Courtwood Holdings S.A. v Woodley Properties Ltd & Ors [2017] EWHC 3514 (Ch)

Case No HC-2015-002163; HC-2015-002636[2017] EWHC 3514 (Ch)IN THE HIGH COURT OF JUSTICECHANCERY DIVISIONVenue ROLLS BUILDING14 JULY 2017
Before
MR JUSTICE NORRIS
Between
COURTWOOD HOLDINGS S.A.Claimant-v-
Between
WOODLEY PROPERTIES LIMITEDDefendant(a company registered and incorporated under the laws of Jersey)DefendantDOUGLAS MAGGSDefendantTHE HONOURABLE CHARLES GEORGE YULE BALFOURDefendantTHE RIGHT HONOURABLE DAVID MELLORDefendantSVEA BALFOURDefendantWHARF LAND INVESTMENTS LIMITED (IN ADMINISTRATION)DefendantNIGHT RHYTHM LIMITEDDefendant(a company registered and incorporated under the laws of Gibraltar)DefendantTAMADOT CAPITAL SADefendant(a company registered and incorporated under the laws of Nevis)DefendantKINGFISHER HOLDINGS LIMITEDDefendant(a company registered and incorporated under the laws of Nevis)DefendantWOODCOCK LIMITEDDefendant(a company registered and incorporated under the laws of Gibraltar)DefendantCHARLESTOWN MANAGEMENT LIMITEDDefendant(a company registered and incorporated under the laws of Nevis)DefendantCHATEAU MANAGEMENT LIMITEDDefendant(a company registered and incorporated under the laws of Nevis)Defendant
MR M CUNNINGHAM QC and MR G BANNER (instructed by Wallace LLP) appeared for Claimant.MR T ROBINSON (instructed by Isadore Goldman) appeared for Fifth, Ninth and Tenth Defendants.MR G LIDINGTON (instructed by Birketts LLP) appeared for Third Defendant.MS B STEVENS HOARE QC and MS H TER BERG (instructed by CMS Cameron McKenna LLP) appeared for First, Fourth, Eighth, Eleventh and Twelfth Defendants.MR E DAVIES (instructed by DLA Piper LLP) appeared for Sixth Defendant.
JUDGMENTDate Friday, 14 July 2017
[1]MR JUSTICE NORRIS: There was a development site at Sandford Farm near Reading. In 2005, Mr Maggs and Mr Balfour promoted a development investment company called Sandford Farm Properties Limited (“Sandford Properties”) to induce investors to fund the purchase of the site. Sandford Properties bought the site with the benefit of the investors' monies and with a mortgage from a commercial lender. Courtwood Holdings SA (“Courtwood”) a Panamanian company, was one of the investors.[2]The aim was to acquire the site and then seek planning permission for it, thereby greatly enhancing its value. Sandford Properties itself did not undertake the seeking of planning permission or the negotiation of associated planning agreements. This was undertaken by a company called Wharf Land Investments Limited (“Wharf”), in which Mr Maggs, together with Mr Mellor, were involved as participants.[3]The property advisory agreement between Sandford Properties and Wharf provided that Wharf would protect and promote Sandford Properties' best interests and seek to maximise the returns to Sandford Properties, in which connection it would use all reasonable endeavours to protect the interests of Sandford Properties and would act in good faith towards Sandford Properties, taking all reasonable steps to avoid a conflict of interest.[4]It seems that that original agreement with Wharf was replaced by subsequent agreements with Wharf and other parties; but for present purposes, nothing turns on that and, for the simplicity of analysis, I shall assume that Wharf continued to owe obligations towards Sandford Properties of the nature I have summarised.[5]In 2009, Sandford Properties ran out of money. The investors in Sandford Properties removed the board. Immediately thereafter, Wharf presented a winding up petition against Sandford Properties. It is suggested, though of course it remains yet to be established, that the petition was an attempt by those behind Wharf to ensure that there was no independent management of Sandford Properties.[6]The consequence of the presentation of the petition against Sandford Properties was that its commercial lender appointed receivers over Sandford Farm. The object of the receivers was, of course, to sell Sandford Farm, with its partly progressed planning application, in order to recover its indebtedness.[7]A matter of days later, Woodley Properties Limited (“Woodley”) was incorporated. The participators in Woodley were in effect those who had been behind Wharf. (I simplify the position).[8]The receivers received bids from the investors behind Sandford Properties on the one hand, and bids by Woodley on the other hand for the development site. The receivers decided to sell to Woodley and did so for £15 million, which was enough to repay the commercial lender.[9]Shortly after the entry of contracts between the receivers and Woodley, the site received planning permission for residential development in a number of categories. Thereupon, Woodley sold the development site with the planning permission to a developer for £27 million.[11]One of the levers that Woodley had used to persuade the receivers to sell the site to it had been that it was entitled to the benefit of all of the work that had been done to secure the planning permission, which had now come to fruition. The £27 million purchase price was divided between those who were participators in Woodley. These were Gibraltarian or Nevis companies which were the corporate vehicles of the human participators.