[View without highlighting]
[Printable RTF version]
||Neutral Citation Number:  EWCA Civ 540
||Case No: A3/2016/2019
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
MR G BOMPAS QC (Sitting as a Deputy High Court Judge)
 EWHC 964 (Ch)
||Royal Courts of Justice
Strand, London, WC2A 2LL
B e f o r e :
THE RIGHT HONOURABLE LORD JUSTICE MCFARLANE
THE RIGHT HONOURABLE LORD JUSTICE FLOYD
THE RIGHT HONOURABLE LORD JUSTICE HENDERSON
|| GRESPORT FINANCE LIMITED
||- and -
Mr Don McCue (instructed by David Wyld & Co Solicitors) for the Appellant
Mr Duncan Macpherson (instructed by Cartwright King Solicitors) for the Respondent
Hearing dates: 16 & 17 January 2018
HTML VERSION OF JUDGMENT APPROVED
Crown Copyright ©
Lord Justice Henderson:
- In this action, which was heard over three days in February 2016 by Mr George Bompas QC sitting as a deputy judge of the High Court in the Chancery Division, the claimant Gresport Finance Limited ("Gresport") claimed from the defendant Mr Carlo Battaglia ("Mr Battaglia") various sums of money with a total value in Euros of approximately 1.187 million which it alleged he had wrongly caused to be paid away over the period of some 26 months between 11 August 2005 and 8 October 2007 ("the payments claim"), together with the value in Swiss francs (CHF 543,975) of a portfolio of investments and securities which Gresport alleged he had caused to be wrongly removed from its account with Banque Privιe Edmund de Rothschild, Nassau, Bahamas ("BPER Nassau") in June 2007 ("the portfolio claim").
- In his reserved judgment handed down on 28 April 2016, the judge held that the portfolio claim succeeded in full, but that the payments claim succeeded only where the payments in question had been made either to a particular bank account (the so-called ROSS account at BPER Geneva) or to a payee (ARAAL SA) which the judge found to be connected with Mr Battaglia. By his order of the same date, the judge gave judgment accordingly for Gresport in the principal sum of £722,072 together with interest of £219,845, making a total of £941,917.
- All of the transactions in question, except for the last (a payment of 19,245 made on 8 October 2007), took place more than six years before the issue of the claim form on 7 August 2013. Mr Battaglia pleaded a defence of limitation, on the footing that (as was common ground at the trial) the limitation period prima facie applicable to the claims, either directly or by analogy, was six years. In its amended reply, Gresport sought to rebut this limitation defence in two ways.
- First, Gresport relied on section 21 of the Limitation Act 1980, contending that it was a beneficiary under a trust, and that Mr Battaglia was a trustee guilty of fraud or fraudulent breach of trust within the meaning of section 21(1)(a), which provides that there is no statutory limitation period in relation to an action by a beneficiary under a trust, where the action is "in respect of any fraud or fraudulent breach of trust to which the trustee was party or privy".
- Alternatively, Gresport pleaded that Mr Battaglia's actions "were a fraud", which could not have been discovered with reasonable diligence, and that he took deliberate steps to conceal them from Gresport, with the consequence that the limitation period did not begin to run until it could with reasonable diligence have discovered them, which it did not do before April 2008. By the trial, however, this alternative plea had been refined to one of reliance upon section 32(1)(b) of the 1980 Act, which provides that where any fact relevant to the claimant's right of action has been deliberately concealed from him by the defendant, the period of limitation shall not begin to run until the claimant has discovered the concealment, or could with reasonable diligence have discovered it. No reliance was placed on either section 32(1)(a) or (c), which make similar provision where the action is based upon "the fraud of the defendant" or "the consequences of a mistake" respectively.
- In relation to these limitation issues, the judge found that Gresport had made out a case of concealment of relevant facts by Mr Battaglia under section 32(1)(b), read with section 32(2) which states that, for the purposes of section 32(1), "deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time amounts to deliberate concealment of the facts involved in that breach of duty." The judge also found that Gresport could not with reasonable diligence have discovered the concealment at any time before 7 August 2007, that being the date six years before the commencement of the action. Accordingly, Mr Battaglia's limitation defence failed.
- In these circumstances, it was not strictly necessary for the judge to reach any conclusion about Gresport's alternative case based on section 21(1)(a) of the 1980 Act, but the judge went on to consider it in some detail, at   of his judgment, before concluding that the argument broke down because Mr Battaglia had not been shown to be in possession (as well as in control) of the property which he misappropriated.
- Both sides now appeal to this court from different aspects of the judge's order. Mr Battaglia appeals, with permission granted by Briggs LJ on 27 July 2016, on the single issue of whether Gresport could with reasonable diligence have discovered the deliberate concealment of its right of action earlier than 7 August 2007. By its respondent's notice and grounds of appeal, Gresport seeks to uphold the judge's judgment on the additional ground that he was wrong to hold that the circumstances of the case did not fall within section 21 of the 1980 Act, and also cross-appeals against the judge's findings (a) that Gresport's claims to the remaining payments in the payments claim had not been made out, and (b) that Mr Battaglia had received none of the payments or transfers of assets beneficially. To the extent that permission was needed for the cross-appeal, it was granted by Patten LJ on 27 January 2017.
- At the hearing before us, Mr Battaglia was represented (as he had been below) by Mr Don McCue, while Gresport was represented by Mr Duncan Macpherson, who did not appear at trial.
The Factual Background
- The background facts are no longer in dispute, and I would summarise them as follows, drawing on the judge's findings in his judgment.
- Gresport was incorporated in Belize in May 2002, as a vehicle for holding cash and securities belonging to Mr Paul Mackey. Mr Mackey is a Certified Public Accountant, having qualified in 1986. By the late 1990s, he had come to be associated with a group of companies known as the "Alpha Group". According to Mr Mackey, the Alpha Group had international operations in several countries, including Italy. In May 2000 the Turin Prosecutor obtained a court order closing down the Alpha Group's Italian operations on the ground that they constituted a Ponzi scheme. Criminal bankruptcy proceedings were later brought against Mr Mackey and others in Italy, and in 2009 he was convicted of fraudulent bankruptcy and sentenced to a term of seven and a half years' imprisonment, together with a finding of liability to pay "millions of Euros". Mr Mackey has appealed against both the conviction and the finding of liability.
