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England and Wales Court of Appeal (Civil Division) Decisions
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Cite as:  WLR(D) 57,  EWCA Civ 59
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ON APPEAL FROM CHANCERY DIVISION
Mr Justice Hildyard
Strand, London, WC2A 2LL
B e f o r e :
VICE PRESIDENT OF THE COURT OF APPEAL, CIVIL DIVISION
LORD JUSTICE UNDERHILL
LORD JUSTICE BRIGGS
| BELLIS & ors
|- and -
|CHALLINOR & ors
(Transcript of the Handed Down Judgment of
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No: 020 7404 1400, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
(instructed by CLYDE & CO LLP) for the APPELLANTS
ANDREW SUTCLIFFE QC and ADAM KRAMER
(instructed by HEWLETT SWANSON LLP) for the RESPONDENTS
Hearing dates : Tuesday 16th Thursday 18th December 2014
Crown Copyright ©
Lord Justice Briggs :
Summary of conclusions
(a) The judge was, in my view, wrong to find that the Respondent investors paid the money to the Firm upon trust for themselves, pending fulfilment of the safety condition. On the contrary, an objective review of the relevant primary facts leads me to the conclusion that they paid the money to AFL's solicitors as immediate loans to AFL.
(b) On that analysis, the issue whether the Firm knew of the alleged trust does not arise.
(c) Again, contrary to the judge's conclusion, I consider that regardless whether the Firm had AFL's authority to receive the money on its behalf, the Firm nonetheless held it on trust solely for AFL and not on resulting trust for the Respondents. Whether the Firm had AFL's authority to disburse the money for AFL's benefit in the way in which it did is also irrelevant to the legal consequences as between the Respondents and the Firm.
(d) Again, contrary to the judge's provisional view, I consider that there can be no restitutionary claim by the Respondents against the Firm. It was not unjustly enriched by receipt of the money into client account, on statutory trust for AFL. Regardless whether there was a relevant mistake or a total failure of consideration, the disbursement of the money by the Firm to or for the benefit of AFL was a sufficient change of position in good faith, vis a vis the Respondents, to bar any restitutionary claim. It is in that context irrelevant whether the Firm acted in all respects with commercial probity in relation to their dealings with the money, vis a vis AFL.
(e) In the result, I consider that this appeal should be allowed.
The contextual background
(a) They were unregulated collective investment schemes promoted, in every case, by Mr. Egan's firm Egan Lawson, later re-named ECS after its takeover by the Erinaceous Group PLC ("Erinaceous") in late 2006.
(b) All the schemes involved investment through a single purpose vehicle ("SPV"), being either a limited company or a limited liability partnership. The underlying subject matter of each scheme consisted either of commercial or development property, or a mixture of both.
(c) The schemes sought to achieve tax advantages for the investors via a combination of loan and equity which the judge aptly described as:"horse and carriage: put another way, they were intended to be stapled together or at least matched and coupled."The loans consisted usually of unsecured interest-free loans and therefore subordinated in priority to any secured bank lending. The equity investment consisted of a share in the SPV proportionate to the amount of each investor's loan, with loan and equity typically having the ratio 9,999:1.
(d) The effect of the equity part of the investment was that the investors would control the SPV.
(e) The tax advantage was that investors' return would consist, first, of the tax-free repayment of their loans in full (rather than dividends) and secondly, a distribution of the profit from the scheme at the end of its natural life, taxed as a capital gain, at rates usually lower than income tax.
Subscription in Albemarle (Shoreham) LLP ("LLP")
I wish to invest £ in the LLP and confirm that I have arranged for this money to be sent to the client account of Juliet Bellis & Co.
[bank details then specified for the Firm's client account]
to arrive no later than 28 February 2007.
I understand and agree as follows.
1. Funding from investors under the proposal contained in the information memorandum with which this application letter was sent to me (the "Information Memorandum") is to be applied in subscription for Units in the proportions of 1 Unit of £1 for every £9,999 of Member's Loan, subject to compliance with the conditions set out below. The number of Units issued will be rounded to the nearest whole number and the balance of my investment will be by way of subscription of loan notes.
Pending the satisfaction of the first condition set out below I understand that such sums will be held by Juliet Bellis & Co. on the escrow terms attached to this letter. The second condition set out below is a condition subsequent to the release of the money and I understand that if it is not satisfied within the time scale set out in it I will be entitled to return of the money. However, for the avoidance of doubt, my rights in respect thereof will be against the LLP and Juliet Bellis & Co., as escrow agent shall not be liable to me in respect thereof other than as is expressly set out in the escrow terms.
2. I will take Units subject to the Membership Agreement from time to time and the loan notes subject to the relative Loan Note Instrument and the risk factors and other matters set out in the Information Memorandum.