[12]The agreement for a sale to the developer included two provisions for overage payments. One was an interim overage payment, which became due on a quarterly basis by reference to sales of completed units. The other, and for present purposes the more important, provision was contained in paragraph 18 of the Second Schedule to the Agreement and provided, in effect, for an accelerated overage payment due on the sixth anniversary of the completion date in respect of unsold or undeveloped units within the planning permission. It assumed that all those units had been sold or would be sold and calculated the overage payment that would be due on that hypothesis, making it payable as a lump sum in advance, according to a formula.[13]Under the sale agreement between Woodley and the developer, some interim payments were made. In connection with those interim payments, Woodley engaged the services of Knight Frank to assist in the negotiation and calculation. Knight Frank acted under a retainer, evidenced by a letter from Knight Frank dated 1 October 2014. This said that their fee for acting would be based on a fixed fee of £15,000 for agreeing an interim overage payment, but if paragraph 18 became engaged, then they would be entitled to charge a fee of 0.75 per cent of the total overage payment, all subject to VAT.[14]Paragraph 18 did become engaged and, in January 2017, Woodley received a further overage payment of the order of £13 million, net of VAT.[15]Sandford Properties is now in liquidation. Courtwood, one of the original investors who lost out when the receivers sold the development site to Woodley, has acquired from the liquidator Sandford properties’ rights of action. Courtwood has brought proceedings saying that Wharf owed fiduciary duties to Sandford under the property advisory agreement to which I have referred and breached those duties in relation to the transfer, by the receivers, of the development site to Woodley effectively, as I understand, in circumstances where the participators in Woodley competed against the investors in Sandford Properties to acquire the site.[16]The present proceedings (commenced in 2015) by Courtwood are against Woodley and its participators. In relation to the participators, the nature of the claim is that they are knowing recipients of property, namely part of the sale proceeds and the overage payments, generated by Wharf's breach of fiduciary duty. In relation to Woodley, Courtwood claims that Woodley holds the remainder of the land and holds the proceeds of sale and the benefits deriving from the sale of the remainder of the development site, including the right to receive overage, on constructive trust for Courtwood or, in the alternative, is liable to give restitution to Courtwood in the amount of all such property and/or profits and/or benefits derived from that property.[17]I should note that the defendants deny that there was any breach of fiduciary duty. They allege that the circumstances of the sale by the receivers of the development site are unimpeachable. They say that there are no traceable assets arising from that transaction which survive to enable Courtwood to advance a claim because the sale proceeds were used to discharge the loan that was taken out to acquire the land and they deny knowing receipt of any property acquired in breach of fiduciary duty.[18]Knowing that there was a right to receive overage payments (including the accelerated overage payment), Courtwood applied without notice to Mr Justice Hildyard on 31 July 2015 for a proprietary injunction to be granted. This was renewed on undertakings before Mr Justice Mann on 5 August 2015, but then became the subject of a contested hearing before Mrs Justice Asplin on 11 July 2016. She granted a proprietary injunction directing that, until trial or further order, Woodley must not dispose of or deal with or diminish the value of "any overage received by the respondent under the agreement and the right to receive any overage under the agreement". Accordingly, the injunction bound the gross receipts arising under the overage obligations.[19]Courtwood supported that proprietary injunction with a cross-undertaking in damages. As I have indicated, Courtwood is a Panamanian company, originally an investor in the scheme, which has lost its money but which has purchased the right to pursue the litigation.[20]I have noted that Knight Frank was retained to assist in the negotiation of the overage payment. Knight Frank presented an invoice in respect of that work, which indicates that, apart from what is described as “a balancing payment” (which I think refers to work undertaken in relation to an interim overage payment) the bulk of the work charged for relates to work under paragraph 18 of the Second Schedule, namely the negotiation of the amount of the advance overage payment. Their bill is in the sum of £112,341, plus VAT, and was delivered on 19 January 2017.[21]A trial is set for a window opening on 26 February 2018. There is before me an application by Woodley to vary the proprietary injunction granted by Mrs Justice Asplin to permit the payment out of the gross receipts of the overage the amount of the Knight Frank bill. This is strongly resisted by Courtwood. The arguments have been canvassed in correspondence. The competing positions may be summarised in a thumbnail sketch in these terms.