Barnes & Ors v Tomlinson & Ors [2006] EWHC 3115 (Ch)

[2006] EWHC 3115 (Ch)Case No HC05C02040
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 7 December 2006
Before
THE HONOURABLE MR JUSTICE KITCHIN
Between
DEREK HUGH BARNESClaimantsLESLEY ANN BARNESClaimantDOMINIC HUGH BARNESClaimantNATASHA HEATH SMITHClaimantCHARLOTTE HEATH SMITHClaimantBRIAN TOMLINSONDefendantsPETER WILLIAM BRETHERTONDefendantMARJORIE BURTON (as personal representative of Frank Milner Burton)Defendant
Mr Gerald Heap (instructed by Messrs. Denison Till) for ClaimantsMr Philip Jones QC (instructed by Messrs. Withers) for Second DefendantMs Jennifer Haywood (instructed by Davis Blank Furniss) for Third DefendantHearing Hearing dates: 7, 8, 9, 10 November 2006
JudgmentMr Justice Kitchin :Introduction
[1]This is an action for breach of trust. The first claimant (“Mr Barnes”) and the second claimant (“Mrs Barnes”) are the present trustees of a deed of settlement dated 31 March 1973 (“the Settlement”) made by Mr Barnes. The intended purpose of the Settlement was to benefit Mr Barnes’ children and grandchildren. The third claimant (“Dominic”) is the son of Mr and Mrs Barnes and the fourth and fifth claimants are their grandchildren. The claimants collectively seek an order that the third to fifth claimants may represent all the persons now and or in the future beneficially interested under the Settlement. That order is not resisted by the defendants.[2]The first defendant (“Mr Tomlinson”), the second defendant (“Mr Bretherton”), Mr Burton and a Mr Gould were the original trustees of the Settlement. I shall refer to them (with the exception of Mr Gould) collectively as “the trustees”.[3]Mr Burton was originally the third defendant. He died on 15 November 2005 and by order dated 11 May 2006 his widow and administratrix, Marjorie Burton, was substituted as third defendant.[4]Mr Tomlinson died in July 2005 and his estate is the subject of an insolvent administration order. The claimants do not pursue Mr Tomlinson’s estate in these proceedings. The present action therefore concerns only Mr Bretherton and Mr Burton.[5]The claims made are based upon the actions of Mr Bretherton and Mr Burton as trustees of the Settlement from 1994 to 2000.[6]In order to understand the nature of the claims and the basis for them I must set out a certain amount of the background. Background The early days

Background

[7]In 1972 Mr Barnes formed a company called Elizabethan House Trust Limited (“EHT”). The nominal share capital comprised 250,000 £1 shares which were issued in full to Mr Barnes. EHT was formed to finance property development projects. The directors of EHT were Mr Barnes and a Mr Sharples. Mr Sharples subsequently resigned.[8]At that time Mr Bretherton was employed by Northern Developments (Holdings) Limited (“Northern Developments”), another company which Mr Barnes had founded and of which he was at the time chairman and managing director. Its shares were listed on the London Stock Exchange and it was principally involved in the development of residential property. Mr Bretherton worked at the head office in Blackburn. He was 27 years old and had been personally head hunted by Mr Barnes from his previous employment in London.[9]Mr Tomlinson and Mr Burton were chartered accountants and partners in Bedell & Blair, a firm of chartered accountants based in Manchester which audited the accounts of Northern Developments. Mr Gould was a director of Northern Developments.

The Settlement

[10]As I have mentioned, the Settlement was established by Mr Barnes by a deed made on 31 March 1973. The trustees were the defendants and Mr Gould. Mr Barnes transferred 249,998 of the shares in EHT into the trust, the remaining two shares being held by Mr Barnes and Mr Sharples (Mr Sharples later transferred his share to Mr Barnes). In addition, Mr Barnes made a loan of £250,000 to EHT. The total sum of about £500,000 was used by Mr Barnes and Mr Sharples (without consultation with the trustees) shortly after the date of the Settlement to acquire for EHT 352,920 shares in Northern Developments. The Settlement contained the following provisions relevant to these proceedings.[11]Clause 8:
“Monies subject to the trusts hereof may in the Trustees’ discretion be applied to the purchase of such assets of whatsoever nature and wheresoever situate and whether involving liabilities or not and whether purchased for the production of income or with a view to capital appreciation or to the purchase of any dwelling house for the actual use or enjoyment of any of the Beneficiaries or upon such personal credit with or without security as the Trustees shall in their absolute discretion think fit to the intent that the Trustees shall have the same full and unrestricted power of investing and transposing investments in all respects as if they were absolutely entitled thereto beneficially but no money subject to the trusts hereof shall be given lent or otherwise transferred to or for the benefit of the Settlor or any person for the time being his wife AND the Trustees shall be under no obligation to diversify the investments made hereunder AND it shall be no objection to the exercise by the Trustees of their powers hereunder that the whole or substantially the whole of the Trust Fund is invested in shares or securities of one body corporate only;”
[12]Clause 9: “During the Trust Period and during such further period if any as the law may allow the Trustees shall have the following additional powers:(1) power to allow all investments at any time forming part of the Trust Fund to remain in their then actual state of investment as long as the Trustees may think fit and at any time or times to sell call in or convert the investments or any of them or any part thereof into money.”(2) power (but during the lifetime of the Settlor not without his consent in writing) to change or vary any investment for the time being forming part of the Trust Fund for others hereby or by law authorised…[13]Clause 11:
“Every discretion and power hereby conferred on the Trustees shall be an absolute and uncontrolled discretion or power and the Trustees shall not be liable or answerable to any Beneficiary for the manner in which they shall exercise any power or discretion nor shall any Trustee be held liable for any loss or damage accruing as a result of his concurring or refusing to concur in any exercise of any such power or discretion.”
[14]Clause 12:
“In the professed execution of the trusts and powers hereof no Trustee being an individual shall be liable for any loss to the Trust Fund arising by reason of any improper investment made in good faith or for the negligence or fraud of any agent employed by the Trustees or by him or by any other Trustee (although the employment of such agent was not strictly necessary or expedient) or by reason of any mistake or omission made in good faith by any trustee hereof or by reason of any matter or thing except wilful and individual fraud or wrongdoing on the part of the Trustee who is sought to be made so liable.”
[15]Clause 14:
“Any Trustee (other than the Settlor or any person to whom the Settlor is for the time being married ) who shall be or become a Director or who holds or shall hold any remunerated office in relation to any company in the shares of which (or in the shares of any other company controlling it) any of the Trust Fund is invested shall be entitled to receive and retain for his own use all remuneration and other benefits derived from that Directorship or office and shall not be liable to account therefore whether or not voting rights available to the Trustees have been exercised in order to enable the Trustees to obtain or retain the Directorship or remunerated office.”
[16]Clause 16:
“ The Trustees shall not be bound or required to intervene in the management or conduct of the business of any company British or otherwise in which (or any subsidiary of which) the Trustees shall hold or control the whole or a majority of any part of the shares carrying the control of the company or other the voting rights of the company but as long as there shall be no notice of any act of dishonesty or misappropriation of money on the part of the Directors of such company or on the part of the manager of its business the Trustees shall be at liberty to leave the conduct of its business (including the payment or non-payment of dividends other than cumulative preferential dividends) wholly to its Directors and no Beneficiary or potential Beneficiary pursuant to this Settlement shall be entitled to require the distribution of any dividend by any Company British or otherwise in which the Trust Fund or any part thereof may be invested or require the Trustees to exercise any powers they may have of compelling any such distribution.”

