Lord Justice Briggs :
Introduction
- These proceedings arise out of the diversion by a company director, in breach of his fiduciary duty to the company, of funds and business opportunities to another company in which he enjoyed a concealed beneficial interest. The director in question, Mr Andrew Gregory Pache, died before the proceedings were issued, or the claims first intimated, by the claimant Mr Nigel Stephen Clegg, his co-director of the company, GAP Steel Trading Limited ("GAP") in which they each held 50% of the shares. As its name implies, GAP's business consisted of trading in steel.
- The case against Mr Pache, which the trial judge HHJ Bird (sitting in the Manchester District Registry of the Chancery Division) accepted in principle, was that between late 2004 until GAP's entry into insolvent administration in December 2008, and continuing until shortly before his death in October 2010, Mr Pache carried on a steel trading business for his own benefit through an alter ego company Focusplay Limited ("FPL") which he beneficially owned and controlled, while concealing from Mr Clegg and therefore from GAP the fact that he had any beneficial interest or involvement in its affairs, at least until September 2007, when a partial discovery of the true facts by Mr Clegg revealed to him that Mr Pache had been acting in breach of fiduciary duty to GAP, and was continuing, notwithstanding his protest, to do so.
- Mr Clegg obtained an assignment of all GAP's claims arising out of Mr Pache's misconduct from its administrators shortly before Mr Pache's death in October 2010. He therefore pursued the claims which might have been made against Mr Pache personally against his estate (as first defendant). He sued FPL as second defendant and Mrs Pache as third defendant, claiming against her in respect of payments which she received from FPL on the basis of knowing receipt and unjust enrichment.
- Mr Clegg also joined three other defendants: (4) Preston Steel Products Limited ("PSL"); (5) David Caldwell and (6) Michael Hillier. Mr Caldwell was a senior employee of GAP. Mr Hillier was the legal owner of the shares in FPL and also the legal and beneficial owner of PSL.
- On the first day of a five day trial in January 2014 Mr Clegg settled all his claims against FPL, PSL, Mr Caldwell and Mr Hillier ("the FPL defendants"). The trial therefore continued only against Mr Pache's estate ("the Estate") and against Mrs Pache personally.
- Again in bare outline, the judge ordered the Estate to account in respect of the profits derived from Mr Pache's breaches of fiduciary duty, or to pay equitable compensation for GAP's loss, it being common ground that the two were broadly equivalent. He also granted a money judgment against the Estate in respect of the balance which he found owing on Mr Pache's directors' loan account with GAP.
- By contrast, the personal claims against Mrs Pache were rejected by the judge in their entirety.
- Mr Clegg was dissatisfied with the ambit of, and restrictions upon, the account ordered against the Estate, about the quantum of the money judgment against the Estate, and about his failure as against Mrs Pache personally. He obtained permission to appeal from this court (in part on the papers, and in part on oral renewal) in relation to six of a much larger number of grounds of appeal, to each of which I will return in due course. Five of them relate primarily to the ambit of the account as against the Estate. In outline, Mr Clegg asserts that the judge wrongly restricted the ambit of the account to profits arising from a list of specific transactions, that he wrongly excluded as relevant profits payments made by PSL to FPL which Mr Clegg categorised as bribes or secret commissions, that he wrongly ordered that amounts paid in settlement by the FPL defendants be deducted from the account, that he wrongly made a deduction to reflect a contribution liability for breach by Mr Clegg of his fiduciary duty to GAP, for failing to prevent Mr Pache's misconduct once he became aware of it, and he failed to require to be added to the account sums promised to be paid by FPL to Mrs Pache pursuant to an agreement with Mr Pache made shortly before he died.
- That last ground is repeated as against Mrs Pache, but the main ground of appeal pursued in relation to the unsuccessful claim against her is that the judge failed to treat her as liable for knowing receipt or by way of unjust enrichment in respect of a sum of £50,500 actually paid by FPL to Mrs Pache pursuant to that agreement.