[22]Courtwood says that, having secured a proprietary injunction, the gross overage receipts must be treated as, in effect, its property. The question is whether its property should be used to satisfy an invoice raised by Knight Frank pursuant to a retainer which Woodley entered into in October 2014 and which simply constitutes a commercial debt of Woodley's.[23]In support of its application, Woodley submits that this is not a simple commercial debt. Courtwood is only entitled, if it succeeds, to an account of the profits made by Woodley, that those profits will be the overage receipts net of the costs of securing them, that Knight Frank's bill was a necessary expense properly incurred to secure the best payment out of the developer in respect of the overage, and accordingly, it ought not to be treated as an ordinary commercial debt of Woodley, and the proprietary injunction should be varied so as to permit its payment.[24]I propose to accede to the application.[25]The position taken by Courtwood derives from propositions set out by Lord Justice Sales in Marino v FM Capital Partners Limited [2016] EWCA Civ 1301. I am bound by those observations so far as they form part of the ratio of the case and I would loyally follow them. I do not think that they are of application in relation to the matter before me without some refinement.[26]In Marino, Mr Marino sought a variation of a proprietary injunction so that he could have recourse to certain funds which FM Capital asserted was its property in equity for the purpose of paying his reasonable living expenses and legal expenses. For present purposes, one can treat the same principles as applying if Mr Marino had applied to discharge an ordinary commercial debt that he owed, for example, to a garage.[27]In beginning his discussion,

Lord Justice Sales said at paragraph 18:

"The ordinary position is that a defendant who has resources of his own which are not affected by a good arguable claim by the claimant that they are the claimant's property, should be required to use those unaffected resources to finance his legal defence and to meet his living expenses."
I of course accept that and I would apply the same principle to an ordinary commercial debt.[28]In paragraph 19, Lord Justice Sales went on to address a slightly different situation, namely where the claimant had a good arguable proprietary claim in relation to funds in the defendant's hands but they were the only funds out of which a defendant could pay his legal expenses or his living expenses, because he lacked any other assets. Lord Justice Sales noted that, in that case, the court would have to weigh up the balance of justice to decide whether the defendant should be permitted recourse to the claimant's property. He relied on the observation of Sir Thomas Bingham MR in the Sundt Wrigley case (unreported 23 June 1995) that the matter involved a careful and anxious judgment "... as to whether the injustice of permitting the use of the funds held by the defendant is outweighed by the possible injustice to the defendant if he is denied the opportunity of advancing what may, in course, turn out to be a successful defence."[29]In deciding whether a case fell within this latter category, Lord Justice Sales pointed out at paragraph 20 that the onus was on the defendant to persuade the court that he had no or no adequate assets of his own unaffected by the proprietary claims and, in that regard, Lord Justice Sales had pointed out in paragraph 15 of his judgment that the question was not whether the defendant himself had those assets or means, but whether there were assets or means available to him which could be utilised for the purposes sought.[30]Lord Justice Sales summarised the position at paragraph 23 by adopting a four-stage process adumbrated by Mr Justice Lewison in the Independent Trustee case, [2009] EWHC 161. The first question is whether the claimant had an arguable proprietary claim to the funds in issue; the second was whether the defendant had arguable grounds for denying that claim; the third was, if he had, had the defendant demonstrated that, without the release the funds in issue, he could not effectively defend the proceedings, or meet his legitimate living expenses; and lastly, if that was demonstrated, where did the balance of justice lie as between, on the one hand, permitting the defendant to expend funds which might belong to the claimant and, on the other hand, refusing to allow the defendant to expend funds which might belong to it?[31]All of this is clear and I must loyally apply it. But the position being addressed in those cases was the ordinary position. That is to say, where the claimant had a proprietary claim to assets in the defendant's hands, and the defendant wanted to use those assets to discharge his personal liabilities, living expenses, costs or commercial debts, having himself no claim to those monies.[32]As I see it, that is not the position in the present case. This is a case, itself not out of the ordinary, of a claim for an account against a knowing recipient of property acquired in breach of trust by a fiduciary. The remedy against him is that of an account of profits, see Akita Holdings v Attorney General of the Turks and Caicos Islands [2017] UKPC 7, as summarised in the first paragraph of the headnote.