The collapse of the property market and the compromise with Barclays

[17]In 1974 a number of significant events occurred. First, Mr Barnes and Mr Sharples, again without consultation with the trustees, arranged for EHT to borrow the sum of £900,000 from National Westminster Bank (“NatWest”) and lent the money to Northern Developments and a subsidiary of Northern Developments, GCT Construction Limited (“GCT”). The loans to Northern Developments and GCT were secured by legal charges granted by GCT and Daleholme (Builders) Limited (“Daleholme”), another subsidiary of Northern Developments, over two large pieces of potential development land at West Ardsley near Morley, West Yorkshire (“the West Ardsley land”). At the same time EHT granted a sub-charge to NatWest as security for the loan.[18]Second, Mr Barnes persuaded the trustees to borrow a substantial sum of money from Barclays Bank (“Barclays”) in order to buy shares through the Stock Market in Northern Developments. The trustees used this money to buy 628,920 shares in Northern Developments in about February 1974. At the request of Mr Barnes the trustees bought a further tranche of shares in Northern Developments in June 1974 and again borrowed the full purchase price from Barclays. This brought their total share holding purchased using the borrowed monies to 743,920 shares. The trustees only agreed to borrow from Barclays on the basis that Mr Barnes gave them an indemnity, which he duly did. In addition, Mr Barnes gave Barclays a guarantee, deposited a large number of shares in Northern Developments to support his obligations and charged in favour of Barclays certain monies standing to his credit at Barclays. In March 1974, and by way of further security for the loan, the trustees charged to Barclays their shareholding in EHT.[19]Third, the property market crashed. Financial advisors began to investigate the affairs of Northern Developments which apparently had outstanding loans from over 30 banks secured on a large land bank. At about this time Mr Sharples resigned.[20]In February or March 1975 Peat Marwick Mitchell organised a moratorium on debt repayment with all the bankers. It was a condition of the moratorium that there should be a restriction on fresh housing starts. Mr Barnes did not, however, observe the restriction and, as a result, receivers were appointed over all the assets of Northern Developments on 2 June 1975.[21]At this time the assets of the Settlement were 743,920 shares in Northern Developments and 249,998 shares in EHT. The trustees and Mr Barnes believed the Settlement to be insolvent because the shares in Northern Developments were almost certainly valueless; it was most unlikely that Northern Developments and GCT would be able to repay to EHT the loan of £900,000, together with interest; the West Ardsley land held by EHT as security for the loan had been valued at substantially less than the amount of the loan plus interest; and finally, the trustees had no means of repaying the Barclays loan, then standing at something of in excess of £800,000. I should add that the trustees believed that the indemnity from Mr Barnes was likely to prove worthless as his wealth was largely tied up in Northern Developments when he had himself given substantial guarantees to banks. This was a deeply anxious time for all the trustees. They faced personal ruin and so they turned to a Manchester firm of solicitors, Davis Blank Furniss, for advice. Originally they were advised by Mr Blank and subsequently by Mr Alcock.[22]On 6 November 1975 Mr Burton was appointed a director of EHT.[23]By 1977 the trustees had lost faith in Mr Barnes’ commercial judgment. They were also concerned that Mr Barnes was at loggerheads with the receivers of Northern Developments and it was not possible for the board of EHT to negotiate with them in a proper manner. Moreover, there was a conflict between the personal interest of Mr Barnes and the interests of EHT. Accordingly, the trustees concluded that the right course was to remove Mr Barnes as a director of EHT, which they did in February 1977. Following his removal, EHT petitioned for the winding up of Northern Developments. A winding up order was made in October 1977. During the course of the same year Mr Bretherton spent a good deal of time working with Mr Alcock. The aim of this work was to determine the legal position of the West Ardsley site, the only asset which could possibly be realised to provide any value for the Settlement.[24]In January 1978 Mr Tomlinson was appointed a director of EHT. Thereafter EHT issued and pursued complex proceedings against Daleholme and others in connection with the enforcement of the charge given by Daleholme to secure the loans to Northern Developments and GCT. Further, the trustees and EHT pursued lengthy and complex negotiations with the creditors of Northern Developments and its receivers with a view to concluding a scheme of arrangement. The trustees were also actively engaged in trying to find buyers for the West Ardsley land. I should also mention that in the course of 1978 NatWest brought pressure to bear upon EHT to repay its borrowing. Certain reductions in the level of debt were made, largely out of funds provided by Manchester Industrial Finance Limited, a private company. In addition NatWest appropriated £317,000 standing to the credit of a sister company, also controlled by Mr Barnes, called Elizabethan House Securities Limited.[25]In September 1980 the aggregate debt of the trustees to Barclays was well over £1,200.000. Barclays did not make a formal demand for repayment but did make it clear that they regarded the trustees as personally liable for the full amount of the debt. However they also indicated that they might be prepared to compromise their claims subject to the scheme of arrangement becoming effective. This was vital because it was anticipated that the only way that the trustees could obtain funds was via the claims of EHT against Northern Developments and the realisation of the West Ardsley land.[26]Eventually the trustees entered into a compromise with Barclays, the terms of which were as follows:
“In consideration of your procuring the consent of Elizabethan House Trust Limited (“EHT”) to the proposed Scheme of Arrangement regarding Northern Development (Holdings) Limited and provided that such a Scheme becomes effective, we hereby agree to accept in full settlement of your liability to us in respect of your Loan Account Number 11001906 at our York Street, Manchester Branch the amount ultimately to be received in respect of your shareholding in EHT charged to us and all other assets owned by the Trust or £900,000 (nine hundred thousand pounds) whichever is the greater, provided that if the amount ultimately to be received as aforesaid shall be less than £850,000, we agree to accept in full settlement as aforesaid such amount plus £50,000.”
[27]By letter dated 16 January 1981 (“the Interest letter”) Barclays agreed to stop charging interest if the scheme of arrangement became effective:
“The balance standing to the debit of the Trustees’ account at the close of business on the 31st December 1980 was £1,253,641.20. After careful consideration we are prepared to cease charging interest on this sum with effect from the 1st January 1981 provided the Scheme of Arrangement goes ahead. We retain the right, however, at our discretion to continue to charge interest after 1980 should for some reason the Scheme not take effect.”
[28]In 1981 Mr Tomlinson and Mr Burton thought it appropriate for Mr Bretherton to join the board of EHT so that the three active trustees were also board members of the company holding the only potentially valuable asset. Accordingly Mr Bretherton was appointed a director of EHT on 12 November 1981. A scheme of arrangement between Northern Developments, its subsidiaries and its creditors was finally approved by the court on 31 March 1982 and became effective on 1 April 1982.[29]I will return to the terms of compromise later in this judgment. Suffice to say for present purposes that the trustees recognised that their personal liability was capped at £50,000 and that Barclays continued to have a charge over the shares in EHT as security for the indebtedness of the trustees. Further, the trustees themselves continued to have a right of indemnity against Mr Barnes, but this was thought to have very little value. No one contemplated that there would ever be any sums available for the beneficiaries of the Settlement.[30]At some time after the scheme of arrangement became effective Mr Gould ceased to play any role as a trustee of the Settlement.

