IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

Thursday, 9th December 1999

B e f o r e :

LORD JUSTICE NOURSE

LORD JUSTICE BUXTON and

MR JUSTICE FERRIS

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FRANK HOUGHTON

(and 38 other claimants scheduled to the Statement of Claim)

Claimants/Respondents

-v-

CLIVE FAYERS

First Defendant

HOWARD DAY

Second Defendant/Appellant

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The Appellant Second Defendant Mr H Day appeared in person.

Mr J Clifford (instructed by Messrs Harding Evans, Newport) appeared on behalf of the Respondent Claimants.

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J U D G M E N T

Lord Justice Nourse:

1. On 18th December 1998 Mr Justice Collins entered summary judgment against both defendants to this action. Against the first defendant, Clive Fayers, he made a declaration that he was liable to account to the 39th claimant, Fayers Legal Services Ltd ("FLS"), for misfeasance and breach of trust, ordered that he pay to FLS the sum of £962,562 forthwith, being the minimum sum for which he was liable to account, together with interest, and ordered that there be judgment for the 38 individual claimants for fraudulent misrepresentation, with damages to be assessed. Against the second defendant, Howard Day, he made a declaration that he was liable to account to FLS as constructive trustee for having received its property knowing that it was being paid to him in breach of trust and ordered that he pay to FLS the sum of £473,237 forthwith, being the minimum sum for which he was liable to account, together with interest.

2. The judge refused the defendants permission to appeal, but permission was granted in each case by this court. In the case of Mr Day permission was granted on 30th March 1999 by Lord Justice Mantell, his stated reason being that it was arguable that the case against him depended upon allegations which could only be resolved after a trial. Appeals by both defendants having been duly entered, orders for security for costs were made against them. The security ordered against Mr Fayers was not put up and his appeal has been dismissed. Mr Day put up the £5,000 security ordered against him and his appeal was argued before us on 11th and 12th November, when judgment was reserved.

3. Because it is no longer necessary to consider the case against Mr Fayers and because, on the view I take of the case against Mr Day, the judgment entered against him cannot be sustained in full, the facts can be stated more briefly than they were stated by the judge.

4. FLS was incorporated by Mr Fayers on 19th April 1993. In an affidavit sworn in the proceedings he explained its incorporation as follows:

5. The judge said that between October 1993 and January 1996 Mr Fayers himself or his brother Richard and possibly some other agents induced members of the public to invest about £1.6m in FLS. Over £1m of that amount was invested by the 38 individual claimants in this action. Except for the receipt of some so-called dividends which, because they were paid out of capital, it is agreed must be returned to FLS, the individual claimants and, it may be assumed, all others who invested in FLS have lost every penny of their investment.

6. Having reviewed the evidence relating to the case against Mr Fayers, the judge said:

7. Later he said:

8. Those were indeed the only three claims which were handled by FLS. I will refer briefly to the Taylor claim in due course. At this stage it is enough to say that the judge’s findings, albeit made only on affidavit evidence, appear to have provided an adequate basis for his order that Mr Fayers should repay £962,562 to FLS as moneys misapplied by him and for his judgment for the individual claimants for damages for fraudulent misrepresentation.

9. I turn to the case against Mr Day, who is now 53 years of age. In affidavits sworn in these proceedings he has given the following account of his business activities up to 1994. In 1978 he sold the successful agricultural contracting business he had built up in Essex in order to concentrate on his own farming interests and a consultancy he had with a large Romford-based company. In 1991 he started a consultancy business under the name Anderson Stuart & Co in order to assist an accountant friend, Mr John Thorpe, but he has said that from April 1993 the only work conducted through that business was of small nature. In the autumn of 1991 he suffered an accident in the shooting field which rendered him unable to work for two years. In February 1994 he was approached by his two sons, who wished to take over Anderson Stuart & Co in order to develop its business. From April 1994 Anderson Stuart & Co, though still in Mr Day’s name, was being run by his two sons, Mr Thorpe and a solicitor called Eamonn Forsdike, who was struck off the roll in July 1994 for breaches of the Solicitors Accounts Rules and improper use of clients’ funds. Mr Day claims that he transferred the business to his two sons in August 1994 and in October of that year it was incorporated under the name "Anderson Stuart Ltd". He maintains that he has no interest in or connection with the business except as a consultant under a consultancy agreement made at the time of its incorporation. Henceforth I will refer to Anderson Stuart & Co or Anderson Stuart Ltd, as the case may be, as "ASC".