- There was some dispute before the judge about the extent of Mr Mackey's involvement with the Alpha Group, his evidence being that he was merely a consultant to the head entity of the group in the British Virgin Islands, which licensed local franchisees, and that his main role was to calculate the licence fees to be paid by the franchisees. The judge found it unnecessary to make any detailed findings about the Alpha Group or Mr Mackey's role in relation to it, because it was no part of Mr Battaglia's case that these matters provided any answer to Gresport's claims against him. The judge did comment, however, at , that they could explain "how Mr Mackey came to have assets which he wished to have sheltered through an opaque offshore structure such as that centred on Gresport." The judge also recorded, at , that Mr McCue relied on the Alpha Group affair as being relevant to Mr Mackey's credibility, since the case turned ultimately on which of Mr Mackey or Mr Battaglia the judge was to believe. The judge added (ibid):
"Second, there is the undoubted fact, as demonstrated by his involvement with the Alpha Group, that Mr Mackey is a competent accountant, and could be expected to be interested in and have no difficulty in finding out about his financial affairs including the disposition of money and securities held for him through Gresport."
- Mr Battaglia is an asset management consultant, who first came to know Mr Mackey before 2002. In that year, Mr Battaglia moved from his previous job with a private bank in London to BPER Geneva, and around the same time Mr Mackey (to whom, as the judge found, "Mr Battaglia from time to time gave investment advice") established Gresport to hold money for him, and arranged for Gresport to bank with BPER Nassau. The Gresport bank account with BPER Nassau was designated "036108 SPORT", the "SPORT" label presumably being a contraction of Gresport's name. I will follow the judge in referring to this as "the SPORT account". It was a multi-currency account, denominated in euros, sterling and US dollars, and also included a portfolio of securities held by BPER Nassau for Gresport.
- Gresport was initially administered for Mr Mackey by a trust company in Jersey, but in 2003 Mr Battaglia was instrumental in arranging for the administration of Gresport to be transferred to a firm of solicitors in Hong Kong called Horvath & Giles ("H&G"), which provided company administration and secretarial services through nominee companies under the control of its senior partner, Mr Bodnar-Horvath. Thus it was that one nominee company of H&G became the nominee shareholder of Gresport, another such company became the nominee director, and secretarial services were provided by a third company. The judge drew no distinction between H&G and the various nominee companies, referring to them collectively as "H&G". I shall do likewise.
- Mr Bodnar-Horvath gave evidence at the trial by video-link from Hong Kong. The judge accepted his evidence that Mr Battaglia visited him in Hong Kong shortly after the initial approach to H&G, and told him on that occasion "that all instructions in relation to Gresport would come through him, Mr Battaglia, and that Mr Mackey did not wish to communicate directly with Mr Bodnar-Horvath": see . Thereafter, Mr Bodnar-Horvath and his firm "had virtually no direct contact with Mr Mackey until 2008. The only direct contact of which there was clear documentary evidence concerned a request made in March 2005 for the payment of certain money held by H&G which did not belong to Gresport" (ibid).
- The SPORT account became operational in about October 2003. The signatories on it were Mr Bodnar-Horvath or his partner Mr Giles. There was no evidence of the initial receipt of funds into the account. The relatively scanty documentary evidence of the operation of the account between October 2003 and October 2007 consisted of:
(a) a print-out of a March 2010 statement showing movements of monies handled by H&G, through its clients' account, for Gresport;
(b) a "portfolio statement" as at 12 December 2006, giving details of the various securities and other assets then held on the account, with their current values; and
(c) a short run of month-end cash statements, starting on 31 December 2006 and continuing to 30 June 2007, showing movements of cash and balances in the three relevant currencies in the form of conventional bank statements.
- Gresport was not the only company associated with Mr Mackey which employed the services of H&G. There were at least two further companies, Earnshare Investments Limited and Belmore Overseas Limited, which had funds which passed through H&G's clients' account at HSBC, leaving entries recorded on the H&G statement to which I have referred. By the date of the trial, it was accepted by Gresport that the Earnshare and Belmore monies had nothing to do with Gresport: see the judgment at .
- For his part, Mr Battaglia appears to have carried on his asset management business through a company incorporated in the British Virgin Islands called Gressler Investments Limited ("Gressler"), which had an account at BPER Geneva called the ROSS account. There was evidence that a payment of commission due to Mr Battaglia personally had been paid by H&G into the ROSS account, and on the basis of this and other indications the judge found that the ROSS account was connected with Mr Battaglia. There is no appeal against that finding, which is significant because nine of the disputed payments were made into the ROSS account on instructions transmitted by Mr Battaglia to H&G, purportedly acting on Mr Mackey's behalf.
- Another disputed payment was made to a Panamanian company called ARAAL SA, which the judge found was connected with Mr Battaglia's father, Paolo Battaglia. Again, there is no appeal from that finding.
- A further account which features in the story is the so-called GRESS account at BPER Geneva, which the judge found to be connected with Gressler (and thus with Mr Battaglia). The judge rejected Mr Battaglia's written evidence (untested by cross-examination, because Mr Battaglia did not attend or give evidence at the trial, having failed to secure an adjournment) to the effect that the GRESS account might have been opened by Gresport. As the judge said at , the designation "GRESS" points to an account for Gressler rather than Gresport, and, if so, "it would be an account Mr Battaglia controlled directly as part of his investment management business." The particular relevance of the GRESS account is that it was the designated transferee of the portfolio of securities comprised in the portfolio claim.
- In an important passage of his judgment, the judge described the respective positions of Mr Mackey and Mr Battaglia as follows:
"67. Whatever may have been said about the ownership of Gresport or its funds during 2007 or 2008, it is now undisputed that Gresport belonged to Mr Mackey, and that its property was held by it for him.