[33]What is sought to be done in the instant case is to recover from property which is to be treated as trust property expenses incurred in relation to that trust property. As to that, I think there are two principles which must guide one to the answer. The first, on which I place the lesser reliance is the broad principle that he who seeks equity, must do equity; he who seeks to claim the equitable title to property in the defendant's hands must make allowance for the costs of protecting or acquiring the asset to which he makes claim. The ultimate relief relates to an account of profits, not to an account of gross receipts. And there will be cases, not every case, where it is right and proper to permit what is essentially a trust expense to be paid out of the trust property.[34]The second principle, a narrower one, on which I place principal reliance, is that whilst a trustee cannot benefit from his position as a trustee, so that there could be no question of his resorting to trust monies to pay any personal expenses of any sort whatsoever, including commercial debts, yet a trustee is entitled to be indemnified out of the trust property for expenses reasonably and honestly incurred.[35]So, the way I would approach the present application is, whilst recognising that Courtwood has obtained a proprietary injunction, which protects the gross assets until the trial in February, when considering a variation, I should ask whether there is a serious issue to be tried in relation to Woodley's claim to an indemnity out of the trust fund in respect of its liability for Knight Frank's fees. In other words, is there some serious issue that the Knight Frank fees are not proper trust expenses or that they were not honestly incurred or that they are not reasonable in amount?[36]When I asked Mr Cunningham QC what would be Courtwood's position in relation to that, he said that they might wish to challenge whether it was appropriate to engage a professional at all in relation to the overage payment. That struck me as surprising, given the amount of the overage payment, the complexity of the provisions of paragraph 18 of the Second Schedule, of which I have only given the briefest summary, and the obvious areas for disagreement over value. Then he said the question would arise whether the fee was appropriate. But that is not a point that has hitherto been taken, and on its face a fee of 0.75 per cent for negotiating a complex overage payment does not strike one as so wildly out of line that there is no serious issue but that it would be disallowed on an account. He suggested that perhaps it would have been right for a trustee to put out such work to tender and that there was no evidence as to the circumstances in which Knight Frank had been retained. He suggested that, instead of the fixed fee element and the commission payment, perhaps it would have been more appropriate for Knight Frank to have been remunerated on a time charge basis. These may be points that might be taken on an account, but they do not appear to me to amount to a serious challenge to the impropriety of the Knight Frank invoice as a trust expense. Indeed, in correspondence, Courtwood have not sought to charge the professionalism itself of Knight Frank, and have explicitly said so.[37]So the question, it seems to me, in relation to what is plainly a trust expense and not a personal expense, is whether the interests of justice require the trustee personally to bear out of his own means or to undertake a personal liability to borrow to fund the payment, when the gross payment is available to provide, on a temporary basis, the discharge of the Knight Frank invoice, leaving the issue to be the subject of challenge on the entry of the trust account, ie the accounting process which a successful claimant in an action for knowing receipt is entitled to require.[38]It seems to me a plain case for saying that the Knight Frank payment ought to be discharged out of the gross overage receipts.[39]There is, of course, the risk that when the account is taken, the payment is found not to be a legitimate trust expense and Woodley may be called upon to discharge the payment personally. Mr Cunningham QC quite properly asks: out of what? For Woodley has no assets. But the same question might be asked in the event that Woodley has to make the appointment out of its own assets, and, for one reason or another, has to call the cross-undertaking given by Courtwood, for Courtwood has no assets either.[40]In the result, having regard to the fact that the Knight Frank invoice cannot properly be described as an ordinary commercial debt, I will vary the injunction subject to one matter. The Knight Frank invoice also includes a balancing payment of £14,500. That is in relation, as I understand it, to work done on an interim overage payment which has already been distributed amongst the participators in Woodley. That does not directly relate to the injuncted funds and I would permit only the commission-based overage payment to be paid utilising the injuncted funds. The balancing payment must either be left outstanding or satisfied by Woodley out of other resources. I will so order.