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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> HR & Ors v JAPT & Ors [1997] EWHC Ch 371 (19 March 1997) URL: https://www.bailii.org/ew/cases/EWHC/Ch/1997/371.html Cite as: [1997] EWHC Ch 371, [1997] OPLR 123 |
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CHANCERY DIVISION
B e f o r e :
____________________
HR AND OTHERS |
Plaintiffs |
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- and - |
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JAPT AND OTHERS |
Defendants |
____________________
(instructed by Messrs Sacker & Partners J
Mr Anthony Mann Q.C. and Mr David Halpern appeared on behalf of the Third Defendant
(instructed by Messrs Wilde Sapte)
handed to the parties on Wednesday the 19th March 1997
____________________
Crown Copyright ©
MR JUSTICE LINDSAY:
"........where the legal viability of a cause of action is unclear (perhaps because the law is a state of transition), or in any way sensitive to the facts, an order to strike-out should not be made".
See per Sir Thomas Bingham M.R. in E (a Minor) -v- Dorset C.C. [1995] 2 AC 633 at p. 694 in the Court of Appeal (in which the Defendants' Appeal to the House of Lords was dismissed).
The Pleaded Facts
Direct Fiduciary Duty
"The liability of a fiduciary for the negligent transaction of his duties is not a separate head of liability but the paradigm of the general duty to act with care imposed by law on those who take it upon themselves to act for or advise others"
see Lord Browne-Wilkinson in Henderson -v- Merrett Syndicates Ltd [1995] 2 AC 145 at p. 205 and see also Bristol & West Building Society -v- Mothew [1996] 4 All ER 698 at p. 711-712 per Millett L.J..
"It was strenuously moved on behalf of the plaintiff that the defendants were as a necessary consequence of their position as directors of the company personally trustees of the plaintiff and had been guilty of a breach of trust" -per Brett L.J. at p. 525.
"I am of opinion that the defendants were not from the mere fact of their being directors trustees of the plaintiff at all".
"........ assuming that there is a trust and a breach of
it, I can see no reason on which directors can be held personally liable for it to the plaintiff. On this matter also I agree entirely with the reasoning and authorities of my brother Brett ......."
"Directors stand in a fiduciary relation to the company but not to a stranger with whom the company is dealing. It is of course true that a company acts through its directors. But that does not involve the proposition that if a breach of trust is committed by a company, acting through its board, a beneficiary can maintain any action against the directors in respect of such breach of trust. Of course I accept the case where the trust property can be followed into the hands of a director, or of any stranger with notice. No such points arises here".
At p. 627 he said:-
"I base my decision upon the broad principle that directors stand in a fiduciary position only to the company, not to creditors of the company, nor even to individual shareholders of the company, still less to strangers dealing with the company. This principle applies equally whether the relation between the company and the stranger is one purely of contract, such as principal as an agent, or as one of trustee and cestui que trust".
"This conclusion is rested upon the proposition that the directors stand in a fiduciary position towards Mr Bath. In my opinion this is erroneous. A fiduciary relation can only arise either contractually or by implication of law".
After negating any contract between Mr Bath and the directors, Buckley L.J. continued:-
"Then does there arise as between those parties any fiduciary relation by implication of law? I think not. Under circumstances such a relation might arise by implication of law. The facts here do not raise it."
Whilst a trustee could not profit from his trust because doing so would put him in a position in which his duty and his interest would conflict - p. 644 - he continued:-
"A director is not personally liable for the breach of trust or breach of duty of the company towards a person contracting with the company".
At p. 647 he held that a declaration:-
"That the remuneration is to be disallowed on the mere ground that the recipient was a director is in my judgment erroneous".
The case includes a very powerful dissent from Fletcher Moulton L.J. who, at p. 637, held that where a limited company undertook the administration of a trust its directors came under a duty direct to the beneficiaries of the trust. He said that:-
"In my opinion they are liable for matters of personal conduct inconsistent with their full knowledge of the fiduciary character of the duties which in the name of the company, they have to carry out".
"The corporation cannot do what it likes with its assets, but must apply them in furtherance of the objects of the charitable trust. This duty is also imposed on the corporators, who are in complete control of the corporation."
However, Dankwerts J. observed at p. 570:-
" It seems to me that in a case of this kind the Court is bound to look at the real situation which exists in fact. It is obvious that the corporation is completely controlled under the provisions of the Charter by the Governor, Deputy Governor and other directors, and that those are the persons who in fact control the corporation and decide what shall be done. It is plain that those persons are as much in a fiduciary position as trustees in regard to any acts which are done respecting the corporation and its property."
He then supposes the case of such a "director" pocketing the property of the corporation, points to the obviousness of that being illegal and continued, as to the "Directors" - (and with my emphasis):-
"Therefore it seems to me plain that they are, to all intents and purposes, bound by the rules which affect trustees."
