. 57. At that hearing the question of the Lump Sum Payment will have to be considered. Mrs Morris will have to give a credit for it one way or another. I fully accept that she could not obtain both the benefit of the Lump Sum Payment under the Consent Order and seek a larger payment on a reconsideration. What would happen in effect is that if Mr Morris was not ordered to pay any larger sum then she would retain it. Alternatively it is possible that she might be given a larger sum and be required to repay the Lump Sum Payment in exchange for the larger sum. That is in my view unlikely. If she obtained a larger sum it is inevitable that Mr Morris would be able to appropriate that sum in partial discharge of his greater liability on the reconsideration. All of this is in the future in my view. 58. Equally when the matter is finally resolved by the order of Holman J on 13th January 2010 Mrs Morris is able to appropriate for herself in satisfaction of the greater liability the Lump Sum Payment which she has retained.” “it is no part of the philosophy of the re-vesting theory that all intermediate transactions occurring prior to the rescission can be undone. Until rescission the property is vested in the representor and if it is disposed of to a good faith purchaser that purchaser will obtain a title which will be unimpeachable after any rescissions.”

“61. The Shalson decision is looking at the position of the victim and the creation in the victim of a sufficient equity in property he handed over so as to enable him to trace into other assets. It has nothing to do with the present situation. 62. Even if it did it requires a further leap in logic then to decide that the monies automatically vest in ITS. I do not see that that is the case. ITS has its separate claims against Mr Morris for knowing receipt and dishonest assistance. That enables it to claim against him. It is not an absolute right. Even if the monies were paid back to Mr Morris any right on the part of ITS to claim those monies might be lost. For example Mr Morris might have charged any funds to a third party. When he received them they could become subject to the charge immediately which would operate (assuming the chargee has no notice of ITS’ claims) in priority to the ITS claim. 63. Therefore in conclusion I find no assistance from these authorities. In my view the effect of Moylan J’s order was to set aside the Consent Order. It did not address the full implications of that. The order was not set aside in toto because the periodical payments order remained. Mrs Morris obtained title to the monies. I do not see that she lost title subsequently by reason of her seeking to rescind the Consent Order by reason of Mr Morris’ fraudulent representations. She might for the reasons that I have set out above become under a personal obligation to return those monies if she is ordered so to do. No such order has been made. 64. If such an order were made it seems to me that Mrs Morris would be entitled to set off against any such personal obligation the amounts ordered in her favour by Holman J on 13th January 2010. ITS cannot in my view circumvent that by bringing a direct claim. Its claim must be throughMr Morris and thus subject to any rights that Mrs Morris can assert against him. 65. There is a further fatal flaw in ITS’ argument. It seeks to bypass Mr Morris and make a direct claim against the monies. I do not see that it can do so. Any claim must be brought through Mr Morris. If the Lump Sum Order had not been set aside any claim would have had to come through him and it would have failed as ITS acknowledges because Mrs Morris acquired the monies under the Lump Sum Order bona fide and without notice of any ITS claim. If the Lump Sum Order is set aside nevertheless ITS cannot ignore intervening events that have occurred. It must still assert a claim via Mr Morris. Thus to be able to seek the payment of the monies of £1.4m back from Mrs Morris it must be subject to rights that have accrued by the time that claim is made. The most important right is the financial adjustment order made by Holman J on 13th January 2010 which awarded Mrs Morris a lump sum of £6m. Any claim to the £1.4m (whether by Mr Morris or by ITS claiming through Mr Morris) must be subject to Mrs Morris being able to raise a set off of £6m. That fatally flawed ITS’ claim in any event in my view. 66. Alternatively Mrs Morris impliedly might acknowledge she is under some obligation to restore the fruits of the Consent Order if she seeks to enforce the Holman J Order in full. She can simply do that by appropriating the money notionally repayable to Mr Morris in part satisfaction of his liability to her. 67. I conclude therefore that Mrs Morris became the beneficial owner of the monies paid over to her by the Consent Order and she did not cease to be the beneficial owner merely because she applied to set aside the Consent Order and obtained further relief by virtue of the order by Holman J on 13th January 2010. For the reasons I have set out above this will not enable her to obtain benefits under both the Consent Order and the Holman J order but that is not the point. I do not see she ceased to be the beneficial owner of these monies free from any claim by ITS.”