- For the most part, the issues arising under each of these permitted grounds of appeal are separate and distinct. Nonetheless, in order to understand the way in which the trial proceeded and, in particular, the purpose and relevance of the order for an account of FPL's profits as against the Estate, it is necessary to summarise a little more of the factual and procedural history, which I shall do in the next section of this judgment.
- A singular feature of the case in its present form is that, except for Mr Clegg and Mrs Pache, all the other parties to the proceedings, including the Estate, are in one or another form of insolvency process. This applies to all the FPL defendants, who defaulted in making the payments agreed under the settlement of the claims against them. It also applies to the Estate, which is being administered by a trustee in bankruptcy who has, for understandable reasons including a lack of available resources, declined to take any part in the proceedings. Mrs Pache had been ordered to represent the Estate prior to trial, and appeared both in that capacity, and on her own account, as a litigant in person throughout the trial, although she had some form of legal assistance from September 2012 until just before the trial. Mrs Pache has an interest in advancing any available arguments which the Estate might put forward in answer to Mr Clegg's appeal, because there is a claim by the Estate's trustee in bankruptcy against her, which she disputes, in relation to property, part of which she claims to have jointly owned with Mr Pache and to have succeeded to his interest in it by way of survivorship.
- Mr John Dagnall, who appeared for Mr Clegg on this appeal and as junior counsel at the trial, made no objection to Mrs Pache making submissions in response to his appeal as against the Estate, and it was therefore unnecessary for us to resolve what he described as a possibly difficult technical question whether the administration of the Estate by a trustee in bankruptcy had the effect of terminating the representation order pursuant to which she had previously represented the Estate at the trial.
- I would like to take this opportunity to express the court's gratitude to Mr Dagnall for the way in which he assisted the court in the context of an appeal raising matters of some factual and legal complexity, opposed only by a litigant in person. He took the greatest care to appraise the court of matters which a legal representative for Mrs Pache might have wished to raise, without in any way compromising his duty to present a vigorous case for his own client.
- For her part, Mrs Pache made carefully prepared and concise oral submissions which vividly portrayed her sense of injustice at having to resist a complicated claim communicated only after her husband's death, in circumstances where Mr Clegg had discovered the relevant facts three years previously. Even though she could not be expected to address the legal detail of the grounds of appeal pursued against the Estate, and against her personally, she nonetheless made some telling submissions by sensible references to short passages in the voluminous documentation, and the court is grateful to her as well for the dignity, economy and focus of her submissions.
- Both Mr Dagnall and Mrs Pache made short further written submissions after the hearing of the appeal, which I have also considered.
Factual and Procedural History
- Mr Pache and Mr Clegg began working together as equal quasi-corporate partners through GAP in 2001. GAP traded with both PSL and FPL, on the basis (as Mr Clegg understood it at least until 2007) that these were ordinary arms' length business transactions with separate firms in which Mr Pache had no interest, and over which he had no control. Mr Hillier (the sixth defendant) was indeed the owner and controller of PSL and Mr Pache wrongly assured Mr Clegg that the same was true in relation to FPL.
- The judge found that, in reality, FPL was properly to be regarded as Mr Pache's alter ego, in the sense in which that phrase is used in Snell's Equity (23rd Ed) at paragraph 7-055, where the editors say that:
"The corporate veil will not protect a profit from being stripped where the company's separate legal personality has been used to conceal the fact that the fiduciary has made the profit, such as where the company is a mere cloak, or alter ego, for the fiduciary."
By this I infer that the judge intended to mean that Mr Pache did not merely beneficially own the shares in FPL, but had complete dominion over the conduct of its business and affairs, albeit that he may have exercised that dominion at least in part through intermediaries, including Mrs Pache.
- The judge accepted Mrs Pache's evidence that she performed mainly (although not entirely) secretarial services on a self-employed basis for FPL at her husband's request, in return for regular payment by FPL from about August 2002, before she and Mr Pache became husband and wife.