The restoration of EHT

[31]Over the ensuing years the trustees gradually put EHT on a better financial footing. They repaid the loans from NatWest, partly with the secured commercial loans from Manchester Industrial Finance Limited and partly with monies repaid by Northern Developments after the implementation of the scheme of arrangement. Second, the claims of NatWest and the mortgagors over the West Ardsley land were extinguished by orders for redemption and foreclosure made in 1983. The freehold of the land was transferred to EHT in 1985. Third, and importantly, in September 1983 and after extensive negotiations, EHT entered into an agreement with McLean Homes Northern Limited (“McLean”) for the sale of the West Ardsley land by instalments for residential development. Under that agreement EHT was to receive a fixed percentage on all sale proceeds of the West Ardsley land and the homes to be built on the land and McLean guaranteed minimum annual payments to EHT over the seven years from 1984 to 1990, such minimum aggregate payments to 31 December 1990 totalling £1,500,000.[32]1986 was a period of intense discussions with McLean. Mr Burton and Mr Bretherton were concerned about the potential liability of EHT for the development site. Mr Bretherton constantly tried to get McLean to erect warning signs to discourage trespassers. That and other work involved a considerable amount of time and effort on Mr Bretherton’s part.[33]1987 saw the culmination of extensive negotiations carried out by the trustees with the Inland Revenue over a number of years. No corporation tax had been paid, although a series of assessments had been made and were held over. In the course of 1987 all the secured creditors of EHT were paid off and a small sum was deposited in a savings account. Advice was taken from tax counsel to investigate the tax liability of EHT and to assess the best method of dealing with the Inland Revenue in the future. In addition, advice was sought from counsel about directors’ fees. Further, Mr Alcock had lengthy correspondence with the Development Land Tax Office over the West Ardsley site. After a further conference with counsel, and in the light of the advice received, the defendants secured a satisfactory outcome to the claims for corporation tax and the Development Land Tax Office abandoned its claim in respect of the West Ardsley site. The trustees also considered approaching Barclays to propose a settlement, on the basis that money paid there and then would be better than a long and uncertain wait. However the decision was made that it was not appropriate to make such an approach at that time.[34]In 1987 and 1988 McLean proceeded with the development of the West Ardsley site and to sell off plots. A considerable amount of time was taken ensuring that the 1987 accounts correctly reflected the agreements reached on tax affairs.[35]1989 saw the first payment of emoluments by EHT to the trustees. Each of them was paid £80,000 representing £10,000 in respect of each year from 1982 to 1989 inclusive. The trustees set aside a portion of these fees to establish a fund to use in the event that the minimum payment under the compromise agreement had to be paid out to Barclays.[36]Matters progressed in much the same way during each of the years 1990, 1991, 1992 and 1993. EHT was run as a development company, the development being the West Ardsley site. Accounts for each year were prepared and filed and show the assets of the company gradually increasing. As directors of EHT, the trustees received total emoluments over those four years of £40,113, £59,420, £59,310 and £60,509. There was, however, one material change. In the summer of 1991 the trustees learnt from Barclays that at the particular branch dealing with the compromise there was no one left who knew the background circumstances.[37]In the period 1992 through 1993 Barclays made no contact with the trustees at all. Mr Bretherton started to form the view that any claim by Barclays might well be statute barred by 2003, with the result that at that time there would be a real possibility of making a substantial distribution to the beneficiaries. 1994 to 2000, the period of the claim[38]I now come to the period in respect of which the claim is made. Before dealing with the details of the claim, it is convenient to set out certain background facts which were not in dispute or which I find established on the evidence. 1994[39]By December 1994 the net assets of EHT had increased to £1,816,481, the bulk of which represented sale proceeds of the West Ardsley land and net recoveries of money owed by Northern Developments. The assets of the company consisted primarily of cash.[40]At this time the development of the site at West Ardsley was coming to an end. There was a certain amount of tidying up still to be done but the trustees began to consider the future of EHT. At the same time Mr Burton’s health was deteriorating. He was often unable to travel to meetings but tried to attend by telephone. He was concerned that his health would further deteriorate if he remained a director and began to discuss the possibility of relinquishing his position.[41]The trustees were also greatly exercised about the course the company should take bearing in mind their obligations to Barclays. As the trustees were subsequently advised by Mr Sher QC and Mr Taussig (in circumstances I relate in more detail hereafter), the compromise agreement is susceptible to different possible interpretations. One is that Barclays were to receive everything realised through EHT. The other is that the amount to be paid to Barclays was capped at £1.2 million. I believe that the latter is the correct interpretation, particularly in the light of the interest letter. Nevertheless, the former is at least a possible interpretation, as Mr Sher advised. Moreover I believe that it is likely that Mr Bretherton had forgotten the Interest letter by 1994. What he was particularly concerned about was the personal liability of the trustees – and this was dealt with in the main compromise proposal. This also appears from paragraph 33 of an affidavit sworn by Mr Tomlinson on 3 May 1999 which was put to Mr Bretherton in re-examination: “As I explained in para 22 above at the time of the Compromise everyone including the Original Trustees expected that the amount ultimately to be received by the Settlement would be less than the amount – over £1.2 million – then owing to Barclays and in the years after the Compromise became effective the Plaintiffs saw themselves as realising the assets of the Settlement and in particular the West Ardsley Land held by EHT for the benefit of Barclays. It did not occur to the Plaintiffs that there would ever be funds available for the Beneficiaries. Against this background the Interest Letter had never appeared to be of any significance and it was perhaps for this reason that both the Plaintiffs and their Solicitors simply forgot about it. I understand from Mr Alcock that it was only very recently when he was preparing the papers for Mr Jules Sher QC that he recalled the existence of the Interest Letter”.[42]I have to say I found Mr Bretherton’s evidence on this issue to be not entirely consistent. At various points he suggested that he was aware that the liability was capped at £1.2 million. Nevertheless, I am satisfied in the light of his evidence as a whole that in 1994 he believed that all monies held by the Settlement were payable to Barclays under the terms of the compromise. Accordingly, and after a good deal of discussion and thought, the trustees took the decision not to re-awaken Barclays’ interest by initiating settlement discussions and decided to invest the assets of the company in property for the next few years until they could be sure that Barclays had lost interest and would be unable to recover its loan. The trustees therefore decided to develop EHT as a property company in order to generate profits with the cash that it had realised. They were influenced in reaching this decision by Mr Tomlinson’s experience in the commercial property market.[43]In that year £51,650 was paid to the trustees in emoluments. Net of social security costs, Mr Bretherton and Mr Tomlinson received £15,000 and Mr Burton received £18,000. The trustees again spent a good deal of time on the business and affairs of the company and Settlement. 1995[44]By May 1995 Mr Burton’s health had deteriorated to such an extent that it prevented him from fulfilling his duties as a director and company secretary. He therefore resigned and Mr Bretherton was appointed company secretary. Nevertheless, Mr Burton remained a trustee. At about the same the time the name of EHT was changed to Thane Investments Limited although, for convenience, I shall continue to refer to it as EHT in this judgment.[45]May 1995 also saw the completion of the purchase of a parade of shops called Gilda Parade in Bristol for £1,475,000. The purchase was effected through a new subsidiary company, Lemones Limited.[46]At about this time Mr Bretherton turned for advice to a Mr Hugh Kemsley, the senior partner of Kemsley Whiteley & Ferris, a firm of surveyors in the City of London. Mr Bretherton had met Mr Kemsley in the course of his main job as Director of Corporate Affairs (and Chairman of the Pension Trustees of Senior and Staff Pension Schemes) at Provident Financial plc. He agreed to help Mr Bretherton with desk top valuations so that he could have a second opinion on the proposals which were emerging at the meetings of EHT. This proved important to Mr Bretherton because he found himself with little spare time.[47]The directors’ emoluments for the year totalled £73,146. This figure included £25,000 paid by EHT to Mr Burton and described in the accounts of the company as “compensation for loss of office”. 1996[48]In 1996 the trustees spent a good deal of time considering various property proposals. Mr Tomlinson was by this time being advised by Mr Giles Knopp, the former auditor of EHT and now a property consultant, and Mr Bretherton was advised by Mr Kemsley. They did not always agree. Mr Bretherton paid Mr Kemsley’s fees himself because he did not wish EHT to incur the extra costs. Mr Bretherton also felt uncomfortable that he was slowing deals down because he knew little about property and was based in Bradford whilst Mr Tomlinson was based in London.[49]By letter dated 26 November 1996 Mr Alcock wrote to Mr Bretherton saying that he had been asked by Mr Tomlinson to let him have copies of the trust deed, the deed of indemnity and the compromise agreement and that he had put in hand the preparation of a deed of retirement and the appointment of a new trustee. The clear implication was that Mr Tomlinson wanted Mr Bretherton to retire and it made Mr Bretherton cross. It was followed by a letter from Mr Tomlinson direct to Mr Bretherton on 5 December 1996. This made it clear that Mr Tomlinson wanted Mr Bretherton to resign as a director, although he was happy from him to remain as a trustee.[50]In the course of 1996 the remaining directors were awarded emoluments of £43,344. 1997[51]Mr Bretherton decided to resign as a director and company secretary of EHT on his return from holiday in January 1997. He told me, and I accept, that he did not resign because he was “pushed” by Mr Tomlinson but rather because he had little time in the light of his full time job and because he had less experience of property transactions than Mr Tomlinson. He also was aware that he was being replaced by Mr Knopp, a chartered accountant and EHT’s former auditor. Mr Bretherton regarded him as honest and experienced. Indeed in these circumstances he thought there was no need for him to remain on the board and it would simply result in the company paying a greater level of emoluments. Mr Knopp was therefore appointed a director in place of Mr Bretherton on 5 February 2006. Mr Tomlinson became company secretary as well as director. Nevertheless Mr Bretherton remained a trustee because he considered he had undertaken obligations which he had to see through, albeit for no financial reward. He still thought that a period of 12 years from the date of the last contact with Barclays (that is to say 2003) would be the optimum time to open negotiations.[52]Mr Bretherton wrote a letter of resignation on 31 January 1997 in which he acknowledged that he had no financial claim of any kind. Shortly after he resigned he received an “ex gratia” payment of £45,000. In a letter of 27 March 1997 acknowledging receipt he described it as “very generous” and “a most pleasant surprise”. This is another matter to which I shall return in considering the claims advanced in this case.[53]In July 1997 Slater Heelis, solicitors acting for Mr Barnes and the beneficiaries, wrote to the trustees drawing attention to the fact that their client had never seen accounts for the trust, asking for all such accounts and other relevant documents, noting that EHT appeared to have large amounts of cash and asking for details of the activities of the company and its goals. On the 5 August Mr Tomlinson replied:
“As far as Thane Investments Limited (“TIL”) (formerly Elizabethan House Trust Limited) is concerned, the whole of its issued share capital was charged to Barclays Bank Limited in 1974 as security for the loan from that Bank. However, the directors of TIL continued to manage the Company and TIL now has a fund of approximately £1.8m which TIL is in the process of investing in commercial properties. I am the only trustee who has been a director of TIL throughout the whole of the period in question, although each of Mr. Bretherton and Mr. Burton has been a director and/or secretary for considerable periods. The objective is to achieve over a period of years sufficient growth to repay the outstanding debt and interest. The chances of success are remote bearing in mind the size of the debt and interest.”