“My cardinal conclusion is that ordinary contractual principles do not determine the issues in this appeal. This is because of the fundamental distinction that an agreement for the compromise of an ancillary relief application does not give rise to a contract enforceable in law. The parties seeking to uphold a concluded agreement for the compromise of such an application cannot sue for specific performance. The only way of rendering the bargain enforceable, whether to ensure that the applicant obtains the agreed transfers and payments or whether to protect the respondent from future claims, is to convert the concluded agreement into an order of the court. The decision of the Privy Council in de Lasala v de Lasala [1980] AC 546 demonstrated that thereafter the rights and obligations of the parties are determined by the order and not by any agreement which preceded it. The order is absolute unless there is a statutory power to vary or unless vitiated by a fact that would vitiate an order in any other division. Additionally, as was demonstrated in Robinson v Robinson [1983] FLR 102 an order in ancillary relief proceedings may be set aside if the product of a material breach of the duty of full and frank disclosure. An even more singular feature of the transition from compromise to order in ancillary relief proceedings is that the court does not either automatically or invariably grant the application to give the bargain the force of an order. The court conducts an independent assessment to enable it to discharge its statutory function to make such orders as reflect the criteria listed in section 25 of the Matrimonial Causes Act as amended.”

“In consequence, it is clear that the award to an applicant for ancillary relief is always fixed by the court. The payer’s liability cannot be ultimately fixed by compromise as can be done in the settlement of claims in other divisions. Therefore the purpose of negotiation is not to finally determine the liability (that can only be done by the court) but to reduce the length and expense of the process by which the court carries out its function.”

“29. ….. But, whatever the position may have been in earlier days, it is, in my view, self-evident that the ability of one spouse to apply to the court for one or more of the orders referred to in ss. 23 to 24D is a right conferred and recognised by the law. Further it has value in that its exercise may, and commonly does, lead to court orders entitling one spouse to property or money from or at the expense of the other. That money and property is, prima facie, the measure of the value of the right….. 35. If one considers the economic realities, the order of the court quantifies the value of the applicant spouse's statutory right by reference to the value of the money or property thereby ordered to be paid or transferred by the respondent spouse to the applicant. In the case of such an order, whether following contested proceedings or by way of compromise, in the absence of the usual vitiating factors of fraud, mistake or misrepresentation the one balances the other. But if any such factor is established by a trustee in bankruptcy on an application under s.339 then it will be apparent that the prima facie balance was not the true one and the transaction may be liable to be set aside.”

“43. There is an obvious tension between the statutory scheme for the protection of a bankrupt's creditors and the statutory scheme for the financial protection of the bankrupt's former wife and child. Bankruptcy Acts and Matrimonial Causes Acts may be said to compete for shares in the fund which will always be incapable of satisfying both. Clearly if the act of bankruptcy precedes an order made under the Matrimonial Causes Act the legal and practical outcome is straightforward. Difficulties arise when the order under the Matrimonial Causes Act precedes the bankruptcy. 44. The rules of law governing this tension have been settled and well understood for almost a hundred years. The decision of this court in re: Pope Ex Parte Dicksee [1908] 2KB 169 established that the financial benefit obtained by the wife under a post-nuptial settlement made by the husband within two years of his bankruptcy in consideration of the wife refraining from taking divorce proceedings against him was valid against the trustee in bankruptcy. That was the conclusion of the Master of Rolls and Fletcher-Moulton LJ, a conclusion from which Buckley LJ dissented. 45. That this remained the proper approach was demonstrated by the decision of the Divisional Court of the Chancery Division in re: Abbott (a bankrupt) [1983] 1 Ch 45. 46. These authorities did not, of course, establish that all ancillary relief orders are proof against the claims of the trustee in bankruptcy. Plainly if the ancillary relief order was the product of collusion between the spouses designed to adversely affect the creditors the trustee would intervene in the ancillary relief proceedings and apply for the order to be set aside. Such a situation is illustrated by the decision of Ferris J in re: Kumar (a bankrupt) [1993] 1 WLR 225. 47. Additionally the ancillary relief order, like any other order, might be set aside if some other vitiating factor could be established, including a failure on the part of the wife to make full and frank disclosure of her own assets.”