- The judge accepted Mrs Pache's evidence that, although she knew that Mr Pache worked both for GAP and FPL, she believed that his activities in relation to FPL were known about and consented to by Mr Clegg, as the only other shareholder or director in GAP, so that she had no knowledge or notice of any breach of fiduciary duty by Mr Pache in carrying on business through FPL and paying her for her work for FPL out of its revenue.
- There was a factual issue, which the judge did not find it necessary to resolve, about the similarities or differences between the respective steel trading businesses of GAP and FPL. It was not suggested that either company had a significant business other than in trading steel, or that there was any significant geographical difference in the location of the steel, its sellers to, or its buyers from, either company. FPL had no separate warehousing premises of its own and, to the extent that its trading involved holding or storing stocks of steel, it appears to have made use of GAP premises for that purpose. Mr Clegg's evidence (based on a long and painstaking reconstruction of FPL's accounting records produced on disclosure) was that there were no transactions or business opportunities exploited by FPL which it would not have been possible, or in its interests, for GAP to exploit for itself. Mrs Pache's evidence was that the two businesses were "completely different".
- There was some direct trading between GAP and FPL of which, as GAP's finance and accounts director, Mr Clegg was aware. The judge accepted his evidence that he understood it to be limited to the interposition of FPL as an intermediary between GAP and those of its customers from whom GAP both bought and sold steel so as to render more effective a factoring agreement between GAP and its bankers by protecting the bank from set-off claims by those customers in relation to debts which had been factored. Mr Clegg understood that FPL had a separate business of its own, in which he assumed that Mr Pache was wholly unconnected, and that its participation as an intermediary in GAP's business for this purpose was rewarded only by a modest uplift in prices sufficient to pay FPL the equivalent of an administrative fee.
- Mr Clegg's understanding changed in late 2007 when he discovered that Mr Pache had an interest in FPL. Mr Clegg protested to Mr Pache, but was told to mind his own business. Thereafter, and until the onset of GAP's administration, Mr Clegg maintained his objection to Mr Pache's conduct, but took no active steps to bring it to an end, taking the view that the only effective step which he could have taken was to "collapse" GAP. Thus, for just over a year before GAP ceased trading, and for the whole of the period thereafter until shortly before Mr Pache's death, Mr Pache continued to carry on a steel trading business through FPL for his own benefit, to Mr Clegg's knowledge, but not with his consent.
- As I have said, GAP ceased trading and went into insolvent administration in December 2008. FPL acquired some of GAP's machinery from the administrators and continued trading.
- Mr Pache died on 8 October 2010. Two months previously Mr Clegg had taken an assignment from GAP's administrators of all GAP's claims subsequently asserted in these proceedings, and notice of that assignment was sent to Mr and Mrs Pache on 9 August 2010. On 7 October 2010, the day before he died, Mr Pache (through Mrs Pache as his attorney) and FPL (by its director Mr Caldwell) signed a brief written agreement ("the 2010 Agreement") whereby FPL was to make a series of instalment payments amounting in total to £85,000. £75,000 was to be in satisfaction of contributions previously made by Mr Pache to FPL and the remaining £10,000 was to cover outstanding business expenses previously unpaid to him. The payments were all to be made into the account of T&S UK Limited, a company beneficially owned by Mrs Pache. £50,500 of that amount was subsequently paid under the 2010 Agreement for Mrs Pache's benefit. Now that FPL is itself in insolvent administration, it is a safe assumption that nothing further will be paid hereafter.
- The second recital to the 2010 Agreement, and clause 4 of it, contain "full and final settlement" provisions which led to a dispute, still unresolved but now probably purely academic, as to whether Mr Pache thereby also disposed of his beneficial interest in FPL's shares. From his death on the following day, it appears clear that FPL's continued trading was conducted entirely separately from any control or participation by any member of the Pache family.
