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||Neutral Citation Number:  EWCA Civ 4
||Case No: A3/2011/0526
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
His Honour Judge Raynor QC
(sitting as a High Court Judge)
||Royal Courts of Justice
Strand, London, WC2A 2LL
||18 January 2012
B e f o r e :
LORD JUSTICE MUMMERY
LORD JUSTICE JACKSON
LORD JUSTICE LEWISON
|| DANIEL THOMAS BRIAN HORLER
||Claimant / Respondent
||- and -
||DAVID RUBIN & ORS
||Defendants / Appellants
MR ROBERT HANTUSCH (instructed by Berrymans Lace Mawer, London)) for the 1st, 2nd & 4th Appellants
MR KEITH ROWLEY QC & MR PETER DODGE (instructed by Morgan Cole LLP, Cardiff) for the Respondent
Hearing date : 19 December 2011
HTML VERSION OF JUDGMENT
Crown Copyright ©
Lord Justice Lewison:
- Mr Andrew Millar was adjudicated bankrupt on 25 January 1999; and Mr David Rubin was appointed as his trustee in bankruptcy. During the course of the administration of the bankruptcy, Mr Rubin secured the transfer of shares in a company whose abbreviated name is ATG; and sold them. He applied the proceeds of sale partly in paying a dividend of 60p in the £ to Mr Millar's creditors, and partly in paying his own professional fees, which were considerable. Mr Daniel Horler, who is a creditor of Mr Millar, and (as it turned out) also a business partner of his, says that Mr Rubin is personally liable for having misapplied the proceeds of sale in that way, when the shares were in reality assets of the partnership and their proceeds should have been used in paying creditors of the partnership and the partners themselves. HH Judge Raynor QC held that Mr Horler had no valid complaint about the destination of the proceeds of sale where he had consented to the application of the money proposed by Mr Rubin; but that he did have a valid cause of complaint where he had not consented.
- It is common ground that:
i) Mr Horler's claim to have been a business partner of Mr Millar was a good one, although the partnership had terminated on 4 July 1998;
ii) On the basis of that claim the shares in ATG were partnership assets, rather than assets that belonged to Mr Millar personally;
iii) They did not therefore vest in Mr Rubin as Mr Millar's personal trustee in bankruptcy as part of his estate, but were required by virtue of the Partnership Act 1890 to be applied in the first instance in payment of the partnership's debts;
iv) Mr Rubin honestly believed that Mr Horler's claim was ill-founded, but whether he had reasonable grounds for his belief is hotly in dispute.
- I must now set out some more of the relevant narrative. Upon his appointment as trustee Mr Rubin began to investigate the extent of Mr Millar's assets. He came across a Manx company called Jamestown Ltd. Jamestown's assets included over 2 million shares in ATG. There were two issued shares in Jamestown; one owned by Nominee One and the other by Nominee Two. Jamestown's position was that the share owned by Nominee One was beneficially owned by Mr Millar, while the share owned by Nominee Two was beneficially owned by his daughters or their trust. Mr Rubin, however, believed that both shares were in fact beneficially owned by Mr Millar or, if not, that any allotment in favour of the daughters was liable to be set aside under the insolvency legislation.
- Mr Horler submitted his claim in the bankruptcy at some time before 1 April 1999. The judge described it as "singularly unhelpful" because it was both vague and unquantified. On 14 May 1999 a creditors' committee was formed. Mr Horler was a member of that committee. However, Mr Rubin rejected Mr Horler's claim on 3 August 1999. Mr Horler appealed against the rejection although the appeal was never heard. In September 1999 Jamestown released to Mr Rubin the shares in ATG. Those shares attributable to Mr Millar were released unconditionally, and those which Jamestown said were attributable to the daughters were released on terms.
- The ATG shares were sold in stages. The first tranche sold in the spring of 2000 realised £56,000; and the proceeds of sale were included in Mr Rubin's Receipts and Payments Account which was presented to creditors in September 2000. The second tranche, sold between May and July 2000, realised £619,833. These shares were those said by Jamestown to be attributable to Mr Millar's daughters; and for that reason Mr Rubin paid the proceeds of sale into an escrow account.
