- On 25th June 1999 Rimer J gave
summary judgment under RSC Order 14 for the claimant Trustor AB against the
first defendant Mr Smallbone for £426,439 and interest. At the same time he
dismissed an appeal of the second defendant Introcom (International) Ltd ("Introcom")
from the order of Master Bowman giving summary judgment under the same rule
in favour of Trustor for SEK 166.7m, £404,100 and FIM 75.5m. On 9th May 2000,
on appeal from the orders of Rimer J, the Court of Appeal indicated that,
in their view, Mr Smallbone’s liability was not limited to the amount of the
judgment against him but extended to a joint and several liability for the
much larger amount for which Introcom had been found to be liable. They did
not then extend the judgment against Mr Smallbone to the larger amount because
counsel for Mr Smallbone had not had adequate opportunity to deal with some
of the conclusions of the Court of Appeal. This application was made by Trustor
on 12th September 2000 seeking judgment for the additional relief the Court
of Appeal had suggested.
- Trustor is a company
incorporated in Sweden. Formerly it held major investments in the steel, engineering
and automotive parts industries. On about 23rd May 1997 Lord Moyne acquired
voting control of Trustor. On 13th June 1997 Lord Moyne, Mr Smallbone and
others were appointed to the board of Trustor. At a directors meeting held
on the same day Mr Smallbone was appointed to be the managing director and
it was resolved that Trustor’s bank accounts might be operated on the signature
of any two directors.
- Without having obtained
the approval of the Board, on 18th June 1997 Lord Moyne and Mr Smallbone opened
an account for Trustor with Barclays Bank plc, Cheapside and procured the
transfer to the credit of that account of moneys of Trustor amounting to SEK
779m. The only signatories to that account were Lord Moyne and Mr Smallbone.
Between mid-June and early November 1997 SEK 486m. (£38.88m) was paid out
of that account on the signatures of Lord Moyne and Mr Smallbone without reference
to Trustor or its other directors. The recipients included Mr Smallbone (£33,334.34)
and Introcom (SEK 166.7m, £404,100 and FIM 75.5m). Of the sums received by
Introcom SEK 43,335 and £327,509 were applied for the benefit of Mr Smallbone
in payments to his wife and Cove Investments Ltd, a company incorporated in
the Turks and Caicos Islands and controlled by Mr Smallbone.
- Trustor was wound up
by the court in Stockholm on 23rd December 1997. The writ in this action was
issued by Trustor on 17th March 1998. The statement of claim, which has been
amended twice, sets out the relevant facts. In paragraphs 16-22 it alleges
that SEK 486m of Trustor’s money was misappropriated in the manner and in
the amounts I have summarised. In paragraphs 23-27 Trustor sets out its allegations
of knowledge and complicity. In the case of Mr Smallbone it is alleged that
all transfers from the account of Trustor with Barclays were made on the instructions
of Mr Smallbone. In addition it is alleged that Mr Smallbone was the controlling
mind of Introcom and knew of and gave instructions for all transfers to or
from Introcom. In paragraphs 31-35 Trustor alleges that the various transfers
constituted a breach of duty. In the case of Mr Smallbone it is alleged that
he acted fraudulently and dishonestly and in breach of duty as a director
of Trustor. Paragraphs 36-39 contain allegations concerning claims to trace
at law and for money had and received, paragraphs 40-42 relate to a claim
for damages for conspiracy and paragraph 43 seeks equitable compensation.
For present purposes the relevant claims are for knowing receipt (paragraphs
44-46) and knowing assistance (paragraphs 47-49).
- The first application
of Trustor was for summary judgment against Introcom. It was pursued in respect
of all the causes of action relied on in the Statement of Claim. This application
came before Master Bowman. It was successful in respect of the claims for
money had and received and knowing receipt. It was unsuccessful in respect
of the claims for knowing assistance and conspiracy. By an order made on 13th
October 1998 Master Bowman ordered Introcom to pay to Trustor SEK 166.7m,
£404,100 and FIM 75.5m.