3. [English law and jurisdiction clause]
4. If the aggregate value of applications received from all intending investors exceeds the required amount, my application may be reduced pro rata.
The conditions referred to above are as follows:
1. That the aggregate amount received from all investors who have received a copy of the Information Memorandum when aggregated with the subscription for Units by Egan Lawson, and the unit trust investment, is not less than £9,000,000.
[Space for signature and address of investor]"
"These terms apply to all sums paid to Juliet Bellis & Co. as escrow agents unless otherwise agreed by a partner of Juliet Bellis & Co. in writing (the "Escrow Sums").
The Escrow Sums are to be held by Juliet Bellis & Co. pursuant to the terms of an offer for shares and loan notes in Albemarle (Shoreham) LLP to which these terms are scheduled ("the Offer"). Juliet Bellis & Co. will hold the Escrow Sums in their client account with their bankers.
The Escrow Sums will continue to belong to the payer unless and until released to Albemarle (Shoreham) LLP on issue of Offer Shares as provided for in the Offer. The Escrow Sums will not be returned to the payer or transferred to the payer unless and until the Offer lapses without Offer Shares having been issued as provided for in the Offer. Juliet Bellis & Co. will be entitled to retain any interest accruing on the Escrow Sums.
[various liability exclusions]
Juliet Bellis & Co. will have no obligations except as expressly set out in these terms and are not responsible for any sums which are not effectively transmitted to them, notwithstanding any prior notification of intended transmission, nor for any delay or failure in the transmission of any sums by their bankers once when they have given instructions in correct form to those bankers to do so.
Erinaceous, Mrs. Bellis and the Cummings
The Fairoaks scheme
(a) An offshore company would be used as the SPV, and
(b) The investors would acquire equity not in the SPV itself, but in an offshore unit trust which would be set up to acquire the SPV. It was also envisaged that, in due course, the same unit trust could be interposed between the investors and the Shoreham SPV, so as to create what the judge described as "some sort of umbrella/super-fund" which could own more than one Albemarle scheme.
"I understand that Geoff (Mr. Egan) is taking his own advice as to the structure which will be adopted for the fundraising but that, until that structure is in place, investors will be making loans to Shelco Twenty Two Limited in order, first of all, to repay the equity bridge of £7m and secondly to repay the loan which will be made by Erinaceous Group PLC of the balance needed to complete (likely to be £15m). This firm is not instructed in any taxation or other aspects which arise from the implementation of any future structure although I will be happy to give practical assistance as specifically requested.
This firm does not have the expertise to advise on the structure which should be adopted in future as a vehicle for investors. As indicated above, Geoff is taking his own advice on this (initially from Ric Berman) and I understand that Lucy (Cummings) is also assisting in liaising with Ozannes in Guernsey. Following my discussion with Geoff and Michael (Pearson), however, I can confirm that I am agreeable to receiving the monies from investors upon the basis that these monies are remitted either by way of loan to Shelco Twenty Two Limited or as an investment in whatever structure is put in place for the project and that these monies will be immediately utilised to repay monies owed to the Royal Bank of Scotland. I can supply a standard form of loan note if that would assist but I must emphasise that any such document will need to be approved by Ozannes in Guernsey as the legal requirements in Guernsey may be different. If any other documentation is required (for example, a unit in a fund) then this will have to come from Ozannes as it is outside the scope of my firm's expertise. You, Geoff and Lucy will also be responsible for ensuring that any regulatory requirements in Guernsey are complied with in conjunction with Ozannes and Legis, the company's administrator.
I have already verified your identity. I understand that most of the initial investors are likely to be those who have also invested in Shoreham. I therefore already have proof of identity on file. If there are other investors who I do not know, then I will need proof of identity (a passport or similar together with an utility bill/bank statement showing an address). This firm is not authorised by the Financial Services Authority to carry out investment business. It is Geoff's responsibility to ensure that any information memorandum which is sent out to investors is compliant with any regulatory requirement. I will, however, need to see a copy of any documentation which goes out to investors. So far, all that I have seen is a "Teaser" which was prepared at the end of last month."
The Engagement Letter concluded by noting that the Firm's costs were to be borne by Erinaceous and added to the amount of its loan to AFL.
We have just completed the purchase of Fairoaks Airport and the income producing element 160,000 sq. ft. on 16 acres plus 20 acres of development land has been transferred into Albemarle Fairoaks and we are now aiming to raise the equity, it has been banked by RBS.