68. As I find, the function of Mr Bodnar-Horvath, and that of his firm, in relation to Gresport and the property from time to time held in the name of Gresport was to act on the instructions given by Mr Battaglia as a relay from Mr Mackey. Mr Bodnar-Horvath and H&G had no discretion. Effectively Gresport was a money-box to which Mr Bodnar-Horvath and his firm held the key: and the money-box and the contents were to be disposed of at the directions of Mr Battaglia given on behalf of Mr Mackey. This is to say, directions for Mr Bodnar-Horvath and H&G were not expected by Mr Bodnar-Horvath, or for that matter by Mr Mackey or Mr Battaglia, to come direct from Mr Mackey. Further, it was not expected that Mr Bodnar-Horvath or H&G would contact Mr Mackey direct. This arrangement continued until 2008.
69. Mr Mackey, in my judgment, had two characters in relation to Gresport. On the one hand he was the beneficiary for whom Gresport held its property as nominee. As such, he was entitled to require Gresport to dispose of his property as he wished. On the other hand he was the owner of Gresport, and in that capacity the person whose commands Gresport by its nominee directors would follow. To this extent he was also a shadow director of Gresport."
The Impugned Transactions
- Apart from the portfolio claim, the payments which Gresport says were made without Mr Mackey's authority may be summarised as follows:
1) four relatively small payments in euros or sterling made between August 2005 and March 2007 to Elina Eglite (who was then Mr Battaglia's wife), and a payment of £2,000 made in August 2005 to G. Teoli & Co (who were UK accountants acting for Mr Battaglia and clients of his);
2) the nine payments to the ROSS account at BPER Geneva to which I have already referred, made between June 2006 and March 2007, totalling US$83,087 and 327,989;
3) the payment of 30,000 to ARAAL SA on 1 March 2007;
4) a payment of 110,000 on 22 May 2007 to Freemont Business Inc;
5) a payment of US$23,924 on 20 June 2007 to Westbend International Ltd; and
6) two payments to Bank Syz & Co SA, Geneva, the first of 598,980 on 11 July 2007, and the second of 19,245 on 8 October 2007.
- All of the impugned payments were made after June 2005, the relevance of that date being that Mr Battaglia accepted in his amended defence that he left BPER Geneva in June 2005 and thereafter acted as agent for Gresport in relaying instructions given by Mr Mackey on Gresport's behalf to H&G; he also accepted that he owed to Gresport common law duties of skill and to comply with his mandate, as well as fiduciary duties. The judge's conclusion in relation to the duties owed by Mr Battaglia to Gresport as its agent was expressed by him as follows, at :
"He owed in contract a duty, and in tort a duty to use reasonable care, to give directions in accordance with, and only in accordance with, Mr Mackey's instructions. His mandate was only to give directions which would result in property held by Gresport being applied in accordance with those instructions. A fortiori, he was not to give unauthorised directions which would result in that property being applied to or for his own benefit."
- The judge then added, at :
"It is asserted by Gresport, and (as already mentioned) admitted by Mr Battaglia, that as Gresport's agent he owed fiduciary duties in parallel with his common law duties described above. I agree. While Mr Battaglia did not himself hold any Gresport property, and was not a trustee of such property
importantly, he had the power to control all disbursements of funds by his relationship with H&G. And this power was a fiduciary one, to be used only for the purpose for which it had been given (namely to bring about dispositions of Gresport property instructed by Mr Mackey)."
- The judge therefore directed himself, at , that Mr Battaglia would be liable to Gresport to pay equitable damages for breach of fiduciary duty for the misuse of his power of control, the amount of such damages to be the value of the property misapplied. He would also be liable in contract, for breach of mandate, for any directions given for dispositions of Gresport property which had not been instructed by Mr Mackey.
- It is common ground that the judge directed himself correctly on the relevant law, which he then proceeded to apply to the impugned payments and the portfolio claim.
- The judge rejected the claim in relation to the five payments of modest amount made to Elina Eglite and G Teoli & Co, being satisfied on the evidence that in one way or another they were, or represented, reimbursements of cash advances which Mr Battaglia had made to Mr Mackey at the latter's request. There is no challenge by Gresport to this conclusion, save in relation to the final payment of 6,000 to Ms Eglite.
- As I have already indicated, the judge upheld Gresport's claims in relation to the payments made to the ROSS account at BPER Geneva and to ARAAL SA, in view of the connections which he found to be established between those recipients and Mr Battaglia. In relation to these transactions, and the transfer of the portfolio securities to the GRESS account, the judge expressed his conclusions as follows:
"118. I have already indicated my conclusion concerning the payments to the ROSS Account and the transfer of the securities to the GRESS Account. While I am not satisfied that the evidence establishes beneficial receipt by Mr Battaglia of Gresport's money or its securities, the evidence is in my judgment sufficient to establish that these items went to accounts which Mr Battaglia controlled or with which he was associated. That, together with the absence of any explanation to show how Mr Mackey might have benefited or why he should have wanted Mr Battaglia to bring about the payments and the transfer, is also sufficient to lead me to reject Mr Battaglia's evidence that the transactions were after all instructed to him by Mr Mackey.
119. Related to the previous point is the absence of any documents from Mr Battaglia concerning his activities on behalf of Gresport and Mr Mackey. It seems to me that the arrangements put in place with Mr Mackey and Gresport contemplated that Mr Mackey's instructions to him, Mr Battaglia, would not be written for reasons of secrecy. Given this, it maybe understandable that for just those reasons Mr Battaglia would make or keep no record of his dealings with, and hence his instructions from, Mr Mackey. Thus, the only relevant documents with Mr Mackey's signature are one or two which were transmitted to, and retained by Mr Bodnar-Horvath despite his promise to Mr Battaglia [in October 2007] to shred documents.
120. But while it may be understandable that there are no written communications, or records of communications, between Mr Mackey and Mr Battaglia, I consider that Mr Battaglia's failure to produce anything concerning, or indeed to give any worthwhile explanation of, the ROSS Account or Gressler or the GRESS Account stands in a different case. In short, it seems to me that, once it is shown that there has been an allegedly unauthorised disposition of property directed by Mr Battaglia to a recipient connected with him, it is reasonable to infer in the absence of any further evidence or explanation that in fact the disposition was unauthorised.