- I have already described in outline the proceedings which ensued, which were issued in 2011 in the Manchester District Registry of the High Court. In their final form, the Re-amended Particulars of Claim, running to 35 closely reasoned pages, supported by 88 pages of detailed schedules, assert a wide range of claims against the defendants, including an account for breach of fiduciary duty by Mr Pache, against the Estate and against FPL as a participant for, in substance, the whole of FPL's gross profits from late 2004 onwards, for equitable compensation in the same amount, for damages on the basis that, but for the matters complained of, GAP would have avoided insolvent administration and retained a valuable business, together with various proprietary claims in relation to moneys and benefits received by the various defendants in which GAP claimed a beneficial interest. The particulars also include certain personal claims by Mr Clegg himself, such as losses incurred by having to make payments under guarantees of GAP's liabilities.
- These claims were all set out in great detail in schedules lettered A through Q (with some of the lettered schedules being substantially sub-divided). It is for present purposes sufficient to describe the schedules relatively briefly.
- Schedule A (divided into three parts) was mainly directed at identifying the benefits received by the Pache family from Mr Pache's breach of fiduciary duty. In particular schedule A2 identifies benefits received by Mrs Pache and A3 benefits by other members of the Pache family (excluding Mr Pache). Schedule B is of no present importance, concerning only benefits received by the fifth defendant Mr Caldwell.
- Schedules C to H inclusive contain a minutely detailed breakdown of the central claim in the proceedings that the whole of FPL's profits, assets and property were ultimately derived from Mr Pache's breach of fiduciary duty by FPL as his alter ego. I shall have to describe some of them in a little more detail in due course. They also provide detail as to similar claims against the fourth defendant PSL. The judge rejected the claim to bring any part of PSL's profits into account, and this has not been appealed.
- Schedule J related to the alleged deficit on Mr Pache's directors' loan account with GAP. The judge found it to be made good, but only in relation to a lower figure than that claimed. Permission to Mr Clegg to appeal on that issue was refused.
- Schedule K identified the amounts payable for Mrs Pache's benefit under the 2010 Agreement, of which £50,500 was paid and the recoverability of which against her (albeit not against the Estate) remains in issue.
- Schedule N particularised Mr Clegg's personal losses under his guarantees. The judge rejected these, and no appeal has been permitted.
- I need not describe the items claimed under schedule Q, save to note that those parts of that schedule which were pursued as against the Estate and Mrs Pache at the trial were also rejected by the judge, and no appeal has been permitted.
- The very heavy reliance by Mr Clegg upon the detailed schedules appended to the Re-amended Particulars of Claim led, at the case management stage, to an order for the deployment of a single joint accountancy expert, a Mr Pickles of BDO, who produced a detailed report on the schedules of which (for reasons unexplained) only a draft appeared in the appeal bundles. Neither the Estate nor Mrs Pache personally participated in the instruction or remuneration of Mr Pickles due, she told us, to her lack of the requisite funds.
The Trial
- Central to an understanding of the judge's judgment, and of the issues which he had to determine, is the settlement of the case as between Mr Clegg and the FPL defendants which occurred on the first day of the trial, while the judge was pre-reading the voluminous papers, and reflected in a Tomlin Order made by the judge dated 30 January 2014. As usual, the terms of that agreement are set out in the Schedule to the Order. I shall call it "the Settlement". The context is that the FPL defendants, represented by solicitors and counsel, included, in FPL and PSL, two companies still apparently actively trading, and who may have been supposed to be Mr Clegg's main targets, in terms of net worth, for meeting his claims. By contrast Mrs Pache, representing herself and the Estate, had shortly beforehand lost any legal assistance. Mr Clegg was, by his claim, seeking an order for the administration of the Estate, and Mrs Pache's case (albeit now disputed by the Estate's trustee in bankruptcy) was that there were no significant assets in the Estate, most of Mr Pache's property having been jointly owned with her, and having passed to her by survivorship.
- By the Settlement the FPL defendants agreed to pay £375,000 (in instalments) to settle all Mr Clegg's claims against them, and a further sum of £200,000 (again by instalments) in relation to costs. Clauses 3 and 5 expressly provided against the consequential release of any claims against the Pache defendants (i.e. the Estate and Mrs Pache) and clause 4 limited the FPL defendants' ability to pursue contribution claims against the Pache defendants to use of them as a shield, rather than as a sword.