10. Mr Day has said that his first meeting with Mr Fayers was in March 1994, the meeting being in connection with a claim against Mr Fayers’ brother. That led to ASC being employed to carry out certain duties on behalf of Mr Fayers personally, Mr Day being given care and control of those matters. It is clear that Mr Day soon became aware of the existence of FLS, but his case is that until the autumn of 1996 he knew little about its activities or financial structure, in particular that it had outside shareholders. He has said in evidence:

11. Both before Mr Justice Collins and in this court Mr Day, against whom a bankruptcy order was made on 19th January 1995, has appeared in person. This has inevitably meant that much of his case has been presented through written and oral submissions which in many instances have gone beyond his affidavit evidence. No objection to this has been taken by Mr Clifford, on behalf of FLS, and it has had the advantage of enabling us to get a much fuller picture of Mr Day’s case than would otherwise have been possible. It has also enabled us to form a view as to the reliability of some of the assertions made by him.

12. The judgment against Mr Day for £473,237 was given in relation to aggregate payments of £398,162 and £75,075 which he accepts were made by FLS, as to the larger amount mainly into an account in the name of ASC and as to the smaller amount into a Nationwide Building Society account in Mr Day’s own name. I say that the larger amount was paid mainly into an account in the name of ASC because it appears that £13,000 of it was paid into the account of a company called St Leonard’s Farm Ltd, an account admittedly controlled by Mr Day. For present purposes, however, it is unnecessary to make any distinction between the two accounts and I shall refer only to that of ASC. I should add that the £75,075 consisted of 34 separate payments made between 8th January and 21st December 1996 of amounts ranging between £250 and £8,000, nearly all of which were in very round sums.

13. At the start of the second day of the hearing before us Mr Day put in a summary setting out his case in relation to the total figure of £473,237. He claims that £164,162 was applied in making payments by the direction and on behalf of FLS, to which must be added a further £27,400 of expenditure (mainly on legal fees) which he also claims was made on behalf of FLS, making a total of £191,562. That leaves a balance of £281,675, which Mr Day claims represented fees properly payable by FLS to ASC for services rendered either to FLS or to Mr Fayers personally. In respect of £178,626 of that amount Mr Day has produced 13 invoices, though, as the judge observed, these do not correspond with any payments which have been identified in the books of FLS; nor have the originals of any of the invoices been found. In respect of the balance of £103,049 no invoices have been produced, though Mr Day claims that this amount relates to work carried out in respect of the three claims handled by FLS and other work undertaken on Mr Fayers’ behalf including the restoration of FLS’s name to the register in September 1995. (FLS had been struck off in January of that year. It is now controlled by the individual claimants, who have caused it to join in this action in order to recover its lost funds.)

14. In regard to the £164,162 claimed to have been applied in making payments by the direction and on behalf of FLS, it must be said that many of them appear not to have been made for the benefit or for the purposes of FLS. They include payments made in discharge of mortgage liabilities of Mr Fayers and his brother, payments for Mr Fayers’ son’s school fees and the fees of the supervisor of Mr Fayers’ brother’s individual voluntary arrangement. Before us Mr Day sought to justify the legitimacy of such payments on the ground that, so far as he knew, FLS was Mr Fayers’ own company; in other words, that it was owned and controlled by him. That justification depends upon the validity of Mr Day’s central assertion before us that he did not know that FLS had outside shareholders. I will come to that assertion in due course.

15. In regard to the £281,675 claimed to have represented fees properly payable by FLS to ASC for services rendered either to FLS or to Mr Fayers personally, two comments may be made. First, although Mr Day has produced a 66 page work schedule purporting to detail the services covered by the 13 invoices and rendered between March 1994 and December 1996, the evidence as to the propriety of the fees charged remains highly unsatisfactory. Second, in so far as both the invoices and the work schedule show that many of the services were rendered not to FLS but to Mr Fayers personally they are subject to the objection that payment for them was not made for the benefit or for the purposes of FLS.