- A creditors' meeting took place on 8 September 2000. Mr Rubin's Receipts and Payments Account was placed before the meeting, which Mr Horler attended personally. The account showed the receipt of the proceeds of sale of the first tranche of ATG shares, and also showed that the proceeds of that sale had been applied to the costs and expenses of the bankruptcy. The creditors (including Mr Horler) unanimously approved the accounts. Mr Horler confirmed in his oral evidence that if he had had any objection he would have said so. The proceeds of sale of this tranche of ATG shares formed one of Mr Horler's complaints at trial. The judge rejected that complaint. He said (§ 131):
"… in my judgment there can be no possible liability as constructive trustee on the facts of this case because Mr Horler, at the meeting of 8 September 2000, expressly approved of the application of these proceeds as shown on the Account… In my judgment by such approval, he clearly indicated that he was content that these proceeds should be used for the costs and expenses of the bankruptcy and in my view can have no valid complaint of such use."
- The fact that Mr Horler had consented to the application of the proceeds of sale as shown by that account also led the judge to conclude that Mr Rubin had not acted negligently; and that in any event he would have had a defence under section 304 (3) of the Insolvency Act 1986.
- A further tranche of ATG shares was sold on 12 October 2000. The proceeds of sale, amounting to £927,187.50 were paid into the escrow account; again because of Jamestown's assertion that they were attributable to the daughters or their trust. The final sale of the daughters' alleged shareholding took place on 1 November 2000 and realised £122,812.50. These monies were also paid into the escrow account.
- On 24 January 2001 Mr Rubin made a formal claim to the shares that Jamestown had said belonged beneficially to the daughters or their trust. This claim resulted in an agreement between Mr Rubin and Jamestown. Under the terms of the agreement the proceeds of sale in the escrow account were to be released to Mr Rubin; but they were to be used in payment of the bankruptcy debts and in paying a dividend to creditors. The judge found that these proceeds were treated by Mr Rubin as third party funds although he thought that the shares were, in reality, Mr Millar's. The treatment of these proceeds as third party funds was a charade that Mr Rubin was forced to play out. Mr Rubin did, however, genuinely believe that the agreement he had reached was for the benefit of the estate and the general body of creditors, not least because there would be a substantial saving in fees payable to the Insolvency Service and also the avoidance of a substantial liability to capital gains tax.
- On 15 February 2001 Mr Rubin sent a letter to all creditors. His report to creditors was enclosed with the letter. In his report he referred to the Jamestown shares. He said that he had claimed the shares held by Jamestown and had entered into negotiations with Jamestown's directors. He reported that an agreement had been struck "whereby the costs of the bankruptcy (including payment of £60,000 to the debtor's insolvency and legal advisers) and a dividend distribution to agreed creditors would be made without either side conceding their rights." The report said that there were three benefits of the agreement (1) a dividend of 60p in the £ to creditors could be declared immediately; (2) there would be no legal case with Jamestown thus saving costs; and (3) a distribution from third party funds would save fees to the Insolvency Service of £83,000. He also set out the amount of fees that he had received and his unpaid time costs. Unknown to Mr Rubin, Mr Horler did not read the report. Accompanying that letter and report were a receipts and payments account, a list of admitted claims and a notice convening a meeting of creditors and of the creditors' committee scheduled for 8 March 2001. Both those meetings took place as arranged on 8 March. Mr Horler was not present, but he was represented by Mr Hogg as his proxy. At first Mr Horler said in evidence that Mr Hogg was his representative at that meeting and approved everything that was done. He later retracted that, and said that he did not appoint Mr Hogg as his proxy. However, the judge did not believe his revised evidence and found that Mr Hogg was appointed as Mr Horler's proxy.
- The creditors' meeting and the creditors' committee (including Mr Hogg as Mr Horler's proxy) unanimously approved the resolutions placed before them. These included:
"6.3 IT WAS RESOLVED to approve the costs to date as per paragraph 5.2 above.