“The protection of the doctrine of purchaser without notice also extends to any purchaser claiming through such a purchaser, even though he took with notice of the equity. Similarly, a mere volunteer, if he claims through a purchaser without notice, can presumably claim freedom from the equity, because the principle is that once a legal estate has passed into the hands of a purchaser without notice of the equity, that equity ceases to be enforceable against that estate, and cannot be revived. Unless this were so, the owner of the equity could, by widely advertising his claim, make it difficult for the purchaser without notice to dispose of the land for the price that he gave for it.”

“98. In the course of his submissions Mr Tager sought to build upon a short passage of Lord Browne-Wilkinson's speech which I have quoted, an edifice which I do not think it was meant to support. He has argued (i) that the obtaining of monies by false pretences (at least in the circumstances of this case) should be regarded as “theft”, it having been long accepted, by whatever conceptual route, that theft, as such, immediately constitutes the thief a constructive trustee of the stolen money so that the victim may later trace in equity: see Banque Belge Pour L'Etranger v Hanbrouk [1921] 1 KB 321 per Bankes and Atkin LJJ, who held in the case of stolen cheques that the plaintiff bank could trace its money in law and equity, and per Scrutton LJ who considered that the bank could trace only in equity; (ii) that, even if that were not so, Lord Browne-Wilkinson's observation should be read at face value as recognising that a constructive trust is imposed upon the recipient at the moment of receipt. 99. I do not accept either argument. It seems to me that, whatever the legal distinctions between “theft” and “fraud” in other areas of the law, the distinction of importance here is that between non-consensual transfers and transfers pursuant to contracts which are voidable for misrepresentation. In the latter case, the transferor may elect whether to avoid or affirm the transaction and, until he elects to avoid it, there is no constructive (resulting) trust; in the former case, the constructive trust arises upon the moment of transfer. The result, so far as third parties are concerned, is that, before rescission, the owner has no proprietary interest in the original property; all he has is the “mere equity” of his right to set aside the voidable contract. That equity binds volunteers and those taking with notice of the equity, but not purchasers for value without notice; see generally Worthington: Proprietary Interests in Commercial Transactions (1996) Clarendon Press at pp 163-165 and 167. Despite dicta of Lord Mustill in Re Goldcorp (a case in which the purchase monies sought to be traced were unidentifiable), which, if generally applied beyond the context of the facts in that case, would suggest that equitable title does not (or in appropriate circumstances may not) revest on rescission, the general position seems to me that summarised in Underhill and Hayton (15 Ed) at p.372(f). It is there stated that equity imposes a constructive trust on property where a transferor's legal and equitable title to his property has passed to the transferee according to basic principles of property law but in circumstances (eg involving fraud and misrepresentation) where the transferor has an equitable right (ie mere equity) to recover the property by having the transfer set aside, and the court declares that from the outset the transferee has held the property to transferor's order, though nowadays it seems better to regard a restitutionary resulting trust as arising.”

“equity has always regarded as valid the disaffirmance of a contract induced by fraud even though precise restitutio in integrum is not possible, if the situation is such that, by the exercise of its powers, including the power to take accounts of profits and to direct inquiries as to allowances proper to be made for deterioration, it can do what is practically just between the parties, and by so doing restore them substantially to the status quo ….. It is not that equity asserts a power by its decree to avoid a contract which the defrauded party himself has no right to disaffirm, and to revest property the title to which the party cannot affect. Rescission for misrepresentation is always the act of the party himself ….. The function of a court in which proceedings for rescission are taken is to adjudicate upon the validity of a purported disaffirmance as an act avoiding the transaction ab initio, and, if it is valid, to give effect to it and make appropriate consequential orders ….. The difference between the legal and the equitable rules on the subject simply was that equity, having means which the common law lacked to ascertain and provide for the adjustments necessary to be made between the parties in cases where a simple handing back of property or repayment of money would not put them in as good a position as before they entered into their transaction, was able to see the possibility of restitutio in integrum, and therefore to concede the right of a defrauded party to rescind, in a much wider variety of cases than those which the common law could recognize as admitting of rescission. Of course, a rescission which the common law courts would not accept as valid cannot of its own force revest the legal title to property which had passed, but if a court of equity would treat it as effectual the equitable title to such property revests upon the rescission.”

“The effect of the defence is to allow the defendant to hold its legal proprietary rights unencumbered by the pre-existing equitable proprietary rights. In other terms, when the defence operates, the pre-existing equitable proprietary rights are stripped away and lost in the transaction by which the defendant acquires its legal proprietary rights.”