121. There is sufficient evidence, in my judgment, to enable me to conclude also that Mr Battaglia was associated with ARAAL SA. In this case, too, the absence of explanation for the payment in the face of that association puts the payment into a similar light to the transfers of securities to the GRESS Account. Had there been a proper explanation for Mr Battaglia to give for the payment he could and should have given it."
- The judge then considered the remaining payments, to Freemont, Westbend and Bank Syz, in respect of which he found the position to be "much more finally balanced" : see . The judge was faced with a stark conflict of evidence between Mr Mackey, who gave oral evidence and was cross-examined by Mr McCue, on the one hand, and Mr Battaglia's untested written evidence, that he did what he was told, on the other hand. The judge said, at , that having rejected Mr Battaglia's evidence on a number of important issues, it did not necessarily follow that all his evidence was untruthful or unreliable, but it did mean that his assertion that the Freemont, Westbend and Bank Syz payments were authorised "carries little weight."
- The judge then continued:
"124. On the other hand I am not convinced that Mr Mackey's evidence is to be accepted as necessarily accurate. In particular I do not think he was being truthful when he explained to me both (a) that his last meeting with Mr Battaglia was in December 2006 which was when he had last seen a portfolio statement for the SPORT Account and (b) that he had seen a SPORT Account statement very shortly after the December 2006 sales of securities. His first evidence was because familiarity with deals on the SPORT Account would have undermined the case that the various dispositions were unauthorised; his second evidence was because it would have been implausible to say that he had had no interest in learning what the sales of securities had realised.
125. In the result my conclusion is that Gresport has failed to show the Freemont, Westbend and Bank Syz payments to have been unauthorised. Mr Battaglia, it is accepted by Gresport, did not divert improperly the entirety of Mr Mackey's property which had passed to Mr Bodnar-Horwath or lain in the SPORT Account. The beneficial recipients of the authorised payments, other than H&G itself, were as obscure as any of Freemont, Westbend and Bank Syz. The only evidence Gresport has indicating that payments to these three payees were unauthorised
is the unsupported statement of Mr Mackey. If Mr Battaglia had wanted to remove from the SPORT Account the amounts paid to Freemont, Westbend and Bank Syz, I cannot see why he would not simply have paid the amounts to the ROSS Account or to Gressler."
- The judge accordingly concluded, at , that Mr Battaglia was liable, subject to the limitation issues, to compensate Gresport for breach of duty in relation to the payments made to the ROSS account and ARAAL SA, and with regard to the transfer of securities to the GRESS account, but not otherwise.
- The doubts which the judge expressed about the truthfulness of Mr Mackey's evidence, in , refer back to an earlier passage in the judgment, where the judge recorded Mr Mackey's evidence that his last meeting with Mr Battaglia had been in Dublin in December 2006, when he instructed Mr Battaglia to arrange the sale of all of Gresport's securities, with the exception of shares in two oil companies. There was a dispute about the date of this meeting, which the judge resolved in Mr Mackey's favour, noting at  that in December 2006 there was "unquestionably a significant change of direction with Gresport with the sale of the bulk of its portfolio of securities." The judge found support for this conclusion in the statement for the SPORT account as at 12 December 2006, which Mr Mackey said had been given to him by Mr Battaglia at the December meeting. The evidence also showed that the sale of the securities then took place on about 19 or 20 December 2006.
- Nevertheless, the judge found Mr Mackey's evidence about this meeting to be unsatisfactory, for the following reasons which he gave at :
"However Mr Mackey's evidence as to his meetings with Mr Battaglia and his receipt of statements for the SPORT Account was not satisfactory, and leads me to doubt that Mr Mackey was as little informed as to the balances on the SPORT Account during 2007 as he is seeking to convey. When he was asked in the course of his oral evidence whether he had taken an interest in finding out how much had been raised by the sales of the securities he had requested at his meeting with Mr Battaglia in December 2006, his response was that he knew immediately at the time because he went through the portfolio statement. The difficulty with this answer is that the first SPORT Account statement which showed the sales was not that of 12 December 2006, the portfolio statement in evidence, and was obviously not one available at the meeting with Mr Battaglia when Mr Mackey gave the instruction for the sales. In other words, it must have been after the meeting that he saw a statement reflecting the sales. If true this would point to there having been at least one subsequent occasion when Mr Battaglia and Mr Mackey met for the latter to consider a later portfolio statement for the SPORT Account."
- Despite what the judge considered to be Mr Mackey's unsatisfactory evidence on this point, however, the judge accepted that Mr Mackey never received from Mr Battaglia anything other than portfolio statements, which would have given him a general idea of the position from time to time but without all the detail of what had transpired: see . The judge also accepted his evidence that he did not obtain statements from anyone else, whether BPER or H&G (ibid). The judge further accepted Mr Mackey's explanation that, although he could have asked for more information than he was given by Mr Battaglia, either from BPER Nassau or H&G, he had no reason to think that there was anything amiss, or that he had cause to ask for further information: see .
Mr Battaglia's appeal: could Gresport with reasonable diligence have discovered his concealment of any fact relevant to its right of action before 7 August 2007?
- As I have already explained, the sole issue on Mr Battaglia's appeal is whether the judge was wrong to conclude that Mr Battaglia's admitted concealment of facts relevant to Gresport's right of action against him could not with reasonable diligence have been discovered by Gresport more than six years before the claim form was issued, i.e. before 7 August 2007. The issue turns on the application to the facts of section 32(1) of the Limitation Act 1980, which relevantly provides that:
where in the case of any action for which a period of limitation is prescribed by this Act,
(b) any fact relevant to the plaintiff's right of action has been deliberately concealed from him by the defendant;
the period of limitation shall not begin to run until the plaintiff has discovered the
or could with reasonable diligence have discovered it. References in this subsection to the defendant include references to the defendant's agent and to any person through whom the defendant claims and his agent."
- Although there is no longer any dispute that Mr Battaglia concealed relevant facts from Gresport, it is necessary to understand what was being concealed before addressing the question whether Gresport could with reasonable diligence have discovered it. I will therefore begin by referring to the judge's decision on the issue of concealment. In relation to that issue, section 32(2) of the 1980 Act also needs to be taken into account. It provides as follows:
"(2) For the purposes of subsection (1) above, deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time amounts to deliberate concealment of the facts involved in that breach of duty."