- Introcom appealed. Its
appeal was heard by Rimer J in conjunction with the application for summary
judgment against Mr Smallbone issued by Trustor on 28th August 1998. The hearing
took seven days. Rimer J gave judgment on 25th June 1999. In summary he dismissed
the appeal of Introcom and gave judgment against Mr Smallbone for (1) £426,439
and interest for knowing receipt, (2) damages and equitable compensation to
be assessed for breach of duty and (3) payment of £1m by way of interim payment
on account of his liability for damages or compensation.
- Rimer J made a number
of findings to which I should refer. First, he found (Transcript p. 4) that
Introcom was controlled by a Liechtenstein Trust called the Lindsay Smallbone
Trust of which Mr Smallbone is a beneficiary. He considered that the directors
of Introcom were nominees acting on the instructions of Mr Smallbone so that
Introcom could be regarded as Mr Smallbone’s company and his knowledge could
be treated as Introcom’s knowledge. Second, he found (Tr: 9 and 10) that the
payments into and out of the Trustor account at Barclays, Cheapside and the
account of Introcom at the same bank and branch were made by Mr. Smallbone
or on his instructions without the authority of Trustor. Third, he concluded
(Tr: 13) that Introcom was simply a vehicle Mr Smallbone used for receiving
money from Trustor and that the payments to Introcom "were unauthorised
and involved an inexcusable breach of his duty as managing director of Trustor".
Fourth, he rejected (Tr: 14ff.) a submission of Mr Smallbone to the effect
that the payments to Introcom were justified by an agreement dated 8th August
1997. Fifth, in the light of those conclusions he found (Tr: 17 and 19/20)
that "the payments to Introcom were unauthorised and improper ones, being
payments to Mr Smallbone’s own company which was then going to and did devote
itself to further unauthorised and improper dissipations of the money".
Sixth, in relation to the claim against Introcom based on knowing assistance
Rimer J considered (Tr: 31/32) that Mr Smallbone did act dishonestly "for
there was no sensible explanation for the payment of a single penny to Introcom
or for the onward payments which Introcom made and Mr Smallbone could not
have believed that he was entitled to make them". However as there was
some doubt whether English law applied to that claim and as that cause of
action added nothing to the claims against Introcom Rimer J refused to grant
summary judgment in respect of the knowing assistance claim.
- With regard to the summons
against Mr Smallbone Rimer J considered (Tr: 34 and 36) there was no defence
to the claim by Trustor to recovery of that part of its money which Mr Smallbone
paid to himself and retained. With regard to the claim for knowing assistance
Rimer J considered (Tr: 38) that it was artificial to regard Mr Smallbone
as having dishonestly assisted Lord Moyne in the breach of Lord Moyne’s duties
rather than being in breach of his own.
- Both Trustor, Mr Smallbone
and Introcom appealed with the permission of the Judge or of the Court of
Appeal. In his judgment Sir Richard Scott V-C, with whom Buxton LJ and Gage
J agreed, recorded (paragraphs 21 and 22) that it had not been disputed that
the circumstances in which £38.88m left Trustor’s Barclays, Cheapside account
constituted an unlawful misappropriation of Trustor’s money and a breach of
duty by Mr Smallbone so that Mr Smallbone and Introcom were accountable for
the sums of Trustor’s money they had respectively received. The issues on
the appeal were whether by virtue of other recoveries their liabilities would
be reduced to nothing. Each of those contentions was rejected. In paragraphs
57 and 58 the Vice-Chancellor pointed out that Trustor had two types of claim
against Mr Smallbone, namely, compensation for breach of duty and claims based
on what happened to its money, more specifically the misappropriation arising
from the payment out from the Trustor account with Barclays, Cheapside. In
his summary of the result of the appeal the Vice-Chancellor upheld the order
of Rimer J regarding the liability of Mr Smallbone for the sum of £426,439
received by him from the money of Trustor paid to Introcom.