"That I must look at the substance of the matter and see who really controls the situation. I held, accordingly, that the Governors and Directors were just as much in a fiduciary position and in the position of trustees as the corporation itself."
He held that the persons (the Council members) who regulated the operation of the company in Abbey Malvern were not:-
"free persons unrestricted in their operations, but are the trustees of the Trust Deed, who may act only in accordance with the provisions of that deed, may only use the property of the company in a particular way and must not make use of the assets of the company for the purpose of a profit-making concern. I find that they are strictly bound by the trusts of the Trust Deed, and that those trusts are charitable trusts".
"The principal is entitled to the single minded loyalty of his fiduciary"
then the company in Abbey Malvern could surely expect from its Council members a single minded loyalty that put its interests ahead of those trustees. I do not see the Abbey Malvern case as adding real weight to French Protestant Hospital; it purported to reveal no principle which is applicable to the case before me and certainly none, in my judgment, that at first instance can be preferred to the ratio in Bath in the Court of Appeal. As Mr Mann emphasised, there is the additional curiosity, if third parties have all along been directly liable to beneficiaries for breach of duty of care owed directly to the beneficiaries and without such third parties either improperly receiving trust property or dishonestly assisting in dealings with it, that the law should have been driven to develop the stricter requirements of Barnes -v- Addy accessory liability, to which I shall need to refer below.
"It is not open to doubt that the particular factual relationship existing between a (or the) director(s) of a trustee company and a beneficiary or beneficiaries of a trust, may properly warrant the finding of a fiduciary relationship between them; cf Coleman -v- Myers [1977] 2 NZLR 225; Glandon Pty Ltd -v- Strata Consolidated Ltd 1993 11 ACSR 543. But to say this is not to say that there is anything fiduciary in the trust company director-trust beneficiary relationship as such."
"...... it is difficult to identify a compelling reason why, in addition to the duty of skill and care vis-a-vis the Trustees which the third parties have accepted, or which the law has imposed upon them, third parties should also owe a duty of care directly to the beneficiaries".
Direct Tort
"........ Arises from the circumstances in which the defendants were acting, not from their status or description. It is the fact that they have all assumed responsibility for the property or affairs of others which renders them liable for the careless performance of what they have undertaken to do, not the description or the trade or position which they hold".
"If B is unaware of the fact that A has assumed to act in B's affairs (e.g. in the case of B being an unascertained beneficiary) B cannot possibly have relied on A. What is important is not that A knows that B is consciously relying on A, but A knows that B's economic well-being is dependent upon A's careful conduct of B's affairs".
Lord Browne-Wilkinson continued, on p. 272, to say:-
"It does not follow that in all cases based on negligent action or inaction by the defendant it is necessary in order to demonstrate a special relationship that the plaintiff has in fact relied on the defendant or the defendant has foreseen such reliance. If in such a case careless conduct can be foreseen as likely to cause and does in fact cause damage to the plaintiff that should be sufficient to found liability".
"The law of England does not impose any general duty of care to avoid negligent mis-statements or to avoid causing a pure economic loss even if economic damage to the plaintiff was foreseeable. However, such a duty of care will arise if there is a special relationship between the parties. Although the categories of cases in which such special relationship can be held to exist are not closed, as yet only two categories have been identified, viz. (1) where there is a fiduciary relationship and (2) where the defendant has voluntarily answered a question or tendered skilled advice or services in circumstances where he knows or ought to know that an identified plaintiff will rely on his answers or advice. In both these categories the special relationship is created by the defendant voluntarily assuming to act in the matter by involving himself in the plaintiff's affairs or by choosing to speak. If he does so assume to act or speak he is said to have assumed responsibility for carrying through the matter he has entered upon".
"Dealing first with the law, it is, as already noted, not in dispute that, in order to fix a director with personal liability, it must be shown that he assumed personal responsibility for the negligent mis-statement made on behalf of the company. In my judgment, having regard to the importance of the status of limited liability, a company director is only to be held personally liable for the company's negligent mis-statements if the plaintiffs can establish some special circumstances setting the case apart from the ordinary; and in the case of a director of a one-man company particular vigilance is needed lest the protection of incorporation shall be virtually nullified. But once such special circumstances are established, the fact of incorporation, even in the case of a one-man company, does not preclude the establishment of personal liability. In each case the decision is one of fact and degree".
"In other words the relevant knowledge and experience was entirely his qua Mr Mistlin, and not his qua director. Indeed, I would go so far as to say that, in reality, Mr Mistlin held himself out as personally responsible for the only available figures to support the projections, as was indeed the fact".