- The judge began his discussion of this topic at , finding that Mr Battaglia's abuses of his power of direction, when he gave directions to H&G for unauthorised dispositions of Gresport's property, took place in circumstances in which they were "unlikely to be discovered for some time", so that in principle Gresport had made out a case under section 32(1)(b) and (2) for the postponement of the start of any applicable limitation period. The judge therefore rejected the contrary submission made to him by Mr McCue.
- The judge then explained his reasons for this conclusion, at  . In particular, he said at :
"Mr Battaglia must have appreciated that what he was doing, when he went ahead and gave the unauthorised directions, was unlikely to be discovered for some time. There was no direct communication between Mr Mackey and H&G (and thus Gresport): the arrangements which Mr Battaglia had had a hand in organising anticipated that there would be no direct communication. The communication was, and was expected to be, channelled through Mr Battaglia. In the absence of communication between Mr Mackey and H&G, Gresport would not be able to determine whether or not the dispositions directed by Mr Battaglia had in fact been sanctioned by Mr Mackey (and hence whether it had correctly applied his property). Gresport was at all times supposed to act on directions given by Mr Battaglia without further question or checking. This was an arrangement which Mr Battaglia had himself been instrumental in making."
- The judge added, at , that there was also bound to be practical difficulty in discovering what had become of the property held by Gresport once it had been struck off, pursuant to instructions given by Mr Battaglia in June 2007. The judge concluded, at , that it must have been Mr Battaglia's intention that neither Gresport nor Mr Mackey would find out that there had been unauthorised dispositions of property held by Gresport, "at any rate until it was too late for anything to be done about the want of authority."
- Having thus concluded that there was a postponement of the start of a relevant limitation period, the judge then turned, at , to the issue of whether Gresport could with reasonable diligence have discovered the concealment of the relevant fact, which he identified as "the absence of Mr Mackey's sanction", before 7 August 2007. In the two following paragraphs, the judge explained that, as a matter of construction of section 32(1), the concealment which had to be discovered was the concealment of a relevant fact falling within subsection (1)(b). That appears to be clearly correct, and is I think common ground.
- The judge then referred to the guidance given by Millett LJ (with whom Pill and May LJJ agreed) in Paragon Finance Plc v D B Thakerar & Co  1 AII ER 400 at 418, in the analogous context of discovery of the defendant's "fraud" within subsection (1)(a). Millett LJ said:
"The question is not whether the plaintiffs should have discovered the fraud sooner; but whether they could with reasonable diligence have done so. The burden of proof is on them. They must establish that they could not have discovered the fraud without exceptional measures which they could not reasonably have been expected to take. In this context the length of the applicable period of limitation is irrelevant. In the course of argument May LJ observed that reasonable diligence must be measured against some standard, but that the six-year limitation period did not provide the relevant standard. He suggested that the test was how a person carrying on a business of the relevant kind would act if he had adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency. I respectfully agree."
- After citing most of this passage, the judge then stated his conclusions quite shortly:
"142. In the present case a significant feature of Gresport's business, and one which is relevant to what could and should have been done by Gresport, is the fact that Gresport was supposed to dispose of the property held by it for Mr Mackey in accordance with directions communicated only through Mr Battaglia: Gresport was not to have direct communication with Mr Mackey about those directions. This, indeed, was what made it easy for Mr Battaglia to give directions for unauthorised dispositions.
143. In the circumstances I am satisfied that Gresport could not reasonably have been expected to have discovered before 7 August 2007 that Mr Battaglia had been giving, without Mr Mackey's sanction, directions as to Gresport's dispositions of property held by it. Only by taking the exceptional step of direct communication with Mr Mackey could it have discovered Mr Battaglia's want of authority in relation to the relevant transactions."
- As I understand the judge's rather compressed reasoning, the central point which led him to his conclusion was that Gresport (acting for this purpose through H&G) had deliberately entered into arrangements to hold and dispose of its assets for the benefit of Mr Mackey (its beneficial owner and shadow director), and had undertaken to do so only in accordance with communications received through the agency of Mr Battaglia. In other words, Gresport had, at Mr Mackey's behest, deliberately distanced itself from Mr Mackey, and agreed to act only in accordance with instructions from Mr Mackey's trusted intermediary, Mr Battaglia. In those circumstances, nothing which occurred before 7 August 2007 could with the exercise of reasonable diligence have led H&G to discover Mr Battaglia's lack of authority for the impugned transactions. In each case, instructions had been received from Mr Battaglia in accordance with the machinery set up and agreed with Mr Mackey.
- The judge did not in this passage give separate consideration to the position of Mr Mackey himself, but his conclusion would presumably have been the same. In the absence of anything to put him on notice, Mr Mackey would have had no reason to suspect that anything was amiss, or that Mr Battaglia was giving directions to H&G without his authority: see the judgment at .
- It is fair to say that the arguments advanced by Mr McCue in support of the appeal on this issue have evolved in various respects, both before and during the hearing before us. In particular, Mr McCue expressly abandoned in the course of his opening submissions his original first ground of appeal, to the effect that the judge had misdirected himself on the test to be applied under section 32(1). In the end, Mr McCue took his stand on amended grounds of appeal which he produced at the start of the second day of the hearing, without objection from Gresport.