16. At this point it is helpful to stand back in order to consider what case was capable of being made by FLS before the judge for the recovery of the sums claimed, it being of paramount importance to bear in mind that the judge was hearing an application for summary judgment and not conducting a trial. Judgment was given against Mr Day under the knowing receipt head of constructive trust, the essential requirements of which were stated by Hoffmann LJ in El Ajou v. Dollar Land Holdings Plc [1994] 2 All ER 685, 700:

17. Mr Justice Collins concluded his consideration of the case against Mr Day by saying:

18. That finding, couched rather in the language of knowing assistance, appears to have been one of dishonesty on the part of Mr Day as well as Mr Fayers. However, it was unnecessary for a finding of dishonesty to be made against Mr Day. It was enough for FLS to establish that he knew or ought to have known that the money had been paid to him in breach of Mr Fayers’ fiduciary duty to FLS. That point was made very clearly by Buckley LJ in Belmont Finance Corporation v. Williams Furniture Ltd (No. 2) [1980] 1 All ER 393, 405, an authority which is sometimes overlooked in this context.

19. As to the first of the three requirements for a case in knowing receipt, it is reasonable to assume that most if not all of the £473,237 was paid away by Mr Fayers in breach of his fiduciary duty to FLS. As to the second requirement, the £75,075, having been paid in to Mr Day’s own Nationwide account, was prima facie received by him beneficially. I will return to that sum later. In regard to the balance of £398,162 paid into the ASC account, FLS claims that ASC was the alter ego of Mr Day, so that he can be treated as having received those payments beneficially. There are two objections to that. First, it is doubtful whether the corporate veil can be lifted for this purpose. Secondly, there is a clear dispute on the evidence as to whether ASC can properly be treated as having been Mr Day’s alter ego. As I have said, he claims that from the incorporation of ASC in October 1994 he merely acted as a consultant to the company, which was thereafter effectively run by his two sons, Mr Thorpe and, until he was sentenced to 42 months imprisonment for theft and furnishing false information in July 1996, Mr Forsdike. Although FLS has produced a great deal of documentary evidence tending to show the continuing involvement of Mr Day in ASC’s affairs, in my view that is a dispute which can only be resolved at a trial.

20. On that footing summary judgment cannot properly be entered against Mr Day in respect of the £398,162 in knowing receipt. In respect of that sum a case can only be made at this stage, if at all, in knowing assistance, the principle of which was stated by Lord Nicholls of Birkenhead in delivering the judgment of the Privy Council in Royal Brunei Airlines Sdn Bhd v. Tan [1995] 2 AC 378, 392, as follows:

21. Liability under that principle does not necessarily depend upon receipt of assets disposed of in breach of fiduciary duty. So, if it could be shown that Mr Day had assisted in the disposal of FLS’s money through the medium of ASC, the first hurdle confronting FLS in establishing liability would be surmounted. But it would still be necessary to show that the assistance had been given dishonestly. The evidence as it stands is in my view insufficient to support a summary decision in favour of FLS in relation to either of those requirements. Without going into detail, it is enough to say that what we are really being asked to do is to infer, from the inadequacy and improbability of the explanations so far given by Mr Day, that he has no real prospect of succeeding at trial. Certainly in regard to dishonesty FLS’s case is based, as in comparable cases it nearly always is, on inference. While it does not appear difficult to support the inference drawn by the judge against Mr Fayers, the evidence against Mr Day is less compelling and arguably capable of an innocent explanation. For these reasons I conclude that summary judgment cannot properly be entered against Mr Day in respect of the £398,162 in knowing assistance any more than in knowing receipt. The judgment entered against Mr Day must be set aside to that extent.

22. I return to the claim in knowing receipt in respect of the £75,075. I have already said that it is reasonable to assume that most if not all of the £473,237 was paid away by Mr Fayers in breach of his fiduciary duty to FLS. In my judgment that assumption is fully justified in regard to the £75,075. The next question is whether the £75,075 was received by Mr Day for his own benefit. Before us he asserted that those moneys were immediately applied under Mr Fayers’ directions in making payments on behalf of FLS, in other words, that they all formed part of the £164,162. However, nothing of that sort is said in Mr Day’s evidence, despite the following challenge in the evidence sworn on behalf of FLS:

23. What Mr Day had said in his affidavit was that any money he received from Mr Fayers or FLS "was done for Mr Fayers’ convenience", his explanation to the judge being that FLS was unable to draw sufficient cheques on its own account. The judge described that as being "frankly, incredible". Moreover, since the Nationwide account was Mr Day’s own account, there could have been no difficulty in producing an analysis of the payments out. That was never done. In his own affidavit he relied on Mr Thorpe’s affidavit to confirm the financial transactions inter alia between FLS and his Nationwide account, but the latter affidavit is silent on the point.