- The Vice-Chancellor then
considered the order for an interim payment of £1m. He posed the question
whether it was clear that Trustor would establish a liability on the part
of Mr Smallbone for compensation of at least that amount. He thought that
it might be premature to reach that conclusion and continued:
97. There is,
however, a further point to consider. Introcom is liable, as constructive
trustee, to account for and repay to Trustor the Trustor moneys that were
paid to it. Hence the order for repayment to Trustor of the SEK 166.7 million,
the £404,000 and the FIM 70.45 million (the whole totalling some £20 million
in value). In respect of £462,439, the Trustor money received by Mr. Smallbone
from Introcom, Mr. Smallbone, as well as Introcom is accountable. But what
of the balance? Introcom was the creature of Mr. Smallbone. He owned and controlled
Introcom. The payments out by Introcom of Trustor money were payments made
with the knowing assistance of Mr. Smallbone. Rimer J., on several occasions
in his judgment, characterised Mr. Smallbone's participation in the steps
taken to extract Trustor's money and pay it out to various recipients without
the authority of Trustor's board as being dishonest (see, in particular, p
32 of the judgment). Mr. Hollington's skeleton argument, paragraph 16, protested
that these findings of dishonesty were unnecessary and should not have been
made. He did not, however, before us persist in that contention. It would
follow, it seems to me, from the judge's finding of dishonesty on Mr. Smallbone's
part in respect of the payments out made by Introcom of Trustor's money, that
Mr. Smallbone would be liable jointly and severally with Introcom for the
repayment of that money with interest thereon. Mr. Smallbone's joint and several
liability would not be confined to the part that he personally received.
98. In my judgment,
the judge's order for an interim payment by Mr. Smallbone of £1 million was
not justified as an interim payment on account of damages or compensation
for loss caused by breach of duty as a director. The amount of that loss is
still too uncertain. But Mr. Smallbone is, in my view, clearly liable, jointly
and severally with Introcom, for the whole of the sums for which Introcom
is accountable. It may be, therefore, that paragraph 4 of the judge's order
could be left undisturbed save for the deletion of the words "by way of interim
payment" and the substitution of the words "on account of the sums to be paid
by Introcom". To do so, however, would be to change the basis on which the
judge ordered Mr. Smallbone to pay the £1 million. Since no respondent's notice
on this point has been served and since Mr. Hollington has had no opportunity
on Mr. Smallbone's behalf to argue against the conclusions expressed in paragraph
97, it would not, I think, be right at this stage of the litigation to allow
the order for the interim payment to stand.
The result was
that the order against Mr Smallbone for payment of £1m was set aside but otherwise
the order of Rimer J stood save that the liability of Mr Smallbone for £426,439
was declared to be joint and several with Introcom.
- The judgment of the Court
of Appeal was provided to counsel in draft in advance of the proposed date
for handing it down, then fixed for 12th April 2000. On 11th April 2000 Counsel
for Mr Smallbone wrote to the Vice-Chancellor with comments on, amongst others,
paragraph 97. Counsel pointed out that it had been common ground in the Court
of Appeal that the findings of dishonesty made by Rimer J against Mr Smallbone
were academic. For this reason he had not pursued them in oral argument particularly
when invited to do so late on the last day of the hearing. He emphasised that
in the statement of claim and the argument before Rimer J the only basis on
which Trustor had sought to make Mr Smallbone jointly and severally liable
with Introcom for the money paid to Introcom was conspiracy to defraud and
knowing assistance. He pointed out that Mr Smallbone had succeeded on these
issues and that Trustor had not appealed. He submitted that
"It is not
open to the Court of Appeal to revisit this finding without further argument...nor
to make a finding of joint and several liability on the part of Mr Smallbone
on some other basis."
No alteration
to the draft judgment was made before it was handed down on 9th May 2000;
the Court of Appeal indicated that Trustor would have to make a further application
for summary judgment on which Mr Smallbone would be able to raise any contrary
arguments he chose. Mr Smallbone’s petition for leave to appeal was dismissed
by the House of Lords on 18th December 2000.