- Paragraph 1 of the amended grounds asserts that the judge's finding that Gresport could not with reasonable diligence have discovered the concealment before 7 August 2007 was "wrong and/or against the weight of the evidence" because it was based solely on the standard procedure or "protocol" for all instructions to be given by Mr Battaglia, "such that in the normal course of events Mr Bodnar-Horwath would have no reason to contact Mr Mackey." It is then alleged that the judge's finding took no, or no sufficient, account of the following matters:
1) the judge's finding at  that Mr Mackey was a competent accountant, who could be expected to be interested in and have no difficulty finding out about his financial affairs, including the disposition of money and securities held for him through Gresport;
2) Mr Mackey's evidence that from time to time between 2002 and December 2006 he would meet Mr Battaglia, who gave him portfolio statements which he would check to ensure that everything was in order ;
3) the fact that on Mr Mackey's evidence the funds held in the SPORT account represented his only significant asset;
4) the judge's finding that Mr Mackey was not being truthful when he said that his last meeting with Mr Battaglia was in December 2006;
5) Mr Mackey's evidence that a deficit of 1million would have shown up on a portfolio statement in July 2007, and that had he been shown such a statement he would have seen anything which was obviously surprising;
6) the absence of any explanation from Mr Mackey as to why the meetings ceased completely after December 2006, just when the great majority of the securities in the portfolio had been turned into cash;
7) the fact that Mr Bodnar-Horvath could at any time have discovered Mr Battaglia's breaches of duty by contacting Mr Mackey, whose identity and contact details were known to him, and with whom he had been in direct contact on at least one occasion prior to the impugned payments; and
8) the fact that Mr Mackey could at any time have discovered Mr Battaglia's breaches of duty by contacting him or Mr Bodnar-Horvath and/or requesting copies of the portfolio statement for the account from which moneys were paid away.
- Ground 2 then alleges, more compendiously, that the judge should have found that Mr Mackey exercised a degree of supervision over the funds in the SPORT account prior to December 2006, and had he continued to exercise the same degree of supervision thereafter he would have discovered the unauthorised transfers before 7 August 2007.
- Before considering these grounds of appeal, I must first say a little more about the relevant law. It is agreed on both sides that the starting point remains the guidance given by Millett LJ in the Paragon Finance case. A further point of some importance was added by Neuberger LJ (as he then was) in Law Society v Sephton  EWCA Civ 1627,  QB 1013, at , where he endorsed the view of the deputy judge in that case (Michael Briggs QC, as he then was) to the effect that:
it is inherent in section 32 (1) of the 1980 Act, particularly after considering the way in which Millett LJ expressed himself in Paragon Finance
, that there must be an assumption that the claimant desires to discover whether or not there has been a fraud. Not making any such assumption would rob the effect of the word "could", as emphasised by Millett LJ, of much of its significance. Further, the concept of "reasonable diligence" carries with it, as the judge said, the notion of a desire to know, and, indeed, to investigate."
- Neuberger LJ added that "one must be very careful about implying words into a statutory provision", but he said that the judge had not been seeking to imply words, or a new concept, into the statutory provision. He was merely "explaining what was involved in the process of deciding whether a claimant, could, with reasonable diligence, have discovered the fraud which it now seeks to plead". I respectfully agree. Another of way of making the same point, as I suggested in argument, might be that the "assumption" referred to by Neuberger LJ is an assumption on the part of the draftsman of section 32(1), because the concept of "reasonable diligence" only makes sense if there is something to put the claimant on notice of the need to investigate whether there has been a fraud, concealment or mistake (as the case may be).
- It is a question of fact in each case whether the claimant could not with reasonable diligence have discovered the relevant fraud, concealment or mistake. As Webster J aptly said, in Peco Arts Inc v Hazlitt Gallery Ltd  3 All ER 193, at 199:
"I conclude, first of all, that it is impossible to devise a meaning to be put on those words [reasonable diligence] which can be generally applied in all contexts because, as it seems to me, the precise meaning to be given to them must vary with the particular context in which they are to be applied. In the context to which I have to apply them [the mistaken attribution of an old master drawing], in my judgment, I conclude that reasonable diligence means not the doing of everything possible, not necessarily the using of any means at the plaintiff's disposal, not even necessarily the doing of anything at all, but that it means the doing of that which an ordinarily prudent buyer and possessor of a valuable work of art would do having regard to all the circumstances, including the circumstances of the purchase."
- In relation to findings of fact by a trial judge, it is now trite law, repeated in many recent judgments at the highest level, that an appellate court should not interfere with such findings unless satisfied that the judge was plainly wrong, in the sense that the decision under appeal is one that no reasonable judge could have reached: see, for example, Henderson v Foxworth Investments Limited  UKSC 41,  1 WLR 2600, at   per Lord Reed JSC. That case was not cited to us, but Mr Macpherson referred us to similar observations made by Sir Colin Rimer (with whom Patten LJ and Proudman J agreed) in Lewis v Ramachandren Narayanasamy & Anr  EWCA Civ 229 at  .
- I now return to the amended grounds of appeal. In the light of the principles which I have set out, many of the matters relied on by Mr Battaglia in support of the contention that the judge's conclusion on reasonable diligence was wrong or against the weight on the evidence may in my view be rapidly disposed of. Thus:
1) Although Mr Mackey is a qualified accountant, and no doubt took a close interest in his financial affairs, the judge accepted his evidence that he had no reason to think that there was anything amiss, or that he had cause to ask for further information; see the judgment at . Accordingly, this factor alone could not have triggered an obligation to investigate whether the "protocol" which Mr Mackey had established was working according to plan.
2) Similarly, the fact that Mr Battaglia occasionally gave him portfolio statements when they met between 2002 and December 2006 does not mean that Mr Mackey was guilty of any lack of reasonable diligence in not requesting similar statements between late December 2006 and early August 2007. On the contrary, he knew that the bulk of the portfolio had been liquidated in December 2006, so it now mainly comprised cash; and on at least one occasion thereafter, in March 2007, he requested a substantial payment of 390,000 to be made from the SPORT account, via instructions given by Mr Battaglia in the usual way. No challenge is made to that transaction, which would presumably have reassured Mr Mackey that the protocol was working as normal: see the judgment at  .
3) Again, the fact (if it be true the judge made no such finding) that the funds held in the SPORT account represented Mr Mackey's only significant asset, takes matter no further forward in the absence of anything to put Mr Mackey on enquiry. The same goes for the point that, had Mr Mackey been shown a portfolio statement in July 2007, he would doubtless have seen that there was a deficit of some 1 million.
4) Similarly, there is no reason why H&G should have taken steps to contact Mr Mackey directly, in the absence of anything to put them on enquiry as to Mr Battaglia's honesty. It needs to be remembered, in this connection, that there was nothing obviously suspicious about Mr Battaglia requesting payments to be made to accounts connected with him, because he had an established asset management business and Mr Mackey had been his client for several years. Furthermore, the whole point of the protocol was to distance Mr Mackey from the assets held for his benefit and administered by H&G. In that context, H&G were expected to act on instructions received from Mr Battaglia without demur.