I attach a brief summary of the transaction and figures from which you can see that the IRR projections are 15-32% depending on how much pre-let development we undertake over the next 5 years. The property has been acquired in a Guernsey Limited Company and we intend to create Guernsey Close Ended Fund above it controlled by the investors. This will enable:
1) SIPP investors to invest in Fairoaks
2) Fairoaks to be merged is due course with Abermarle Shoreham
3) Ultimately a listing in the Guernsey or maybe Irish Stock Exchange which will give liquidity to the investments and Inheritance Tax and Capital Gains Tax advantages
Prior to formal fund raising in September, I am keen to offer the opportunity to invest straight away to some of our regular investors as Shoreham was oversubscribed.
If it is possible to transfer money in the next week, I can immediately issue loan notes and ensure that a paid return of 1% above base rate can commence immediately. If you let me know how much to earmark for you, I will send you the bank details.
Geoff Egan FRICS
Albemarle Investment Syndicates"
Thank you for your interest in investing £[amount specified] in Albemarle Fairoaks.
Could you now forward the money to Juliet Bellis I have attached the relevant Bank Details.
I have also attached the loan note (with interest) which we will be issuing pending completion of the Unit Trust.
The remainder of the terms of transaction will be fairly similar to Shoreham LLP.
Please do not hesitate to contact me if you have any queries
Erinaceous Investment (Egan Lawson)"
The email ("the Loan Note email") attached a note of the Firm's client account bank details together with a form of loan note certificate ("the draft Loan Note"). It was entitled "Albemarle Fairoaks Limited 1% Above Base Unsecured Redeemable Loan Notes 2007". The loan notes were to accrue interest at 1% above base, and to be repayable on the later of one year from the date of issue or when the senior debt should have been repaid in full. The certificate was in blank as to the date of the requisite board meeting of AFL, as to the name of the holders, the amount of the note, the number of the certificate and as to execution. The scheduled terms identified the senior debt as being held by RBS pursuant to a loan agreement of 26th July 2007. The interest was to be payable quarterly in arrears (although this remained in square brackets in the draft, with a question mark attached). The notes were to be redeemable by AFL on 20 days' notice. As will appear, I regard the Loan Note email as the second of the two most important documents in the case. The judge labelled the Teaser email and the Loan Note email as "the offering documents" and I shall do likewise.
Trust or Immediate Loan
Quistclose-type trusts the Basic Principles
"If you transfer money to C, it will be used solely for a specified purpose."
The proper interpretation of B's conduct in transferring money to C pursuant to that invitation is that he thereby created a Quistclose-type trust. Whether C will be liable for breach of that trust by using the money for some other purpose will then depend on whether C knew of the terms of A's invitation before disposing of the money.
"Uncertainty works in favour of the lender, not the borrower "
But Lord Millett did not mean thereby that uncertainty whether the property was to be at the free disposal of the transferee also worked in favour of the transferor. In Twinsectra, the denial of any such freedom to the transferee was crystal clear. Nor indeed was the power to dispose of the money within the confines of the transferee's undertaking in Twinsectra uncertain in the relevant sense: see per Lord Hoffmann in paragraph 16.
"A person solely entitled to the full beneficial ownership of money or property, both at law and in equity, does not enjoy an equitable interest in that property. The legal title carries with it all rights. Unless and until there is a separation of the legal and equitable estate, there is no separate equitable title. Therefore to talk about the bank "retaining" its equitable interest is meaningless. The only question is whether the circumstances under which the money was paid were such as, in equity, to impose a trust on the local authority. If so, an equitable interest arose for the first time under that trust."
(a) that the monies paid by the Respondents into the Firm's client account were not thereupon immediately to belong to or be subject to the directions of AFL;
(b) that until the final agreement on the terms of any loan and the finalisation of KYC and regulatory consents the monies were to be retained in the Firm's client account, at least
(c) pending agreement, some future instruction by or on behalf of the Respondents, or the happening of a pre-stipulated event (the achievement of "safety").
At paragraph 562 he concluded in addition that:
"It is to be inferred from the same circumstances that if, for whatever reason, the scheme failed, or no definitive agreement (whether or not documented) could be reached as to the terms of the loan, then the money should be remitted back to the payers, and not to AFL."