- The application now before
me seeks a further order against Mr Smallbone pursuant to CPR Rule 24.2 or
CPR Rule 25. The order sought is for payment by Mr Smallbone to Trustor (after
giving credit for net recoveries received from Mr Smallbone or Introcom) of
SEK 166.7m, £404,100 and FIM 75.5m with interest thereon at the rate of 8%
from 1st November 1997 until payment, such liability to be joint and several
with Introcom. Trustor accepts that it cannot obtain summary judgment for
damages or compensation for breach of duty for all the reasons given by Rimer
J and the Court of Appeal. Thus the claim for summary judgment is necessarily
advanced on a restitutionary basis only. Two such bases were raised in the
statement of claim, namely knowing receipt and knowing assistance.
- Paragraph 21 of the witness
statement of Mr Wilkes made in support of the application led Mr Smallbone
to believe that the application was pursued on the basis of knowing assistance.
He protested that the apparent findings of dishonesty made against him by
Rimer J were unnecessary to the orders of either Rimer J or the Court of Appeal
and could not justify the grant of summary judgment against him. However the
oral argument of Counsel for Trustor made it clear that Trustor’s contention
was that the receipt by Introcom was, in the circumstances, to be treated
as the receipt by Mr Smallbone too. He submitted that as there could be no
question but that Mr Smallbone had the requisite knowledge he should be ordered
to repay all the money of Trustor received by Introcom on the basis of knowing
receipt.
- Counsel for Trustor submitted
that the circumstances were such as to warrant the court "piercing the
corporate veil" and recognising the receipt by Introcom as the receipt
by Mr Smallbone. He suggested that the authorities justified such a course
in three, potentially overlapping, categories, namely (1) where the company
was shown to be a façade or sham with no unconnected third party involved,
(2) where the company was involved in some impropriety and (3) where it is
necessary to do so in the interests of justice and no unconnected third party
is involved. I was referred to Gilford Motor Co. Ltd v Horne [1933]
Ch.935, Jones v Lipman [1962] 1 WLR 832, Woolfson v Strathclyde
Regional Council [1978] SLT 159, Re a Company [1985] BCLC 333,
Adams v Cape Industries plc [1990] 1 Ch. 433, Yukong Line Ltd v
Rendsburg Investments Corporation of Liberia [1998] 1 WLR 294, Ord
v Belhaven Pubs Ltd [1998] BCC 607 and Mubarak v Mubarak Bodey
J 23rd October 2000 (unreported).
- Counsel suggested that
the facts, as found by Rimer J, brought this case within each of the three
categories. He pointed out that Introcom, a company incorporated in Gibraltar,
has only nominee directors and is controlled by a Liechtenstein Anstalt of
which Mr Smallbone is a beneficiary. He relied on the findings of Rimer J
that Introcom acted on the instructions of Mr. Smallbone, that Mr Smallbone
was its directing mind and will and that Introcom had no independent business,
third party directors, creditors or shareholders.
- Mr Smallbone, who appeared
in person, told me that there was a sensible justification for the payment
of Trustor’s money to Introcom. He explained that Introcom had been formed
in connection with an earlier scheme, having no connection with Trustor, as
a vehicle for his remuneration. He contended that Introcom was not a sham,
device or façade but a genuine company having its own separate existence.
He submitted that the fact that Introcom was controlled by him was well known
to the other directors of Trustor. He contended that there was no finding
or evidence of impropriety sufficient to justify the order sought by Trustor.
- It appears to me that
the argument for Trustor raises a point of some general importance. In cases
of knowing receipt attention is usually focused on the extent of the knowledge
required and whether the recipient of the trust property had it. In this case
there is no doubt that Mr Smallbone had the requisite knowledge because the
liability of Introcom, upheld by the Court of Appeal, depended on the imputation
of the knowledge of Mr Smallbone to Introcom. The issue is whether the court
is entitled to regard the receipt by Introcom as the receipt by Mr Smallbone.
- Liability arising from
the knowing receipt of trust property stems from the speech of Lord Selborne
in Barnes v Addy (1874) L.R.9 Ch.App 244, 251 that
"strangers
are not to be made constructive trustees merely because they act as agents
of trustees in transactions within their legal powers....unless these agents
receive and become chargeable for part of the trust property, or unless they
assist with knowledge in a dishonest and fraudulent design of the trustees."