[54]He also enclosed a statement of assets and liabilities as at 31 March 1997 stating that the amount owing to Barclays was £10,838,150 and that the trust had a net deficiency of £10,588,150.[55]The letter and enclosed statement are difficult to explain and Mr Bretherton was cross examined closely upon them. One possible explanation is that Mr Tomlinson had forgotten about the interest letter – that would be consistent with the affidavit he produced in 1999 and to which I have referred in paragraph [41] above. Mr Bretherton accepted that the schedule was far from the complete picture but again explained that he was under the impression that Barclays were entitled to everything in the Settlement and, as he put it, “we were working for Barclays”. For that reason he did not think it necessary to elaborate or correct it.[56]On 31 August 1997 Mr Barnes and his son Dominic made an unannounced visit to Mr Bretherton’s home. At the commencement of the trial I gave the claimants leave to amend the particulars of claim to introduce an allegation that Mr Bretherton knew that Mr Barnes did not consider that the company was being run for the benefit of the beneficiaries because Mr Barnes expressed that view to Mr Bretherton in the course of this meeting. In particular, Mr Barnes asserted and confirmed in the course of his evidence in chief that the gist of his conversation was that he had not seen Mr Bretherton for 25 years and wanted to know what was going on; he had received no documents despite making requests to Mr Alcock; he wanted to know why Mr Tomlinson was using trust funds to invest in property; Dominic was a beneficiary and that something funny was going on and that he intended to sue the trustees. He also asserted that Mr Bretherton informed him that Barclays had served a writ for £6 million.[57]Mr Bretherton’s account was rather different. The following is a summary. He explained that he was surprised to see Mr Barnes and Dominic at 7.0 pm on a Sunday evening but asked them in and gave them tea and biscuits. They asked him why he had resigned as a director of EHT and he explained that it was for reasons of time and because he had no experience of property dealings. He thought it better to let Mr Tomlinson run EHT together with another colleague (Mr Knopp) who had worked in property and step down as a director but not as a trustee. He also explained that if a way out of the position with Barclays could be found which did not involve personal loss to the trustees and insolvency for EHT so that there was something left for the beneficiaries then he had no desire to stay on as a trustee either. He said that with the benefit of hindsight he would never have taken on the onerous task of being a trustee.[58]I am satisfied that Mr Bretherton’s recollection of events is broadly accurate. Nevertheless I also have no doubt that Mr Barnes and Dominic were determined to find out as much as possible about the affairs of EHT and as to why Mr Bretherton had resigned. Moreover, I believe they were concerned to find that EHT was engaging in property dealings. I am sure that these were matters raised in the course of the meeting. I also think it likely that Mr Barnes was assertive and expressed his determination to gain a full understanding of the activities of the trustees and further, that he proposed to take action if he found any evidence of wrongdoing. However I do not accept, as Mr Barnes suggested, that he gave Mr Bretherton any cause to suppose that Mr Tomlinson and Mr Knopp were acting dishonestly; nor that he had any basis for issuing proceedings against the trustees. Indeed Dominic and Mr Barnes accepted in cross examination that they left Mr Bretherton on reasonably good terms. Further, I do not accept that Mr Bretherton suggested that Barclays had issued proceedings claiming £6 million, although I think it likely that Mr Bretherton explained his understanding of the compromise with Barclays.[59]During the remainder of 1997 Slater Heelis pursued their requests for documentation concerning the Barclays loans and compromise.[60]Finally I should note that the accounts for 1997 show directors’ emoluments of £81,448 (including social security costs). These were signed on 14 October 1998 and would have been seen within a few days thereafter by Mr Burton and Mr Bretherton. 1998[61]1998 saw the requests for information continue. The trustees, through their solicitors Davis Blank Furniss, instructed counsel, Mr Geoffrey Pass, to advise on two occasions. The advice was on each occasion provided to Slater Heelis. In his second advice Mr Pass explained that the beneficiaries had the right to see all documents relevant to the administration of the trust, including its investments. The trustees were not required, however, to give reasons for the manner in which they had chosen to exercise any discretion vested in them. As Mr Alcock explained in cross examination and I accept, this guided the way they chose to act. They regarded Mr Barnes as a difficult character and had in the back of their minds the fact they had had to remove him as a director of EHT because of the way he had fallen out with the banks in the past. They did not want him to interfere with the running of the trust or to try to remove its assets or otherwise create difficulties with Barclays. In something of an understatement, Mr Alcock said they felt Mr Barnes had nothing constructive to add. In the late summer Mr Barnes instructed a new firm of solicitors, Black Norman and in November they too made a wide ranging request for information and documents.[62]On 30 November Mr Barnes appointed himself as trustee of the Settlement in place of Mr Gould who, it was said, had died.[63]Directors’ emoluments for the year amounted to £121,429. They were set out in the accounts which were signed on 22 October 1999 and provided to the trustees, including Mr Barnes, shortly thereafter. 1999[64]In March 1999 the trustees decided to seek advice from Mr Sher QC and Mr Taussig. On 17 May they gave preliminary advice in writing that i) Barclays had a claim against the trustees for £1,253,641 to which there was no defence on the merits and probably no defence on the basis of limitation ii) Barclays might well have a good claim against the whole balance of the trust fund either(a) on the footing that the waiver of interest on the sum of £1,253,641 was never binding on Barclays or ceased to be binding on Barclays or(b) on the footing that Barclays had a right to interest or other income received by EHT on cash balances or other assets which could have been distributed to EHT.[65]They also advised that that the only safe course for the trustees was to realise the assets of EHT and to approach Barclays with a view to negotiating a settlement. For this purpose they should seek directions from the court. They concluded:
“Finally we should say that this does not appear to be a case of trustees losing substantial trust assets or of beneficiaries losing valuable rights. Rather it appears to be a case of trustees who never had any material trust assets (apart from the shares in EHT, now Thane Investments Limited) borrowing large sums at the request of the Settlor and investing those sums, again at the request of the Settlor, in shares in the Settlor’s company. When shortly afterwards the Settlor’s company was unable to pay its debts and its shares became worthless the trustees were left with large loans they were personally liable to repay and no means of repayment. Since that time the trustees have in substance been working for Barclays – and if at the end of the day there is anything left for the beneficiaries (which is far from certain) this will be due (it seems) to a combination of skilful management by the trustees, generosity or incompetence on the part of Barclays and plain good luck.”
[66]In the meantime, on 3 February 1999, Mr Barnes executed a further deed confirming his appointment as trustee. Further, on 3 March 1999 Mr Barnes and his family commenced proceedings seeking an order that the trustees be directed to concur in the appointment of Mrs Barnes and Mr Norman Black, a solicitor with Black Norman, in place of the trustees and in the transfer of all the trust property into the names of Mr Barnes and the new trustees. The trustees responded by issuing proceedings seeking directions pursuant to the advice given by Mr Sher and Mr Taussig.[67]Directors’ emoluments for 1999 amounted to £133,016. They were provided to the trustees shortly before the litigation came to a head in July 2000. 2000-2005[68]On 10 July 2000 the trustee litigation came on for hearing before Laddie J. It was settled by order that the trustees would retire, Mr Tomlinson would resign as a director of EHT and that he would use his best endeavours to procure Mr Knopp’s resignation.[69]In the event Mr Knopp did not resign but was dismissed. He brought proceedings for wrongful dismissal under action No. HQ 01011185 which were met by a counterclaim alleging that he was guilty of gross misfeasance. The trial came before HH Judge Thompson QC sitting as a judge of the High Court. By order dated 23 May 2002 he dismissed Mr Knopp’s claim, gave judgment for EHT and ordered Mr Knopp to pay £50,000 on account of the costs of the action. In short he found that Mr Knopp and Mr Tomlinson had been guilty of misfeasance in a number of respects over the period 1997 to 2000. Some idea of the degree of wrongdoing can be gained from paragraph 129 of the judgment:
“In my judgment this was symptomatic of the way in which Mr Giles Knopp and Mr Tomlinson treated the Thane and Denbrae companies as their own private fiefdom. They had started as they intended to go on, with Mr Giles Knopp enjoying meals at expensive restaurants, drawing cash and travelling at the company’s expense when there was no conceivable benefit or interest to the company. The excuse put forward by Mr Giles Knopp that everything he did was approved by his other director, I regard as jejune. Between them Mr Giles Knopp and Mr Tomlinson ran the companies for their own benefit and that of their friends. In my judgment there was a gross misfeasance and breach of fiduciary duty on the part of Mr Giles Knopp in his role of Director of the companies. In summary this is instanced as follows. He disposed of three properties owned by himself and his family to Denbrae, without obtaining independent valuations at a profit of £24,000 to himself, and in the case of the Newport property, enjoyed interest-free loans during the year preceding the transfer. In relation to seven other properties which were acquired during his stewardship, he caused £17,880 to be paid by way of commission to G.K. Ben, half of which found its way back to him. He authorised the acquisition of the Grant Arms Hotel at a price which did not represent its market value but which represented the amount Mr Wagner, Mr Tomlinson’s old friend, needed, and authorised the payment of Mr Wagner’s sale costs as well as the acquisition costs of the company. He then participated in the leasing the Grant Arms Hotel to Mr Wagner (who was supposed to have provided vacant possession) at a rental which Mr Wagner was able to pay rather than what the premises were worth. He was complicit in the preparation of the homemade lease by Mr Tomlinson, which he duly executed on behalf of Astim either without considering it or knowing that it did not contain a rent review clause. He was complicit in the concealment of that lease from the solicitors who were acting for the companies, with the consequence that if the sale to the Devonshire Pub Company had not been aborted, would have resulted in a payment of £215,000 to Mr Wagner, which but for that lease would have gone to the company. He approved a thoroughly reckless and wholly inappropriate exchange of the company’s property stock for some cash and a large number of penny shares in an Isle of Man company quoted on the AIM which had no track record and no dividend payments for the two previous years. He also approved the payment of commission or an introductory fee said to amount to 2.15% or the transfer of £800,000 shares in the Isle of Man Company notionally worth £56,000. Finally, together with his friend of 30 years standing, Mr Tomlinson, they provided each other with generous contracts of employment which contain provision for expensive motor cars, private health care at the top of the range, and expenses which enabled them to enjoy a luxurious lifestyle dining in expensive restaurants and drawing large sums of cash while only being answerable to each other.”
[70]On 30 July 2002 Mr Knopp was ordered to pay £206,778 by way of damages for misfeasance and, with interest, his total liability amounted to in excess of £317,026 by June 2005.[71]EHT also brought proceedings against Mr Tomlinson and his company Reyall under action No HC 0201377. EHT was in the process of preparing an application for judgment based upon the failure by Mr Tomlinson to comply with various court orders when Mr Tomlinson died. As I have indicated, his estate is subject to an insolvent administration order and the decision was therefore taken not to proceed with the claim. EHT has, however, obtained judgment against Reyall in the sum of £222,384 and costs.[72]In short, it has become clear that following Mr Bretherton’s resignation as a director Mr Knopp and Mr Tomlinson embarked on a course of misfeasance to the great cost of EHT and the Settlement.