- Neither Mrs Pache nor the Estate were party to this agreement and clause 9 specifically forbad any attempt by them to enforce it for their benefit. The FPL defendants were plainly concerned to limit their risk of double jeopardy by reason of the pursuit by the Pache defendants of existing contribution claims against them, and they did so by means of the detailed provisions of clause 6, in the following terms:
"The Claimant agrees with the FPL Defendants (but by way of covenant only and not by way or release and subject to Paragraph 3 above) to limit his Claim against the Pache Defendants (and their family members and companies as set out in Paragraph 5 above excluding Focusplay Limited) to or for (or for the amount or proceeds of and with interest and costs): the "Susan Benefits", "the Wider Pache Benefits", "the AP Loan Deficit", "the Susan Focusplay Payments/Entitlements", the AGP Other Proceeds", "the Susan Order Proceeds", and his personal claims against the Estate of Andrew Gregory Pache deceased regarding his personal loss in respect of the RBS Guarantee and the NWB Guarantee, as set out in Schedules A2, A3, J, K, N (Items 1 and 2 only) and Q (Items 2 and 4 only) respectively referred to in to the Re-Amended Particulars of Claim. However, such shall not prevent the Claimant from seeking costs against the Pache Defendants (or resisting any application for costs by them) on the basis that he would have succeeded on the entirety of his claims as previously made in the Claim against them. Further, the Claimant shall give credit to the FPL Defendants in relation to any monies paid by the Pache Defendants (or any insolvency trustee of them or of the Estate of Andrew Gregory Pache) to the extent that such has been derived (applying any appropriate proportionate calculations for monies received from more than one source) from the Pache Claims. Further, although this is not to prejudice any of the Claimant's other aforesaid claims against the Pache Defendants, (i) the Claimant and the FPL Defendants agree (so far as possible) that the agreement of 7 October 2010 is not and is not to be rescinded and shall have effect (ii) to the extent (if any) that the Claimant has any beneficial interest or other claim (including through the Pache Defendants) to or regarding any shares in Focusplay Limited, the Claimant does (subject to Paragraph 3 above) surrender and transfer (without any warranty as to title) any such beneficial interest or claim to Michael Hillier, and (iii) to the extent (if any) that the FPL Defendants have any right to recover any monies paid under the agreement of 7 October 2010 the FPL Defendants will make and pay any such recovery to the Claimant."
- The FPL defendants sought additional protection beyond the terms of the Settlement by continuing their legal team's instructions to attend the rest of the trial, although the extent of their active involvement in what was, thereafter, a dispute between Mr Clegg and Mrs Pache (in her personal and representative capacities) is not clear. It did however have the effect of insuring (as Mr Dagnall frankly acknowledged) that the trial then proceeded strictly in accordance with the terms of clause 6, by Mr Clegg limiting his claim against the Pache defendants to those specified in schedules A2, A3, J, K, N and Q, even though Mrs Pache had no right of her own to insist that this restriction was observed. The judge made it clear in his judgment that this was the basis upon which he did indeed proceed.
- It therefore comes as an initial surprise that the judgment is substantially taken up with addressing the detail of issues raised by schedules C and G, which concern the extent to which FPL's (and PSL's) profits were derived from Mr Pache's breaches of fiduciary duty, and therefore subject to a liability of FPL and the Estate to account to GAP. But the reason why this approach was necessary is as follows. Leaving aside schedules J (about which there is no appeal), N and Q (both of which the judge rejected), schedules A2, A3 and K all identify monies paid out of FPL to or for the benefit of the Pache family (and mainly to Mrs Pache). Mrs Pache denied that any of FPL's monies (representing profits generated from its trade) were subject to any accounting liability in favour of GAP by reason of any fiduciary duty by Mr Pache. Accordingly, proof that these monies had been paid by FPL to or for the benefit of Pache family recipients did not on its own demonstrate any liability, either of the Estate to account in the late Mr Pache's shoes to GAP for breach of fiduciary duty, still less of Mrs Pache herself, to the extent that she had received any part of them. It was therefore necessary for Mr Clegg to prove that the breaches of fiduciary duty which he alleged against Mr Pache gave rise to accountable profits in the hands of FPL of an amount sufficient to cover or fund the payments particularised in schedules A2, A3 and K. This issue appears to have been the main bone of contention during the remaining four days of the trial.