In White &
Tudor’s Leading Cases in Equity 9th Ed. Vol 2 p.595 in relation to that passage
from the speech of Lord Selborne the Editors quote with approval from the
judgment of Kekewich J in Re Barney [1892] 2 Ch. 265, 273 that there
is no liability "unless he has the trust property vested in him, or so
far under his control that he can require it should be vested in him".
- The only modern work
of which I am aware which deals with the problems of receipt in any detail
is Lewin on Trusts 17th Ed (2000) paras 42-32 to 42-34. The Editors suggest
that there is a sufficient receipt if, in accordance with the normal rules
of tracing in equity, the trust property can be identified in the hands of
the defendant. They point out that receipt by a subsidiary company will not
count as a receipt by the parent if the subsidiary is acting in its own right,
not as agent or nominee, at any rate in the absence of a want of probity or
dishonesty. These propositions are supported by the authorities to which the
editors refer, namely Cowan de Groot Properties Ltd v Eagle Trust plc
[1992] 4 AER 700, 762a-b and El Ajou v Dollar Land Holdings plc [1993]
3 AER 717, 738. It is also necessary that the receipt by the defendant should
be for his own benefit or in his own right in the sense of setting up a title
of his own to the property so received. Westpac Banking Corporation v Savin
[1985] 2 NZLR 41, 69.
- I should also refer to
some of the cases relied on by Counsel for Trustor. In Gilford Motor Co.
Ltd v Horne [1933] Ch.935 an individual bound by a non-solicitation covenant
after the termination of his employment set up in business through a limited
company. The individual was held to be in breach of covenant, notwithstanding
the interposition of the company, because the company was formed as the device,
stratagem or mask to "the effective carrying on of a business of"
the individual. See pp. 956, 965 and 969. In each of the passages to which
I have referred it was made plain that the conclusion was one of fact. In
Jones v Lipman [1962] 1 WLR 832 an individual had contracted to sell
land. Wishing to avoid his liability he transferred the land to a company
he had acquired for the purpose. A decree of specific performance was made
against both the individual and the company on two grounds. The first was
that the individual had sufficient control of the company to compel it to
perform the contract. The second, following the principle applied in Gilford
Motor Co. Ltd v Horne, was that the company was the creature of the first
defendant, "a device and a sham, a mask which he holds before his face
in an attempt to avoid recognition in the eye of equity". In Woolfson
v Strathclyde Regional Council [1978] SLT 159 Lord Keith of Kinkel pointed
out that it was appropriate to pierce the corporate veil "only where
special circumstances exist indicating that [the company] is a mere façade
concealing the true facts". This principle was applied by the Court of
Appeal in Adams v Cape Industries plc [1990] 1 Ch. 433, 542A-B. Adams
v Cape Industries plc was followed by the Court of Appeal in Re: H
and others [1996] 2 BCLC 500 which was applied by Rimer J in Gencor
ACP Ltd v Dalby [2000] 2 BCLC 734. These authorities plainly establish
the first proposition of counsel for Trustor I referred to in paragraph 14
above.
- The third proposition
is said to be derived from the decision of this court in Re a Company
[1985] BCLC 333. In that case a complicated structure of foreign companies
and trusts was used to place the individual’s assets beyond the reach of his
creditors. Cumming-Bruce LJ described the structure as a façade (p.336)
but expressed the principle (p.337/8) to be that the Court will use its powers
to pierce the corporate veil if it is necessary to achieve justice irrespective
of the legal efficacy of the corporate structure under consideration. The
latter statement is not consistent with the views of the Court of Appeal in
Adams v Cape Industries plc [ibid] where Slade LJ at p. 536 said
"[Counsel
for Adams] described the theme of all these cases as being that where legal
technicalities would produce injustice in cases involving members of a group
of companies, such technicalities should not be allowed to prevail. We do
not think that the cases relied on go nearly so far as this. As [Counsel for
Cape] submitted, save in cases which turn on the wording of particular statutes
or contracts, the court is not free to disregard the principle of Salomon
v. A. Salomon & Co. Ltd. [1897] A.C. 22 merely because it considers
that justice so requires. Our law, for better or worse, recognises the creation
of subsidiary companies, which though in one sense the creatures of their
parent companies, will nevertheless under the general law fall to be treated
as separate legal entities with all the rights and liabilities which would
normally attach to separate legal entities."