He therefore supported the Judge's holding that the second director, Mr Mistlin, was personally liable, adding, at p. 32:-
"I should emphasise that I have reached this conclusion solely on the particular facts of this case and I do not think there is any risk of compromising the general concept of limited liability".
Waite L.J., speaking of a director, asked:-
"Do the circumstances, when viewed as a whole, involve an assumption by the director of personal responsibility for the impugned statement?"
Accessory Liability
"But .... strangers are not to be made a constructive trustee merely because they act as the agents of trustees in transactions within their legal powers, transactions perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees".
"Whether an honest third party who receives no trust property should be liable if he procures or assists in a breach of trust of which he would have become aware had he exercised reasonable diligence? Should he be liable to the beneficiaries for the loss they suffer from the breach of trust?".
"It is impossible to be more specific. Knox J. captured the flavour of this, in a case with a commercial setting, when he referred to a person who is "guilty of commercially unacceptable conduct in the particular context involved" -see Cowan De Groot Properties Ltd -v- Eagle Trust plc [1992] 4 All ER 700 , 761"
Commenting on this reference at p. 709 Millett L.J. said:-
"The Judge's reference to the solicitor having made a representation which "he knew, or must be taken to have known" to be misleading is not an accurate description of the facts of the present case. It is not alleged that the defendant "knew or must be taken to have known" the facts, but only that he "knew or ought to have known" them, which is a very different matter.".
Indirect Fiduciary Duty and Indirect Tort
"This category also includes officers and employees of companies in respect of the application of company funds. All of these people will be accountable to the trustees for their conduct. For the most parts they will owe to the trustees a duty to exercise reasonable skill and care. Where that is so, the rights flowing from that duty form part of the trust property. As such they can be enforced by the beneficiaries in a suitable case if the trustees are unable or unwilling to do so. That being so, it is difficult to identify a compelling reason why, in addition to the duty of skill and care vis-a-vis the trustees which the third parties have accepted, or which the law has imposed upon them, third parties should also owe a duty of care directly to the beneficiaries. They have undertaken work for the trustees. They must carry out that work properly. If they fail to do so, they will be liable to make good the loss suffered by the trustees in consequence. This will include, where appropriate, the loss suffered by the trustees, being exposed to claims for breach of trust".
"The right of action for breaches of these duties was vested in BPTC before it ceased to be trustee and the new trustee claims to sue, by virtue of their appointment, as successor to the former trustee. The question is whether these rights of actions did pass to the new trustees upon their appointment.".
"The right of action held by the former trustee cannot be shown to have been trust property; there is no basis upon which to conclude it was. Unlike the valuer whom I have used for illustration, the directors cannot be said on the pleading in this case to have owed their duties to the company only in relation to some particular trust or trusts; nor were those duties imposed upon them in relation to some particular item or items of trust property as such. Rather the existence of both the trusts and the trust property was but the context in which the duties fell to be discharged by those who owed duties to the company generally as its officers. There is no basis, then, for supposing that the right of action was trust property in the hands of BPTC or for supposing that the right of action passed to the new trustees, upon their appointment as such".
"...... the benefit of such proceedings would belong to the creditors generally, in the liquidation, consistently with my view that the directors owed their duty to BPTC and not to BPTC in a particular capacity" - p. 748
"It is important that the Plaintiffs do not allege in this portion of the pleading that the directors owed any duties to the beneficiaries; the only duties relied upon are those said to be owed by the directors to BPTC, the former trustee".
"In making the contract with Priestley & Morris to be auditors of the trust, BPTC was clearly acting in the administration of the trust and for the purposes of the trust. In follows then that the benefit of the contract was itself trust property, with the result that any right of action arising thereunder was trust property too.
Further, that is so, whether the respondents rest their claim in contract or in tort; for in either case, the circumstances giving rise to the duty are such that the cause of action is trust property so that the proceeds of any such action would be property belonging to the beneficiaries and would not be property of BPTC available for its creditors generally. If, as Counsel for the auditors submitted, the question of whether the right of action is trust property depends upon all of the circumstances, including such connection as there is with the administration of the trust and the nature and extent of that connection, then in this case I think the connection is such that the rights of action being asserted against the auditors were trust property when vested in BPTC and therefore, upon appointment of the new trustees, passed to the new trustees for the benefit of the trusts".
"Piercing the Corporate Veil"
"......that it is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere facade concealing the true facts" - per Lord Keith of Kinkel.
Conclusion
"It would be difficult to exaggerate the importance of the questions thus raised, especially at a time when there is an increasing tendency to employ corporate bodies in the execution of trusts".
"Lord Salmon himself observed in the Wah Tat Bank [1975] AC 507 that "each case depends upon its own particular facts" I would prefer to leave further elucidation of the limits of the personal liability of directors to the trial judge by reference to the facts as found by him".