- The judge sought to explain this at paragraph 17 of his judgment as follows:
"The quantum of Mr Clegg's claim is limited to the amounts set out in schedules A2, A3, K, N1 and N2, Q2 and Q4 (leaving out the debt claim set out at schedule J). In order to succeed in recovering any part of the sums claimed, Mr Clegg must satisfy me that the profits made or the losses suffered are of at least the same amount as the sums claimed. Otherwise the limitation of his claim to those sums is meaningless."
Both the judge in his judgment and Mr Dagnall in his submissions on appeal treated the analysis as if the claims pursued continued to be claims about the profits for which FPL (which made them) and Mr Pache, now through his Estate) were accountable, subject to a limit or cap imposed by the aggregate of the amounts set out in schedules A2, A3 and K. I am not, for my part, entirely satisfied that this is the appropriate analysis. Rather, it seems to me that the substantive claims still being pursued were those set out in those schedules, and the relevance of the issue about the extent to which (if at all) FPL's profits were properly accountable upon a claim by GAP's assignee really goes to the question whether there was a sufficient fund of accountable profits to taint the scheduled payments with an accounting liability in the Estate and, to the extent that she received them personally, a liability to repay on the part of Mrs Pache. But the two analyses, although different in concept, lead broadly to the same monetary conclusion.
- In response to my request, Mr Dagnall helpfully identified the size of the accountable fund of profits which he needed to prove, in order to succeed in his claims under schedules A2, A3 and K (which are all that matter for present purposes) as follows. Schedule A2 produced an aggregate of £248,665.48. Schedule A3 amounted to £41,086.04. Schedule K amounted in practice to the £50,500 actually received (indirectly) by Mrs Pache pursuant to the 2010 Agreement, there being no prospect of any further payment to her under that agreement. The aggregate is therefore £340,251.52.
The Judgment
- It assists in the analysis of the specific grounds of appeal for which permission has been given to provide the following overview of the judge's judgment:
i) First, he was satisfied on the evidence that Mr Pache had been in breach of fiduciary duty, broadly as alleged, in conducting through FPL as his alter ego a steel trading business without GAP's knowledge or consent, and while actively concealing his involvement in FPL from Mr Clegg, his fellow director and shareholder. Although for perfectly understandable reasons Mrs Pache made it clear that she has by no means been persuaded by that finding, it is not the subject of a cross-appeal by her.
ii) Nonetheless, the judge was not satisfied by the evidence, and in particular the detailed expert accountancy evidence, that this led to the conclusion that any particular profits of FPL could properly be regarded as attributable to that breach. In the result, and although there had been no direction for a split trial, he gave detailed directions for the conduct of an account of profits, by reference to transactions listed in a particular schedule, namely Schedule C1-1, but limited in time to transactions by FPL after 1 November 2004 and until January 2009.
iii) He directed that there should be a 50% limitation in relation to profits earned after 1 September 2007, so as to give effect to what he regarded as Mr Clegg's liability for breach of fiduciary duty following his discoveries in late 2007 about Mr Pache's conduct.
iv) Further, he ordered that there should be a deduction of the whole of the £375,000 payable under the Settlement by the FPL defendants, against any balance of profits disclosed by the taking of that account.
v) He gave judgment against the Estate in the reduced amount which he found due on Mr Pache's directors' loan account with GAP, by reference to Schedule J.
vi) Having dismissed the claims in relation to Schedules N and Q, he concluded that amounts proved under Schedule A2, A3 and K should be the liability of the Estate, to the extent that there were accountable profits of FPL sufficient to cover them.
vii) He dismissed all the claims relating to PSL.
viii) Finally, he dismissed the claims against Mrs Pache personally upon the basis that she was, so far as a knowing receipt claim was concerned, equity's darling, having given consideration for her receipts without notice of GAP's claim, and that there was, on the same factual findings, no basis for any claim against her in unjust enrichment.