The claimants’ case in outline

[73]The claimants sought to establish that Mr Bretherton and Mr Burton each: i) received excessive emoluments whilst acting as directors of EHT or its subsidiaries; ii) resigned as a director in circumstances in which there were obligations to the beneficiaries rendered it wrong for them so to do; iii) wrongfully accepted ex gratia payments from EHT; iv) failed to take any steps to remove Mr Tomlinson and Mr Knopp from their positions as directors of EHT when their duties as trustees dictated that they should do so.[74]During the course of the trial it emerged that there was a certain amount of common ground between the claimants on the one hand and Mr Bretherton and Mr Burton on the other. First, in the light of clauses 8 and 9 of the Settlement it was accepted that, subject to the trustees acting honestly and in good faith, there was no objection to them retaining shares in EHT.[75]Second, clause 11 of the Settlement made clear that the discretion and the powers conferred on the trustees were absolute and uncontrolled and, importantly, the trustees were not to be held liable or answerable to any beneficiary for the manner in which they exercised any such power or discretion; nor were the trustees to be held liable for any loss or damage accruing as a result of the exercise or failure to exercise any such power or discretion. Nevertheless, Mr Burton and Mr Bretherton both accepted that clause 11 must be read subject to the irreducible core obligations of a trustee, namely, to act honestly and in good faith.[76]Clause 11 must also be read together with the wide exclusion contained in clause 12. This exempts the trustees save for wilful and individual fraud or wrongdoing.[77]It was accepted that, in the context of a trustee’s duties, fraud means dishonesty and, wilful means a deliberate breach of trust.[78]As to the meaning of dishonesty, the parties drew my attention to a number of authorities. Mr Heap, on behalf of the claimants, relied on Walker v Stones [2001] 1 QB 902. Mr Jones QC, who appeared on behalf of Mr Bretherton, relied, in particular, upon Twinsectra v Yardley [2002] UKHL 12; [2002] 2 AC 164, as explained in Barlow Clowes International v Eurotrust International [2005] UKPC 37; [2006] 1 WLR 1476. In the end they agreed that the position can be summarised as follows: i) It is for the court to determine what are the normally acceptable standards of honest conduct. ii) The fact that a defendant genuinely believes that he has not fallen below the normally acceptable standards of honest conduct is irrelevant.[79]It has been long established that the test of honesty in the context of an express trustee is whether the trustee is conscious that he is committing a breach of duty or is recklessly careless whether he is committing a breach of duty or not: Armitage v Nurse [1998] Ch 241. Where the trustee is a solicitor then the issue is whether or not the trustee transgressed the normally acceptable standards of honest conduct expected from a solicitor. It is pertinent to ask: What view would an honest solicitor in the position of the trustee have held? Did the trustee fall below that standard? This is relevant in the case of Mr Bretherton who was a solicitor, albeit one who had not been in private practice for a number of years.[80]Clause 14 of the Settlement also has a bearing on the issues I have to decide. This expressly allowed the trustees to receive and retain for their own use all remuneration and other benefits derived from a directorship or other remunerated office in relation to any company in the shares of which any of the funds of the Settlement were invested. Again, this must be subject to the irreducible obligations upon any trustee. In the case of the emoluments and ex gratia payments received by Mr Bretherton and Mr Burton I must therefore consider whether they were of such a size or nature that it was dishonest of Mr Bretherton and Mr Burton to accept them. The case against Mr Bretherton Were Mr Bretherton’s emoluments excessive in the years 1994 to 1996?