- I need to deal in more detail, however, with the judge's finding that Mr Mackey was not being truthful when he said that his last meeting with Mr Battaglia was in December 2006. I have already quoted the relevant findings made by the judge in  and  of his judgment. In the present context, Mr McCue relies on these findings in particular for the judge's conclusion that Mr Mackey must have met Mr Battaglia on at least one occasion after 12 December 2006 and been shown an updated portfolio statement reflecting the sales which had taken place after the meeting on that date. If that is right, there would be scope for an inference that Mr Mackey, contrary to his protestations, took a much closer interest in the performance of the funds held for him by Gresport after the December meeting than he was prepared to admit, which in turn might ground the further inference that he could with reasonable diligence have discovered the true position before 7 August 2007. The difficulty with this submission, however, as Mr Macpherson was able to show us by reference to the transcript, is that the judge appears to have misunderstood the evidence given by Mr Mackey and drawn from it the unwarranted inference that there must have been a further meeting between him and Mr Battaglia after 12 December 2006.
- In the course of answering questions from the judge, while giving evidence on the first day of the trial, Mr Mackey described his meeting with Mr Battaglia in December 2006. During that meeting, Mr Mackey was given the portfolio statement which showed the current state of investment of the funds and the small balances of surplus cash. Mr Mackey confirmed that there was nothing unusual about this statement, and that he then gave instructions for all the stocks and shares (apart from those in two oil companies) to be sold. He then gave the evidence, which I have already noted, that if he had seen a further statement the following July, it would have revealed a deficit of around 1 million; but he had no reason to look for such information, or to doubt Mr Battaglia, because "I trusted him".
- The judge had asked these questions, in the usual way, at the conclusion of Mr Mackey's cross-examination by Mr McCue. When he had finished, the judge asked if there was anything that arose from his questions. In response to this invitation, Mr McCue asked a few further questions, which included this exchange:
"Q. But you must have taken an interest in how much was raised by selling all those shares?
A. I did. I knew at the time because I knew in December when I went through the portfolio statement. The shares were sold straightaway, so I knew what the proceeds were."
- The judge appears to have fastened on this exchange as evidence that Mr Mackey must have seen a portfolio statement later in date than the one which he saw on 12 December, because only thus could he have known what the proceeds of sale were. We were not shown any other evidence which might have grounded the adverse inference which the judge drew at . But with respect to the judge, I do not think this was a fair inference to draw, particularly as it reflected on Mr Mackey's credibility. The natural inference to draw from his answer is that he did not need to see a subsequent statement in order to find out what the shares were sold for, because the 12 December statement itself showed their market value and they had been sold a matter of days later. If Mr McCue had wished to rely on this answer as evidence that Mr Mackey must have seen a subsequent statement, and that he was lying when he said that his last meeting with Mr Battaglia was on 12 December 2006, the point should have been put squarely to Mr Mackey; but it was not, and there is no indication that either the judge or Mr McCue saw anything surprising in Mr Mackey's answer. Indeed, when Mr McCue came to make his submissions in reply, he accepted that the judge's criticisms of Mr Mackey in  may not be sound, and he invited us to draw our own conclusions from the evidence.
- If, as I think, the judge was mistaken in drawing this adverse inference, Mr Battaglia's strongest point on this part of the appeal falls away. There is no good reason to doubt that Mr Mackey's last meeting with Mr Battaglia was indeed on 12 December 2006, or that he never received a later portfolio statement before 7 August 2007. This conclusion also sits more comfortably with the important findings, favourable to Mr Mackey, which the judge proceeded to make in  and : see 
- In conclusion, therefore, I am satisfied that Mr Battaglia's appeal on section 32(1) must fail. Once Mr Mackey's evidence about the December 2006 meeting is placed in its proper context, and the judge's adverse finding is eliminated, the weight of the evidence tells strongly in favour of the judge's conclusion that nothing happened to put Gresport on inquiry before 7 August 2007, and Gresport could not therefore with reasonable diligence have discovered the concealment by Mr Battaglia of Mr Mackey's lack of authority for the impugned transactions before that date. This conclusion is also sufficient to dispose of Mr Battaglia's limitation defence, and makes it unnecessary for us to consider Gresport's alternative arguments based on section 21(1)(a) and/or (1)(b) of the 1980 Act. Those provisions give rise to legal issues of some difficulty, with which it would be unwise to grapple unless we have to.
Gresport's cross-appeal: should the judge also have given judgment for Gresport in respect of the other main impugned transactions?
- I now turn to Gresport's cross-appeal, which concerns the following five payments: the payment of 6,000 to Elena Eglite on 27 March 2007; the payment of 110,000 to Freemont on 22 May 2007; the payment of US$ 23,924 to Westbend on 20 June 2007; the payment of 598,980 to Bank Syz on 11 July 2007; and the payment of 19,245 to Bank Syz on 8 October 2007. The largest of these payments, by far, is the first payment of just under 600,000 to Bank Syz. In respect of all the payments, Gresport contends that the judge's findings were against the weight of the evidence, and gave too much weight to Mr Battaglia's version of events which was contained only in his contradictory pleadings and four witness statements upon which he was not cross-examined. Gresport also relies on what I have now found to be the judge's flawed assessment of Mr Mackey's evidence and credibility in relation to the events of December 2006, and on a detailed examination of the circumstances surrounding the two Bank Syz transfers.
- As Mr Macpherson realistically accepted, since Gresport's cross-appeal seeks to challenge the judge's findings of fact, and it is not contended that the judge misdirected himself in law, the same high threshold has to be met before this court will interfere as applied in Gresport's favour to the judge's findings of fact on the limitation issue. Ultimately, as I shall explain, this is in my view the answer to the cross-appeal. The judge was indeed entitled to reach the conclusions of fact which he did. Nevertheless, Mr Macpherson advanced his submissions with skill, and I would concede that Gresport's case does gain some traction from the adverse view wrongly formed by the judge about Mr Mackey's evidence concerning the events of December 2006.