6.4 IT WAS RESOLVED to sanction all time costs of the Trustee and his adviser in the expedition of his duties where those duties appear to be in the interests of creditors, in order to achieve the ultimate objectives of the bankruptcy.
6.5 IT WAS RESOLVED that an interim dividend of 60p in the £ to all agreed creditors be paid out of the Jamestown third party monies in seven days of the date of this meeting."
- The judge found that Mr Horler did not give Mr Hogg instructions to vote in favour of the resolutions; and that he himself would not have voted in favour of them. Nor would Mr Horler have accepted that the Jamestown monies were "third party monies" as recorded in the resolution. Nor did Mr Horler in fact agree to the outstanding costs of some £400,000 being paid out of the Jamestown monies. As the judge put it (§ 112):
"However, I find, contrary to his assertion, that he did appoint Mr Hogg to be his proxy, as he initially accepted in evidence. It would seem to me inherently improbable that Mr Hogg would have agreed to be his proxy without being asked. However, I am not satisfied that he read the report to creditors, although there is no reason why Mr Rubin should have known that; I also accept his evidence that he did not give Mr Hogg instructions to vote in favour of the resolutions: I do not believe that he would have voted in favour of dividends to Mr Millar's personal creditors given his animosity to him, which was well known to Mr Rubin, who stated that the Claimant did not want just to establish proprietary rights or a partnership but "also to do maximum damage to Mr Millar who he considered had ruined his life" (T4/97); nor, I am satisfied, would he have ever accepted that the Jamestown proceeds were "third party monies" as minuted. And I do not see how he could have known that authorisation would be sought for the payment of outstanding costs of £400,000 and I am satisfied that he never in fact agreed to these being paid out of the Jamestown proceeds. I also accept his evidence that he would not have agreed to this had he been asked (T2/118). It is true that Mr Anderson did not object, and he had supported the Claimant, but he too had his own agenda because he wanted his dividend to be paid."
- Later in his judgment the judge said (§ 153 (10)):
"I have found that the Claimant did not in fact consent to the payment of dividends to non-partnership creditors or to the use of the Jamestown proceeds to pay the costs and expenses of the bankruptcy. Mr Hogg, who was at the meeting as a creditor and as the Claimant's proxy, did vote in favour but did not (I find) have the Claimant's authority to allow the funds to be treated as "third party monies" to pay dividends in respect of non-partnership debts or to sanction their application to the costs and expenses of the bankruptcy."
- Following the approval by the creditors and the creditors' committee of the resolutions Mr Rubin applied the Jamestown monies as to £906,241 in payment of Mr Millar's creditors and as to £304,048 towards his own fees. Mr Horler did not complain about that until May 2002.
- It is these realisations and applications of the Jamestown monies that form the subject matter of this appeal.
- The first defence advanced by Mr Rubin that the judge recorded was that Mr Horler in fact and by his proxy consented to the payment of the dividend and the costs and expenses, so that the application of the Jamestown monies was in no way wrongful. This defence was not explicitly pleaded, but it was raised in the course of the trial. There is some uncertainty about whether Mr Hantusch, appearing then as now for Mr Rubin, raised it in his written skeleton argument, or whether it surfaced for the first time in the course of his cross-examination of Mr Horler. But that does not in my judgment matter. The raising of the point had the effect that the judge permitted Mr Horler to adduce a supplementary witness statement, which effectively resiled from the evidence on this point that he had previously given, and which formed the basis of the judge's findings of fact that I have already quoted. Thus Mr Horler had the opportunity to explain precisely what instructions he had given Mr Hogg.
- As indicated, the judge found that Mr Horler did not in fact consent to the application of the Jamestown monies. He also found that Mr Horler did not authorise Mr Hogg to consent, and would not have done so if asked. Does that preclude reliance on the proxy vote? To answer that question it is necessary to consider the effect of a proxy and the powers of a holder of a proxy in the administration of an insolvent estate.