24. In the circumstances, I am in no doubt that the second requirement for a case in knowing receipt in regard to the £75,075 is satisfied. That amount was received beneficially by Mr Day. That leaves only the requirement of knowledge on his part that the moneys were paid to him in breach of Mr Fayers’ fiduciary duty to FLS. This brings me to Mr Day’s central assertion before us that, until the autumn of 1996, he did not know that FLS had outside shareholders. That assertion was made deliberately, after Mr Day had been given an opportunity to consider it. It was repeated at least once. I am in no doubt that it was a blatant untruth.

25. On 19th October 1994 a meeting was convened by Mr Fayers at Le Manoir aux Quat’ Saisons at Woodstock, near Oxford. Those attending included Mr Fayers and Mr Day. Records of that meeting prepared in June and July 1998 by Mr Williams and Mr Forsey, two of the claimants, have been exhibited in the proceedings. Mr Williams records that approximately 24 people attended. Mr Forsey states that at the meeting were approximately 15 people who were either shareholders or prospective shareholders in FLS. Mr Day said in his affidavit that Mr Forsey’s statement was false and that the allegations made therein were totally opposed to his knowledge of the meeting, and that Mr Williams’ statement was not his recollection of the contents of the meeting. However, in paragraph 20 he said:

26. In paragraph 21.1 Mr Day referred to "the shareholders meeting held on 19th October 1994". Later in that paragraph he said:

27. In the light of his own evidence it is impossible for Mr Day truthfully to assert that he did not know on 19th October 1994, if not before, that FLS had outside shareholders. Moreover, in a document produced by Mr Day and headed "Payments made on behalf of Clive Fayers to 30th June 1995" there are records of payments having been made by ASC to at least seven shareholders in FLS between 31st March and 1st June 1995. Those payments can only have been made by way of purported payments of dividend and I cannot accept that they were not known by Mr Day to be such. In the circumstances, I completely reject Mr Day’s central assertion.

28. On that footing Mr Day must have known that FLS was not Mr Fayers’ own company and, in consequence, that he had no power to cause it to make payments that were not for its benefit or for its purposes. The third requirement necessary to establish a case in knowing receipt in respect of the £75,075 is therefore satisfied. No triable issue has been shown in respect of that part of FLS’s claim or, if you prefer, Mr Day has not established that he has a reasonable prospect of successfully defending it. I would therefore uphold the judge’s judgment to that extent.

29. Finally, I turn to two cross-appeals against Mr Day. The first is made by FLS, which contended before the judge that, in addition to the £473,237 for which it claimed that Mr Day was liable in knowing receipt, he was also liable in knowing assistance for the further £489,325 in respect of which Mr Fayers was held liable. In giving judgment, the judge did not mention that additional claim against Mr Day, presumably because he thought that it could not be made out on an application for summary judgment. It follows from what I have said about the claim in knowing assistance in relation to the £398,162 that I would agree with him. However, since Mr Clifford abandoned this appeal during the course of the argument before us, I need say no more about it.

30. Like the other claimants, the principal claim of the 29th claimant, Mrs Patricia Taylor, is against Mr Fayers for damages for fraudulent misrepresentation. However, she has an additional and specific claim against Mr Day in respect of £10,000 which she says was paid to him by her solicitors on 24th December 1996 for a specific purpose but which was then misapplied by him. Mr Day asserts that the £10,000 was paid to him not for the specific purpose alleged by Mrs Taylor but on account of fees owed by her to him or ASC in connection with the settlement, for £65,000 and an interest in the home, of her claim in matrimonial proceedings against her husband. As to that assertion, the judge said:

31. While I sympathise with the judge’s view of the improbability of Mr Day’s explanation, I am unable to say that he erred in deciding that it was not a claim on which summary judgment could be entered. I would therefore dismiss Mrs Taylor’s cross-appeal.

32. In summary, I would allow Mr Day’s appeal to the extent of substituting the sum of £75,075 for the judgment sum of £473,237 and to that extent only. In respect of the balance I would give him unconditional leave to defend. I would dismiss the cross-appeals of FLS and Mrs Taylor.