"1) the lack of any sensible explanation in all the circumstances for the requirement for payment into a client account other than (a) to prevent its being available to the ultimate intended recipient pending some further event or instructions and (b) to provide that in the meantime it is to be held under the control of a solicitor for the benefit of the payer;
(2) the marketed and obvious characterisation of the transaction as an Albermarle investment scheme with the basic characteristics common to such schemes, in none of which had the investors ever made unsecured loans without an immediate right to a matched equity investment element;
(3) the Claimants' familiarity with those basic characteristics, and their expectations accordingly that what they would obtain by subscribing money was a combination of a loan and 'equity' participation (albeit that the documents to evidence that right might follow after the application of the monies invested);
(4) the arrangements in Albermarle Shoreham, which took place only a few months before, and in which the Defendant Firm was both adviser and escrow agent, and where monies were required to be remitted to the same client account with the Defendant Firm acting as escrow agent on terms set out in a document attached to the Information Memorandum for that transaction and expressly agreed between the investor and the Albermarle Shoreham vehicle, Albermarle (Shoreham) LLP, as a term of the application form required to be subscribed;
(5) the inherent unlikelihood that the Claimants would ever have agreed to lend monies without any security, on terms that were not finalised, without control of the SPV (AFL) and so without any identified right to, or ability to require to be made available to them, some form of 'equity investment' in AFL or in a fund above it;
(6) the fact that at the time of the transfer of the Claimants' monies, Mrs Bellis knew that no formal and final documentation had been provided to them, still less agreed by them;
(7) the fact that in this case (unlike what might be thought the more standard case) the monies to be remitted to the client account came from a number of persons;
(8) all giving rise to the inference that, at the very least pending the agreement of formal documentation and the completion of any steps necessary to ensure there was no impediment to its issue and signature, the monies transferred should be held to the order of the payers;
(9) the fact that, as a solicitor, and in light of her previous experience in respect of the Albermarle Shoreham transaction, Mrs Bellis could be expected to know, and did know, all the above and that (a) it was necessary for AFL's directors formally to approve borrowing in accordance with specified and formal documentation before accepting money from investors (and the concomitant repayment obligation to them) and (b) it was not permissible for her to accept and apply monies received from investors unless and until 'know your customer' and Consent to Borrowing ("COBO") and any other regulatory requirements in Guernsey had been completed."
"Money in a solicitor's client account is held on trust. The only question is the terms of that trust."
"It simply makes no commercial sense at all to be locked into a five-year unsecured, subordinated loan that could not be repaid before RBS was repaid in full, with an interest rate of 1% over base rate."
Issue 2: The Firm's Knowledge
Issue 3: Resulting Trust due to Lack of Authority
i) Mr Cummings was not authorised by AFL to retain the Firm in accordance with the terms of the Engagement Letter because (a) he did not become the beneficial owner of AFL's shares until some days after the date of the letter (13th July 2007); (b) he could not as a mere beneficial owner of 100% of AFL's shares commit the company to anything, since the 'own acts' principle did not apply to beneficial owners of a company's shares, at least in the circumstances of this case. Nothing other than the Engagement Letter was put forward as authorising the Firm to receive loans from the Respondents.
ii) There being no such authority when the payments were made, the consequence of them being made into the Firm's client account was that an immediate trust arose in favour of the Respondents.
iii) There was no subsequent ratification by AFL of the receipt of the money pursuant to the authority purportedly contained in the Engagement Letter, and any supposed ratification would have come too late to defeat the third party interest in favour of the Respondents constituted by the immediate resulting trust in their favour.
"Is necessarily a trust account, with legal ownership and beneficial ownership being divided." (paragraph 626)
He continued, at paragraph 627:
"Put another way, the problem for the Defendant Firm is that if it did not have authority to receive money for AFL, the beneficial title did not vest in AFL, but cannot have been intended to vest in the Defendant firm, and therefore must have remained in the Claimants (as the only remaining candidates) given that "the equitable, or beneficial interest, cannot remain in the air " (per Lord Wilberforce in Vandervell v IRC  2AC 291 at 1412 (in fact 329)"
Later, the judge cited this passage from Lord Upjohn's speech in the Vandervell case, at page 313:
"If A intends to give away all his beneficial interest in a piece of property and thinks he has done so but, by some mistake or accident or failure to comply with the requirements of the law, he has failed to do so, either wholly or partially, there will, by operation of law be a resulting trust to him of the beneficial interest of which he has failed effectually to dispose. If the beneficial interest was in A and he fails to give it away effectively to another or others or on charitable trusts it must remain in him."
Finally, at paragraphs 633-4, the judge concluded:
"Now, of course, the present case is not a case of gift; nor is it one where there is a pre-existing equitable interest in specific property. However, as it seems to me, the like principles apply, since the payment was not intended for the recipient and the recipient had no authority to receive it for anyone else. The money, like the wrongly addressed letter, must be returned to sender, address (as it were) unknown.
I should stress that this is an unusual case. As the Claimants accepted, as indicated above, failure of consideration would not lead to the transferor retaining its equitable interest; it is doubtful whether mistake would either; and property may pass even in a transaction induced by fraud. It is the combination of the receipt into a trust account of borrowed monies where the borrower had not authorised the borrowing or such receipt, that, in my judgment, makes the case exceptional."
Issue 4: Unjust Enrichment
"If and to the extent that the monies paid into its client account were not held by it on trust either for the Claimants or for AFL" (paragraph 658).
Lord Justice Underhill
Lord Justice Moore-Bick