- A proxy is an authority given by a person ("the principal") to another person ("the proxy-holder") to attend a meeting and speak and vote as his representative: Insolvency Rules 1986 r. 8.1 (1). According to rule 8.1 (6):
"A proxy requires the holder to give the principal's vote on matters arising for determination at the meeting, or to abstain, or to propose, in the principal's name, a resolution to be voted on by the meeting, either as directed or in accordance with the holder's own discretion."
- Rule 8.3 (6) provides:
"Where a proxy gives specific directions as to voting, this does not, unless the proxy states otherwise, preclude the proxy-holder from voting at his discretion on resolutions put to the meeting which are not dealt with in the proxy."
- The judge made no finding that Mr Horler gave any instructions to Mr Hogg as to how to vote; perhaps not surprisingly since Mr Horler's revised evidence was that he had not appointed Mr Hogg as his proxy at all. He certainly did not make any finding that Mr Horler prohibited Mr Hogg either from voting at all, or from voting in favour of any resolution. His findings were about what instructions Mr Horler would have given. Since Mr Horler gave no instructions to Mr Hogg, under the Rules Mr Hogg was entitled to use his discretion in casting his vote on behalf of Mr Horler. The whole point of a proxy is that the vote of the proxy counts as the vote of the principal. As Carnwath J put it in Re Cardona  BCC 697, 701 a proxy is simply a form of agency which enables the principal to express his views at the meeting without personally being present.
- As rules 8.1 (6) and 8.3 (6) make clear it is for the proxy to decide how to vote on resolutions not dealt with in the proxy. In other words, the proxy's actual authority is to make whatever decision he thinks fit, unless his authority is actually restricted by his principal. It is important to emphasise that the authority conferred by a proxy is actual authority; not ostensible authority. In my judgment the judge approached the question of authority from the wrong end. It was not a question of what Mr Horler expressly authorised Mr Hogg to do: it was a question of what Mr Horler expressly forbade Mr Hogg from doing. Whatever was not forbidden was actually authorised.
- It is not surprising that the judge approached the question in the way that he did, because although the effect of the proxy had been raised before him, he was not referred to rules 8.1 or 8.3 of the Insolvency Rules at all. He approached the question as being simply an application of the ordinary law of agency, rather than starting from the authority conferred on a proxy by the rules themselves. This omission was the foundation of the argument advanced by Mr Rowley QC and Mr Dodge, appearing at very short notice for Mr Horler, that this court should not entertain the point even though on its face it appeared to be a pure point of law. Mr Rowley argued that this court did not have the benefit of the judge's findings of fact on a number of questions: for instance whether Mr Horler had instructed Mr Hogg not to vote at all. He also pointed out that the proxy form (which might have contained limitations on Mr Hogg's authority) had not survived. Attractively though it was put, I do not accept this argument. First, Mr Horler had the opportunity to explain what passed between him and Mr Hogg before the crucial meeting. He was given permission to adduce a supplementary witness statement for that very purpose. Second, what passed between them is a question of fact; and the facts do not change if a different legal question is asked. Third, the judge found that Mr Horler did not give Mr Hogg instructions to vote in favour of the resolutions. This negative way of putting the finding makes it improbable that Mr Horler would have expressly forbidden Mr Hogg either from voting at all, or from voting in favour of the resolutions. Lastly the very fact that Mr Hogg voted in favour of the resolutions and that (despite his knowledge of that fact) Mr Horler made no complaint for over a year afterwards is strong evidence that Mr Hogg did not overstep the limits of his authority. There is no reason to suppose that the judge's findings of fact would have been any different if the precise point now taken had been raised. Once these objections to the raising of the point have been cleared out of the way, I do not think that Mr Rowley really disputed the legal analysis.
- In my judgment, therefore, so far as Mr Rubin is concerned, Mr Horler is to be treated as having voted in favour of the application of the Jamestown monies, with the result that as against Mr Horler there was nothing wrong about that application; and nothing about which he has a valid complaint. Just as the judge held that as regards the application of proceeds to which Mr Horler personally consented there was no valid complaint, so he should have held by parity of reasoning that the position was no different where his proxy consented.
- I would allow the appeal.
Lord Justice Jackson:
- I agree.
Lord Justice Mummery:
- I also agree.
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