In Ord v Belhaven
Pubs Ltd [1998] BCC 607, 614/5 Hobhouse LJ expressed similar reservations.
It does not appear from the reports that in either of those cases the court
was referred to Re a Company [1985] BCLC 333. In those circumstances
I consider that I should follow the later decisions of the Court of Appeal
in Adams v Cape Industries plc and Ord v Belhaven Pubs Ltd and
decline to apply so broad a proposition as that for which counsel for Trustor
contends in the third principle referred to in paragraph 14 above.
- The second proposition
also appears to me to be too widely stated unless used in conjunction with
the first. Companies are often involved in improprieties. Indeed there was
some suggestion to that effect in Saloman v Saloman & Co. Ltd [1897]
AC 22. But it would make undue inroads into the principle of Saloman v
Saloman & Co. Ltd if an impropriety not linked to the use of the company
structure to avoid or conceal liability for that impropriety was enough.
- In my judgment the court
is entitled to "pierce the corporate veil" and recognise the receipt
of the company as that of the invididual(s) in control of it if the company
was used as a device or façade to conceal the true facts thereby avoiding
or concealing any liability of those individual(s). On the facts of this case
it is unnecessary to decide whether the dictum of Kekewich J in Re Barney
referred to in paragraph 18, is applicable where the recipient is a wholly
owned corporate body. The dictum suggests that complete control of the actual
recipient may be enough. But this was not said in relation to a limited company
and predates the decision of the House of Lords in Saloman v Saloman &
Co.Ltd.
- Mr Smallbone is bound by the
findings made by Rimer J and the Court of Appeal in relation to the issues
before them. Thus it is established that Introcom was and is controlled by
Mr Smallbone, the payments from the Trustor account with Barclays, Cheapside
to the account of Introcom at Barclays, Cheapside were effected by Mr Smallbone
or on his instructions and, in the words of Rimer J, "Introcom was simply
a vehicle Mr Smallbone used for receiving money from Trustor". Rimer
J also concluded that the payments to Introcom were unauthorised and involved
an inexcusable breach by Mr Smallbone of his duty as managing director of
Trustor "being payments to Mr Smallbone’s own company which was then
going to and did devote itself to further unauthorised and improper dissipations
of the money".
- In my view these conclusions
are such as to entitle the court to recognise the receipt of the money of
Trustor by Introcom as the receipt by Mr Smallbone too. Introcom was a device
or façade in that it was used as the vehicle for the receipt of the
money of Trustor. Its use was improper as it was the means by which Mr Smallbone
committed unauthorised and inexcusable breaches of his duty as a director
of Trustor. Mr Smallbone has no real prospect of successfully defending this
part of the claim because he is bound by the findings of Rimer J to which
I have referred.
- I have reached this conclusion
from a consideration of the facts as found by Rimer J and the principles to
be derived from the cases independently from the passage in paragraphs 97
and 98 of the judgment of Sir Richard Scott V-C which I have quoted earlier.
I have been concerned whether that passage was referring to a liability based
on knowing receipt or knowing assistance. Liability for the former would be
consistent with the Court of Appeal’s conclusions regarding the liability
of Introcom but liability for the latter would not. Paragraph 97 seems to
be dealing with the payments out of the Introcom account and so understood
refers prima facie to knowing assistance. But paragraph 98 recognises joint
and several liability for "the whole of the sums for which Introcom is
accountable". The judgment of the Court of Appeal recognised liability
on Introcom for knowing receipt but not at that stage for knowing assistance.
Accordingly my conclusion is consistent with the decision of the Court of
Appeal whether or not I was bound by that decision to reach the same conclusion.
- For all these reasons
I make an order under CPR Rule 24.2 for payment by Mr Smallbone of the sums
set out in and on the terms of the draft order accompanying the application
notice.