The case against Mr Bretherton

[81]At the outset I should make it clear that the claimants accepted during the course of the proceedings that they could not maintain any claim against Mr Bretherton in respect of the remuneration which he and his fellow directors paid themselves during the period he was a director. Any loss is merely reflective of EHT’s loss for which EHT has or had a cause of action. Such was established by the Court of Appeal in Shaker v Al-Bedrawi [2002] EWCA Civ 1452, [2003] Ch 350 at [73] to [86]. There the court found that a beneficiary under a trust of shares cannot make a claim against his trustee for the diminution in the value of the shares owing the wrongful payment of money by the trustee from the company while acting as a director of that company where the company itself has a cause of action to recover from the trustee director the loss suffered by reason of the wrongful payment. Mr Heap, on behalf of the claimants, did not dispute this as a matter of principle. Nevertheless, he maintained his reliance upon the payment of what he described as excessive emoluments in support of the contention that the trustees were behaving dishonestly in the period 1994 to 1996 and that I should infer from this that Mr Bretherton well knew of the misfeasance of Mr Tomlinson and Mr Knopp in the period from 1997 to 2000.[82]Mr Heap submitted that there was no logical, consistent or ordered approach to the process of fixing the directors’ level of emoluments. Further, there was no correlation between the level of emoluments set and the directors’ duties, level of responsibility and hours worked. This, he said, was demonstrated by two matters. First, Mr Bretherton gave evidence that, as the company grew, so did its directors’ emoluments. Second, in 1994 Mr Burton received £3,000 more by way of emoluments than did Mr Tomlinson and Mr Bretherton. This was apparently awarded by reason of his “additional duties” as company secretary. In truth, however, Mr Burton did a good deal less work than Mr Bretherton. In all the circumstances Mr Heap invited me to conclude that the level of emoluments was largely a function of whether or not the company had a significant income in any particular year.[83]Turning to the specific years in issue, emoluments for 1994 amounted to £51,670. The income of EHT in that year was £99,826. Mr Heap submitted that these emoluments were manifestly excessive and based upon no sensible or justifiable reasoning. In particular he relied upon the following matters: i) There was very little company activity during the year because the development of the West Ardsley land was coming to an end. The only income, excluding bank interest, was £6,750 from plot sales. ii) It is extremely doubtful that the amount of work done by Mr Bretherton was anything like the 300 hours which he estimated. iii) Consistent with the above, Mr Burton wrote a letter to Mr Bretherton dated 20 October 1994 suggesting emoluments of £33,000 in the light of what he described as the “much reduced activity and profit” of EHT. iv) The directors met to discuss emoluments on 14 November 2004. At that meeting, and for no apparent reason, the proposed level of emoluments was increased from £33,000 to £48,000.[84]As for 1995, emoluments were £48,148, excluding the ex gratia payment made to Mr Burton upon his retirement in April of that year. Mr Heap submitted that the key to understanding the directors’ approach to emoluments for this year lies in that ex gratia payment of £25,000. He argued that Mr Burton had no legal entitlement to such a payment and that it was clear from Mr Bretherton’s evidence that the decision to make the payment took no account of the beneficiaries’ interest but rather was based upon Mr Burton’s poor health and anticipated future difficulties. He further submitted that in the absence of any directors’ service agreements, in circumstances where there was no consistent or explicable approach to the way in which emoluments were fixed and in the light of the fact that the company had no employees and that its only activity was the acquisition of property, the level of emoluments which Mr Bretherton and Mr Tomlinson awarded themselves could not be justified.[85]As for 1996, emoluments amounted to £43,344 and the claimants maintained the same criticisms as for the two earlier years.[86]These are powerful points and they need careful consideration. At the outset I accept the submission that the directors of EHT had no service contracts at the relevant time and, moreover, had no defined approach to the process of fixing the directors’ level of emoluments. Mr Bretherton accepted as much in cross examination. Nevertheless, he explained, and I accept, that, although there was no set formula, the directors tried to take into account relevant factors such as the size of the company, the nature of the business, the time spent by the directors on the affairs of the company, the responsibility of the directors and the strategic decisions they were taking. He was also conscious that Barclays would be looking at the accounts and any figures for remuneration therefore had to be reasonable.[87]Second, I accept Mr Bretherton’s evidence that the directors felt their responsibilities increased as the company grew. It is right to acknowledge that the assets of the company consisted almost entirely of cash at the bank. This was a matter of which the directors were fully conscious and it gave rise to a good deal of discussion and thought as to the direction that EHT should take in the future. In the end, and as I have explained, they decided to invest the assets and to develop EHT as a property company. It must be remembered that by 1994 the trustees had not heard from Barclays for some time. This was a matter to which the trustees gave careful consideration. As I have found, Mr Bretherton believed at the time that Barclays were entitled to all the assets of the Settlement under the terms of the compromise. However he also believed that as time moved on and what he believed to be the limitation period expired, there was a possibility of doing a deal with Barclays and producing a return for the beneficiaries.[88]I must also consider the time which the trustees believe they spent on the affairs of the Settlement and the business of EHT. In my judgment the best evidence of this is a schedule prepared by Mr Burton during the course of the trust litigation, most probably in about 1999. I am satisfied in the light of Mr Bretherton’s evidence that each of Mr Burton, Mr Bretherton and Mr Tomlinson contributed to that schedule. At that time they had access to all the documents of EHT. As Mr Alcock explained in evidence, there were many documents and they filled some 12 boxes. They were all handed over to Dominic following the order of Laddie J and yet have not been disclosed in this action. This has inevitably made the task of confirming the time estimates more difficult. Returning to the schedule, this reveals the approximate number of hours devoted to the Settlement and the business of EHT by the trustees in each of the years 1994 to 1996 as follows: Year Mr Tomlinson Mr Bretherton Mr Burton 1994 1995 1996 200 350 500 300 350 350 150 150 -[89]It is apparent from this table that Mr Bretherton spent in excess of 300 hours on the business of the Settlement and EHT in each of those years. I have explained earlier in this judgment the nature of the activities Mr Bretherton undertook. In my judgment the level of emoluments does not seem unreasonable in the light of this degree of effort and commitment.[90]I think it is also important to keep in mind a number of other matters upon which Mr Jones has placed reliance. First, it is notable that apart from the allegation of excessive remuneration, the claimants have not produced a single example of any abuse of EHT for the benefit of the directors. This is in striking contrast to the period 1997 to 2000 where the abuses where manifest and summarised by HH Judge Thompson QC in paragraph [129] of his judgment.[91]Second, in my judgment the evidence in fact reveals quite the opposite. Mr Bretherton explained that, with one exception, he never claimed any expenses while acting as a trustee or a director despite the fact it would have been quite legitimate for him to have done so. No expenses were claimed in respect of telephone bills, stationery, postage, computer costs, petrol consumption or, indeed, anything else. Particularly striking to my mind is the fact that Mr Bretherton engaged Mr Kemsley to assist him in relation to potential property transactions and paid Mr Kemsley himself personally out of his own pocket. This is not the mark of a dishonest man.[92]It is true that in 1994 Mr Burton received £3,000 more by way of emoluments than did Mr Tomlinson and Mr Bretherton. Clearly this cannot be justified on the basis of the numbers of hours devoted to the Settlement as the table set in paragraph [88] above shows. But is this evidence of dishonesty? In my judgment it is not. The difference in emoluments is relatively modest. Further, Mr Burton’s main role was dealing with the financial side of the company, that is to say the annual accounts, corporation tax and the like. He was company secretary and the onus lay upon him to ensure that it complied with all necessary formalities. In addition to these responsibilities he also participated in the decision making process in relation to the strategic direction of EHT and this was a matter of considerable concern to the trustees for the reasons that I have already given.[93]Finally, in relation to 1994 I must deal with the submission that Mr Bretherton could give no plausible explanation as to why Mr Burton’s proposed level of emoluments of £33,000 rose to £48,000 when the directors met on 14 November 2004. Mr Bretherton could provide no detailed explanation for the increase. But this is hardly surprising bearing in mind how long ago these events occurred. He did, however, maintain that Mr Burton’s letter was merely a proposal for consideration by all of the directors together. At the meeting the directors would have taken into account all the various matters to which I have referred, such as the size of the company, the amount of work they had done and their responsibilities. I would also note that the letter of 20 October 1994 is hardly consistent with the submission that these directors were engaged together in trying to extract as much money as they could from EHT. To the contrary, Mr Burton specifically suggested that they take less in fees that year in view of the reduced activity and profit.[94]For all these reasons, and subject to the ex gratia payment which I consider later in this judgment, I have reached the conclusion that Mr Bretherton’s emoluments in the years 1994 to 1996 do not evidence dishonesty.

Mr Bretherton’s resignation

[95]Mr Heap submitted that Mr Bretherton’s resignation as a director came about in a curious way and, to put it bluntly, he was ‘pushed’ and did not ‘jump’. He submitted the only realistic conclusion which I can reach on the evidence is that Mr Tomlinson decided that Mr Bretherton had to go and he therefore forced him out. He further submitted that the letter written by Mr Tomlinson to Mr Bretherton on 5 December 1996 should have “set bells ringing” in Mr Bretherton’s mind, particularly as Mr Tomlinson saw fit to remind Mr Bretherton of the protection that the deed of Settlement offered him.[96]I have no doubt that Mr Tomlinson did indeed want Mr Bretherton to retire. Nevertheless, I have already rejected the submission that Mr Bretherton decided to resign because of pressure from Mr Tomlinson. On the contrary, I have concluded that he decided to resign because he had little time available in the light of his full time job and because Mr Tomlinson was much more experienced in property transactions and that was the direction that EHT was taking. In my judgment this does not form any basis for a contention that Mr Bretherton’s resignation amounted to an abrogation of his duties as a trustee.