- Mr Macpherson barely touched in his oral submissions on the payment of 6,000 to Elena Eglite, and in my view the judge was entitled to conclude that it fell into the same general category as the other relatively small payments to her, namely as reimbursement for cash sums paid in euros by Mr Battaglia to Mr Mackey (the reimbursement being to Ms Eglite because Mr Battaglia did not have a euro bank account): see the judgment at ,  and . Gresport's skeleton argument makes the point that the 6,000 payment was not made until 27 March 2007, some three and a half months after Mr Mackey's final meeting with Mr Battaglia in December 2006. How then could the payment have been the result of a cash advance made to Mr Mackey at any meeting consistently with Mr Battaglia's evidence? I agree that there is some force in that point, but the payment follows a previously established pattern, the advance might have been made some months previously, and it was in my view open to the judge to conclude that it should not be treated differently from its predecessors.
- In relation to the remaining four payments, and leaving aside the circumstances surrounding the two Bank Syz transactions, Mr Macpherson made his points by reference to a helpful speaking note which he provided to us. I intend no discourtesy to him by declining to go through it point by point. It certainly establishes that Mr Battaglia's pleadings and written evidence were riddled with inconsistencies, and that there was other material from which the judge could have drawn adverse inferences against him, not least his failure to attend the trial without good reason. But none of this material adequately meets the basic point that Gresport still had to prove its case, on the balance of probabilities, to the satisfaction of the judge, whose function it was to evaluate all of the evidence (both oral and documentary) placed before him, together with the arguments of counsel on each side, over a three day trial. It was not simply a question of comparing the evidence of the two protagonists, Mr Mackey and Mr Battaglia, and automatically accepting Gresport's case merely because Mr Battaglia's evidence was unreliable and untested. An appellate court cannot normally replicate the function of a trial judge, even with the benefit of a transcript, and it can only interfere if the judge's conclusion was plainly wrong. In the light of those principles, I do not think the judge can be criticised for declining to accept Gresport's case in its entirety, and for distinguishing between the impugned payments on the basis of whether they were made to an account or recipient which he found to have a connection with Mr Battaglia. This was, no doubt, a cautious approach, but the onus was firmly on Gresport to prove its case, and the judge may well have felt disinclined to give Mr Mackey (and thus Gresport) the benefit of any doubt when he had deliberately chosen to set up an asset-holding structure of such impenetrable opacity.
- In this connection, Mr McCue rightly reminded us that when the judge said, at , that he was "not convinced that Mr Mackey's evidence is to be accepted as necessarily accurate", he may not have been relying only on what he regarded as Mr Mackey's unsatisfactory evidence about the events of December 2006. That was, indeed, the only matter specifically mentioned in the rest of the paragraph, but the introductory words "[i]n particular" indicate that there may have been other matters too. Mr McCue gave some examples in his written and oral submissions, including an apparently implausible attempt by Mr Mackey in his oral evidence to distance himself from the Alpha Group, despite the disclosure of a business card in his name describing him as the Group's "Chief Financial Officer", and a number of indications that Mr Mackey was a man of substantial wealth, although he had alleged in his witness statement in opposition to Mr Battaglia's application for security for costs that he had no assets. For example, it emerged en passant during Mr Bodnar-Horwath's oral evidence that Mr Mackey had an apartment in Monte Carlo which he had allowed Mr Battaglia and his then girlfriend to use.
- I come finally to the circumstances surrounding the two Bank Syz payments. The story starts on 22 June 2007, when Mr Battaglia gave H&G written instructions to transfer 600,000 to a numbered but nameless account at Bank Syz in Geneva, and the "balance if any" to the ROSS account at BPER Geneva. The instructions were to take effect when H&G received the Euro proceeds from closure of the SPORT account, for which Mr Battaglia had given written instructions two days earlier. Gresport relies on the fact that Mr Battaglia gave this instruction on 22 June 2007 for transfer of the balance, if any, of the Euro proceeds to the ROSS account as a clear indication that both instructions given on that day were unauthorised by Mr Mackey.
- In the event, H&G made two mistakes. First, on 11 July 2007 H&G gave instructions to HSBC to transfer 598,980 from their clients' account to Bank Syz for an account named "ROSS", even though no account in that name existed at Bank Syz. That transfer was then made, and was never returned to H&G. Secondly, on 8 October 2007 H&G instructed HSBC to transfer the balance (which was 19,245) not to the ROSS account, as originally instructed by Mr Battaglia, but to the same numbered Bank Syz account as the first transfer had been sent to. Again, the payment was made, and no complaint was apparently made either by Mr Mackey or by the payee who had the relevant account at Bank Syz. On 16 October 2007, Mr Battaglia contacted H&G, asking why the funds had not arrived at the ROSS account, to which H&G replied that the euros they sent to "ROSS" with Bank Syz had not been returned by the bank, and any further enquires should be directed to Bank Syz, asking them to remit the funds to the ROSS account at BPER.
- There matters appear to have rested. One inference, which Gresport invited the judge to draw, was that both payments were unauthorised by Mr Mackey, and Mr Battaglia was content with their final destination at Bank Syz, presumably because the relevant account was connected with him in some way, or belonged to a person who was willing and able to transfer the sums in question to the true ROSS account. It would certainly have been open to the judge to draw this inference, but he declined to do so. As he said, at , "[a]n alternative inference could be that the Bank Syz beneficiary was Mr Mackey, so that there was no complaint to be made by him when money was received from Gresport." Mr Macpherson complains that this alternative inference was speculative, and had not been put to Mr Mackey. I see the force of that point, but nevertheless feel unable to conclude that the judge's conclusion was plainly not open to him. He had the benefit of all the evidence and submissions, which is denied to us. On the cautious approach which he adopted, I cannot say that he was plainly wrong to reach that conclusion.
- For these reasons, despite Mr Macpherson's able arguments, I would dismiss the cross-appeal.
- If the other members of the court agree, it follows that both Mr Battaglia's appeal and Gresport's cross-appeal will be dismissed.
Lord Justice Floyd:
- I agree.
Lord Justice McFarlane:
- I also agree.
Copyright Policy |
Donate to BAILII