Lord Justice Buxton:

I agree with the order proposed by my Lord. I briefly add only two further points.

First, as to the claim in respect of the £75,075 received by Mr Day himself, I should record that I specifically agree with my Lord’s conclusion that, in respect of the question of whether Mr Day knew if FLS had outside shareholders, Mr Day lied to this court.

Second, as to the claim in respect of the large sum received by ASC, I agree that this cannot succeed on the basis on which it was argued before the judge, that the receipt by ASC had been in law a receipt by Mr Day. The case having been put on that basis, it is not now appropriate to give summary judgment in respect of that sum on the only other basis potentially available, that of knowing assistance by him, through the medium of ASC, to the peculations of Mr Fayers. It would be wrong, however, if I did not record my serious disquiet about Mr Day’s evidence relevant to that issue.

First, as to Mr Day’s relationship with ASC. My Lord has set out Mr Day’s claim that he had only a limited connection with ASC once his sons took over the business in August 1994. In his affidavit which secured the discharge by Wright J of the Mareva injunction imposed on 24 February 1997 Mr Day went further, saying, as quoted by Collins J as page 22C of his judgment, that he had no interest whatsoever save as a self employed consultant in the property and assets of the business known as Anderson Stewart Limited which was incorporated on 11th October 1994.

That assertion does not sit with obvious ease with paragraph 3 of Mr Day’s affidavit in these proceedings, which states

"The facts contained in this affidavit are true and to the best of my knowledge having had day to day control as consultant to Anderson Stewart Ltd."

Nor does the claim that Mr Day had no "interest" seem likely, on the face of the material before us, to have been more than a claim that he had no interest in the narrowly legal sense of that word. I say that because of the very remarkable terms of Mr Day’s consultancy agreement with ASC, by which the company not only agreed to remunerate Mr Day for actual work in respect of clients, but also to pay him £100 per week for "living expenses"; to "financially maintain" two residences occupied by him; and to pay his "costs in respect of horses, dogs and transportation".

ASC was run by Mr Day’s sons, both still in their twenties, from offices at one of Mr Day’s homes. He had an extremely direct financial interest in its affairs. While I agree that none of this suffices to make Mr Day the alter ego of ASC for the purposes of a claim laid in knowing receipt, in the context of a claim based on assistance of Mr Fayers by making available to him the medium of ASC some considerable explanation would seem to be required before it could be concluded that Mr Day did not participate in such assistance.

That however leaves the question of dishonesty in that respect on the part of Mr Day. As my Lord has pointed out, it is necessary in the claim now under consideration, as it is not in respect of a claim in knowing receipt, to establish actual dishonesty, in this case by showing knowledge that the payments were made in abuse of Mr Day’s fiduciary obligations and not, as Mr Day says, properly for services provided. I have had great difficulty with that issue. My Lord has referred, in relation to the payments directly to Mr Day, to Mr Day’s dishonest treatment of the question of his knowledge of the corporate structure of FLS. Mr Day, as a man who claims to act as a consultant in financial and insolvency matters, could hardly be unaware of the importance of that matter in relation to his belief as to the propriety of all payments made by or to Mr Fayers. The judge also pointed out the difficulty of accepting Mr Day’s evidence as to the nature of the work allegedly done for FLS.

I however accept that all this relates to a case never in terms put against Mr Day; and that therefore it is even more necessary than usual to exercise great care before embarking on summary judgment on the basis of inadequate explanation on the part of the defendant. I for some time wondered whether this was a case in which a substantial payment into court should be required as a condition of defending, under the well-known principles permitting such a condition. I have however concluded that such a requirement would be inappropriate as a condition of defending a case which, although closely similar to that which was before the judge, is not the same as that case. I also of course note that since Mr Day is an undischarged bankrupt such a condition would effectively stifle his defence, and thus not be in any event open to the court.

In the event, therefore, I agree that there should be unconditional leave to defend in respect of this part of the claim.

Mr Justice Ferris:

I agree with the judgment of Nourse LJ and with the order proposed by him. Like Buxton LJ I think it right to say expressly that I agree that Mr Day lied to this court in what he said about not knowing before the autumn of 1996 that FLS had outside shareholders. Otherwise I do not wish to add anything.