The payment to Mr Bretherton

[97]Mr Heap submitted that Mr Bretherton was wrong to accept the ex gratia payment of £45,000 which he received after retiring as a director of the company. I have referred in paragraph [52] of this judgment to the letter which Mr Bretherton wrote on 31 January 1997 acknowledging that he had no claim for compensation for loss of office and to the letter of 27 March 1997 in which he thanked Mr Tomlinson for what he described as the very generous cheque.[98]Mr Bretherton accepted in cross examination that he thought about whether or not it was appropriate to keep the cheque when he received it and he decided that it was. Mr Heap submitted that if I accept that Mr Bretherton did give thought to the matter then I must conclude that his decision to keep the money was dishonest. He submitted that the situation would have been different if Mr Bretherton had not been a trustee because, in those circumstances, the payment could have been viewed as a normal commercial transaction. It followed, so he submitted, that Mr Bretherton must have known that in making the payment Mr Tomlinson was acting in a way which was directly contrary to the interests of the beneficiaries. Alternatively, if he did not think about it then he was recklessly indifferent as to whether or not Mr Tomlinson’s decision was incompatible with those interests.[99]Before dealing with the substance of these submissions I would make the following two preliminary observations. First, EHT has already brought a claim against Mr Bretherton in respect of the ex gratia payments made to Mr Bretherton and Mr Burton. The proceedings were compromised before the claim in the present proceedings was issued. In the circumstances the claimants accept that they have no claim against Mr Bretherton in respect of the payment itself. Secondly, and as I have already mentioned, clause 14 of the Settlement expressly permitted Mr Bretherton and Mr Burton to receive and retain remuneration and other benefits derived from their directorship of EHT subject, of course, to their irreducible requirement to act honestly. Once again therefore the claimants rely upon the payment as evidence of dishonesty on the part of Mr Bretherton and Mr Tomlinson and this forms part of the background against which the claimants invite me to conclude that Mr Bretherton dishonestly allowed Mr Tomlinson remain as a director of EHT or at least deliberately turned a blind eye to the obvious misfeasance of Mr Tomlinson and Mr Knopp.[100]I have to say that I do consider that £45,000 was a rather large sum for Mr Bretherton to accept as an ex gratia payment. However, in the course of his cross examination he explained that such payments were, to his mind, relatively common in commerce and that he therefore did not consider that accepting the money was in any way improper. He also explained that he regarded the payment as a reward to which he was not legally entitled but nevertheless represented a ‘thank you’ gift for all the hard work that he had put into the Settlement and stress that he had endured. The reason he paid the money back was because he did not wish to become involved in substantial litigation.[101]I have reached the conclusion that I should accept Mr Bretherton’s evidence. He dealt with the questions put to him in a frank and open manner and I am satisfied that he genuinely believed that it was reasonable, appropriate and lawful for him to retain the ex gratia payment. I do not accept that he behaved dishonestly. I accept the submission advanced on his behalf that he honestly considered that the payment accorded with normal commercial practice and was perfectly proper.

Permitting Mr Tomlinson and Mr Knopp to remain as directors

[102]The claimants submitted that Mr Bretherton dishonestly permitted Mr Tomlinson and Mr Knopp to remain as directors of EHT when he knew of or was recklessly indifferent to their misfeasance. In support of this submission Mr Heap relied on the following matters.[103]First, it was said that the trustees adopted a very curious approach to the Barclays loan. They negotiated a limit to their own personal liability at £50,000, entered into the compromise agreement with Barclays and then persuaded the bank to freeze the interest. In these circumstances, so it was submitted, it was odd to say the least that the trustees, and Mr Bretherton in particular, did not press to wind up the Settlement in 1994 when there was apparently sufficient money in EHT to pay off the Barclays loan, avoid any personal liability and perhaps even make a distribution to the beneficiaries. Instead, it was submitted, the trustees allowed the business of EHT to continue for their own personal benefit.[104]I have addressed the substance of this contention in paragraphs [39] to [43] of this judgment. I have reached the conclusion that Mr Bretherton believed that all monies held by the Settlement were payable to Barclays, that there was therefore no possibility of making a distribution to the beneficiaries unless an agreement with Barclays could be reached and that such an agreement was unlikely to be achieved before 2003. In all circumstances the best course was to ‘lie low’, continue to develop the business of EHT as best they could and try and negotiate with Barclays in 2003, once some 12 years had elapsed since the last contact and in the hope that a suitable settlement could then be reached. I have no doubt that a major concern of Mr Bretherton was his own personal liability and, as the claimants rightly submitted, he accepted that he carried everywhere with him the letter in which Barclays agreed to limit the trustees joint liability to £50,000. I do not, however, think that this is in any way inconsistent with the conclusion that I have reached. For the reasons that I have given the compromise agreement was, in my judgment, susceptible to different interpretations. A reasonable interpretation, particularly if the Interest letter is not taken into account, is that Barclays were entitled to all assets of the Settlement, and it was so understood by Mr Bretherton. Subsequently, Mr Sher and Mr Taussig confirmed the ambiguous nature of the compromise agreement in their advice of March 1999.[105]Second, it was said that the trustees sought to mislead Mr Barnes in respect of the Barclays loan. The claimants rely in particular here upon the letter of 5 August 1997 in which Mr Tomlinson informed Mr Barnes’s solicitors that the amount outstanding to Barclays was over £10.5 million. The claimants say that Mr Bretherton must have known the letter was an attempt to mislead Mr Barnes and did nothing to correct the impression it gave.[106]I have set out the details of this letter and Mr Bretherton’s reaction to it in paragraphs [53] to [55] of this judgment. I do not believe that Mr Bretherton thought the letter was accurate and, to the best of his knowledge, no calculation had been carried out suggesting that the amount owing to Barclays was £10,838.150. Nevertheless, I have accepted Mr Bretherton’s evidence that he was under the impression that Barclays were entitled to everything in the Settlement and for that reason he did not think it necessary to elaborate or correct the letter. I think it also true to say that none of the trustees wished to excite Mr Barnes’s interest. They considered Mr Barnes to have a difficult personality and that he was a person who was unlikely to make any useful contribution to the administration of the Settlement or the running of EHT. Under clause 16 of the Settlement the trustees were at liberty to leave the conduct of the business of EHT wholly to its directors and no beneficiary was entitled to require the distribution of any dividend or require the trustees to exercise any powers they might have of compelling any such distribution. The trustees had no obligation to consult the beneficiaries when exercising powers conferred by the trust deed and, indeed, Mr Barnes himself was the settlor, not a beneficiary, and the trustees owed no duty to him personally at all. They were conscious that he was a domineering and difficult man to work with. In summary, I believe that they wanted as little as possible to do with him. Against this background I do not accept that Mr Bretherton deliberately sought to mislead Mr Barnes and do not accept that he behaved dishonestly.[107]The third matter upon which the claimants rely is the meeting which took place at Mr Bretherton’s house on 31 August 1997. It was submitted that I should accept Mr Barnes’s version of events and that Mr Barnes put Mr Bretherton on notice of his belief that “something funny was going on” within EHT and that such was his concern that he threatened to take action against the trustees should that suspicion prove correct.[108]I have dealt with this meeting in paragraphs [56] to [58] of this judgment. I gained the clear impression that Mr Barnes’s principal concern was the direction that EHT was taking and, in particular, he did not approve of the fact it was engaging in property dealings. But for the reasons I have already given I do not accept that this meeting gave Mr Bretherton any ground to suppose that Mr Tomlinson was acting dishonestly.[109]It was also submitted that Mr Bretherton at the least deliberately turned a blind eye to the obvious. Had he not done so, with very little effort and simple means he could have ascertained the extent to which Mr Tomlinson and Mr Knopp had begun to run EHT for their own benefit. Had he asked whether or not they had awarded themselves service contracts and called for the relevant documents, he would have realised that the two directors had acted in a way which was wholly contrary to the beneficiaries’ interests. He should have concluded that, unless stopped, Mr Tomlinson and Mr Knopp were likely to run EHT for their own benefit in flagrant disregard of the beneficiaries of the Settlement.[110]I do not accept these submissions. As clause 16 of the Settlement makes clear, the trustees were not required to intervene in the management or conduct of the business of EHT. Unless they had notice of any dishonesty or misappropriation of money then they were at liberty to leave the conduct of the business wholly to its directors. Mr Bretherton had known Mr Tomlinson for over 20 years. Mr Tomlinson was a chartered accountant, at one time a partner in Bedell & Blair, the firm which audited the accounts of Northern Developments, and for many years had been engaged in the property investment business as a director of a quoted property company called Dares Estates. Mr Knopp’s appointment as a director of EHT was also, to Mr Bretherton’s mind, a logical progression. He was originally the “deal finder” and Mr Bretherton though it appropriate that he should become a director of EHT. Mr Knopp had been known to Mr Tomlinson and Mr Burton since 1972. From 1972 to 1979 Mr Knopp was the auditor of EHT’s accounts and was also for a time employed by Dares Estates as finance director. In summary, he was familiar with property matters, a qualified accountant, and had previous involvement in the affairs of EHT. Mr Bretherton did not at any time discuss with Mr Tomlinson or Mr Knopp their terms of employment or the method to be used for assessing their remuneration. Prior to his resignation, none of the directors of EHT had ever had a contract of employment or a service agreement of any kind and Mr Bretherton had no reason to think that there would be any change of policy thereafter. He was never party to any discussions about a new policy or any such change. Mr Bretherton believed that Mr Knopp and Mr Tomlinson would continue to approach the business of EHT in the way it had been approached prior to his departure.[111]Finally I turn to the accounts for the years 1997, 1998 and 1999. The claimants submitted that these show massively increased emoluments and benefits and even if Mr Bretherton genuinely did not realise what was happening within EHT then sight of those accounts must have led him to conclude that Mr Tomlinson and Mr Knopp were engaged in significant misfeasance. The claimants therefore contended that Mr Bretherton was duty bound to act to curb Mr Tomlinson’s and Mr Knopp’s excesses in 1997 and came under a new duty so to do each time that he read the company’s annual accounts.[112]The directors were paid emoluments for 1997, 1998 and 1999 of £81,448, £121,429 and £133,026 respectively. Were these figures so excessive that Mr Bretherton must have known or was recklessly indifferent as to whether the directors were guilty of misfeasance? In my judgment the answer to this question is clearly no. I arrive at that conclusion for all of the following reasons.[113]First, the 1997 account were, in all likelihood, received by Mr Bretherton and Mr Burton in October 1998. They were signed by the auditors, Grant Thornton, on 21 October 1998. They revealed an increase in directors fees, certain pension costs and the acquisition of motor vehicles to the value of £33,850. To Mr Bretherton’s mind these were not in anyway out of the ordinary for a company engaging in property dealings and with purchases of £1.87 million and assets of £3.3 million. Mr Bretherton discussed the accounts with Mr Burton who looked at them closely and it did not occur to either of them that there had been any mismanagement of the company.[114]The 1998 accounts were signed off by the directors on 22 October 1999 and by the auditors, Grant Thornton, on 26 October 1999. The directors emoluments had risen to a total of about £122,000 and another motor vehicle had been added at a cost about £26,000. The assets of the company had apparently increased to some £4 million. I should also note that the Chairman’s statement recorded, as a post balance sheet event, the acquisition by EHT of 8,450,000 shares in Manx & Overseas Plc, a property company, and described as a medium term investment.[115]By this time it must be recalled that Mr Barnes had become a trustee and had begun proceedings seeking an order that the defendants be removed as trustees and replaced by Mrs Barnes and Mr Black. For their part, the trustees had begun proceedings seeking directions from the court pursuant to the advice of Mr Sher and Mr Taussig. The accounts were considered at what was described as an acrimonious AGM of EHT on 17 December 1999. There is no suggestion that Mr Barnes, or indeed anyone else, raised the issue of excessive emoluments being paid to the directors. Mr Barnes produced a memorandum in advance of the meeting setting out the matters he wished to raise. These did not include remuneration. It is also relevant to consider the skeleton argument prepared on behalf of the Barnes family in the trust litigation. Despite numerous references to the remuneration paid to the trustees, it is not suggested that the amounts were so excessive as to amount to evidence of dishonesty. The complaints were rather that the beneficiaries had lost confidence in the trustees’ ability to have any regard to their welfare; the trustees had been less than open in the manner in which they had disclosed to the beneficiaries what had been going on; the trustees had failed to address over a number of years the issue of the Barclays loan; the trustees appeared not to recognise their fiduciary duties; the trustees had allowed one of their number (Mr Tomlinson) to indulge in commercial property speculation through EHT; and finally, the trustees now had no substantial interest to protect.[116]Finally, I should mention the 1999 accounts which were signed off by the auditors on 22 May 2000, less than two months before the court hearing on 11 July 2000 when the trustees resigned. The emoluments were of the same order as for 1998 and Mr Bretherton assumed that the directors were liquidating the property assets of the company to leave EHT in a cash rich position in readiness for distribution to the Settlement, payment of tax liabilities and then final agreement with Barclays. It seems that these accounts add nothing to the accounts of the previous years. Indeed, Mr Bretherton does not even know whether they were ever presented to an AGM.[117]In summary, I reject the conclusion that the emoluments for the period 1997 to 1999 as disclosed on the face of the accounts were so excessive that Mr Bretherton must have known or was reckless as to whether the directors were guilty of misfeasance. The case against Mr Burton Were Mr Burton’s emoluments excessive in 1994?

The case against Mr Burton

[118]The claimants rely upon the same facts to support their claim against Mr Burton. Again it was submitted that the fact that the emoluments for the year were excessive did or should have alerted Mr Burton to the fact that the directors were prepared to disregard their duties as trustees and placed him under a duty to ensure that so long as he remained as a trustee the remaining directors did not take excessive emoluments.[119]I reject this submission for like reasons to those given in relation to the equivalent allegation made against Mr Bretherton. In short, he was company secretary with the attendant responsibilities of that office, he dealt with the financial side of the company and was also responsible for the strategic direction of the company. I do not believe that the emoluments paid to Mr Burton in 1994 are evidence of dishonesty.

Mr Burton’s resignation

[120]The submission under this head depends upon the contention that Mr Burton’s emoluments were excessive in 1994. It was submitted that because Mr Burton knew that the emoluments could not be justified he failed properly to bear in mind the beneficiaries’ interests when resigning and so his resignation amounted to a breach of his duties as a trustee.[121]Once again, I reject this submission. Not only were the emoluments for 1994 not so excessive as to amount to evidence of dishonesty but, in addition, I am wholly satisfied that he resigned as a director because of his extremely poor health and the severe stress which he suffered as a result of his duties as a trustee and director.

The payment to Mr Burton

[122]The claimants maintained that the acceptance by Mr Burton of an ex gratia payment of £25,000 was again evidence of dishonesty. They submitted that, but for the fact that he was a trustee, Mr Burton could have justified his acceptance of the payment on the basis that it amounted to a relatively common business transaction. However, as a trustee, he could not have genuinely believed that his acceptance of it was anything other than directly contrary to the interest of the beneficiaries.[123]Once again, and for like reasons to those that I have given in relation to the equivalent allegation made against Mr Bretherton, I reject this submission. I have no doubt that Mr Burton, like Mr Bretherton, thought that ex gratia payments were common in the commercial world. I do not believe for one moment that Mr Burton thought that his acceptance of the payment was in any way dishonest; rather, I think it overwhelmingly likely i). that he considered it formed a measure of compensation for the stress and ill health he had endured over many years. In reaching this conclusion I think it relevant that the directors worked for many years without any remuneration at all and did not pay themselves any money until EHT had discharged its debts. Further, Mr Burton’s letter of 20 October 1994 suggested a lower level of remuneration for that year. This is a clear indication that Mr Burton was concerned to ensure that any remuneration he received was reasonable. Moreover, the remuneration was always stated in the published accounts of EHT and so available to Mr Barnes and the beneficiaries and indeed any other interested third party. I accept the evidence of Mr Bretherton and Mr Alcock that Mr Burton was both conscientious and a worrier. I also accept the submission advanced on Mr Burton’s behalf that it is simply not credible that, at the end of a blameless career, he would had been prepared to expose himself to additional stress in his retirement by perpetuating the existence of EHT for the benefit of the remaining directors. On the contrary, when he retired, he left the company in the hands of Mr Bretherton and Mr Tomlinson whom he had known and respected for very many years and whom he knew to have worked diligently to fulfil their obligations. He had every reason to believe that, so long as Mr Tomlinson and Mr Bretherton remained directors, the company would be run entirely properly.

Permitting Mr Tomlinson and Mr Knopp to remain as directors

[124]The claimants maintain that the accounts should have alerted Mr Burton to the misfeasance carried out by Mr Tomlinson and Mr Knopp. In so doing they relied upon the same arguments advanced against Mr Bretherton. Nevertheless the claimants accepted that their case against Mr Burton was not as strong as that against Mr Bretherton. In my judgment, and for like reasons to those that I have given already in relation to the claim against Mr Bretherton, I reject the submission that the accounts should have alerted Mr Burton to the misfeasance of Mr Tomlinson and Mr Knopp. Is the £25,000 paid to Mr Burton by EHT recoverable by the Settlement as a matter of law?[125]During the course of the hearing the claimants accepted that they could not maintain a claim against Mr Burton in respect of the emoluments paid to him in 1994 because any loss to the Settlement was merely reflective of loss to EHT. The case against Mr Burton for repayment of the £25,000 was not, however, abandoned. Nevertheless the claimants accepted that, in so far as the payment was not properly made, EHT had a claim for its recovery. In the circumstances it seems to me that the claim for the repayment of the £25,000 is indistinguishable from the claim in respect of the directors’ emoluments. In both cases any loss to the Settlement is reflective of loss to EHT. Neither claim is available to the claimants in the light of the decision of the Court Appeal in Shaker v Al-Bedrawi. Conclusion.[126]I am satisfied that at all times Mr Bretherton and Mr Burton acted honestly and in good faith. Their behaviour did not at any time fall below the normally acceptable standard of honest conduct. The claims against them must be dismissed.

Cited in 1 later judgment