- In a separate judgment, after further submissions had been made, he ordered that the Estate (but not Mrs Pache personally) be responsible for 30% of Mr Clegg's costs, and Mr Clegg be responsible for 80% of Mrs Pache's costs in her personal capacity as third defendant.
- Following the trial, the FPL defendants defaulted on their payment instalment obligations under the Settlement, having paid only £197,499.97 on account of the £375,000. Mr Clegg obtained judgment for the balance, thereby affirming the Settlement, and the FPL defendants have, as I have said, all subsequently entered one or other form of insolvency process. Later, Mr Clegg sought and obtained from the judge a variation of his order for the deduction of £375,000 from the account, limiting the deduction to the amount actually paid by the FPL defendants before default.
The Appeal
- The context provided by this judgment thus far now makes it possible to address each ground of appeal separately. There is very little overlap between them.
Ground B1 – The gross profits of FPL
- The combination of the fact that there was no order for a split trial and that both the Re-amended Particulars of Claim and Mr Clegg's evidential case depended heavily on the annexed schedules (which he had personally prepared at immense cost to him in terms of time and effort) led the judge to address the issue as to the ambit of the account of FPL's profits by reference to an unspoken but I think basic assumption that it was for Mr Clegg to prove each item or element of FPL's profits alleged to be accountable, as sufficiently referable to Mr Pache's breach of fiduciary duty, out of some notionally larger pool of FPL's overall profits which were, subject to such proof, made for its own account, free from any claim by GAP.
- From that point of departure, it is readily understandable that the judge focussed his attention on the report of the single joint expert Mr Pickles who, in various passages to which the judge referred, stated his clear opinion that Mr Clegg's schedules did not, on their own, prove that the specific transactions and elements of gross profit thereon which they identified were made by FPL as the result of Mr Pache's breach of fiduciary duty, so as to be accountable.
- The judge briefly addressed Mr Clegg's contention that all of FPL's profits arose from Mr Pache's breaches. He said, at paragraph 72:
"The evidence (lay and expert) and the format of the schedules simply fall far short of that conclusion. I decline to reach the conclusion therefore that I should deal with an account on that basis."
- Turning to the question whether specific profits of FPL were sufficiently identified, he expressed his own understandable reservations about the reliability of Mr Clegg's schedules, having been prepared by someone with strong feelings about his claim: (paragraph 69). Turning to Mr Pickles' evidence, he said, at paragraphs 76 and 77:
"The first and in my judgment principle point raised by Mr Clegg can be summarised as follows: do the Claimant's schedules "adequately support the claim as set out in the Particulars of Claim?" … the short answer was "no"."
- The result was that the judge ordered a fresh account to be taken, upon the basis of a series of transactions in Schedule C1-1, the existence and terms of which were not seriously in issue. He also imposed a limit as to the period within which relevant transactions should be assessed, by reference to the period originally pleaded, which is not separately challenged on appeal.
- Mr Dagnall challenged the judge's approach in limine. He submitted that the judge's findings of fact (which I summarise below) were in themselves sufficient, and without the need to have any regard to the detail of the schedules, to justify as a starting point the proposition that FPL was accountable to GAP for all its gross profits within the defined period and that, although the taking of such an account would not prohibit the defendants proving, if they could, that specific transactions or profits fell outside GAP's entitlement, it was not for the beneficiary positively to prove that each one of them fell within the account. This was in particular because GAP (in the form of Mr Clegg as the innocent director and shareholder) had for most of the relevant period had the entirety of the breach of fiduciary duty concealed from it by Mr Pache, so that Mr Clegg as GAP's assignee could not properly be expected to undertake the ordinary burden of proof in those circumstances.
- For completeness, Mr Dagnall demonstrated that the immensely detailed breakdown of FPL's transactions and profits contained in the schedules did not of itself betoken any admission that an account of less than all of them was appropriate, since in aggregate they amounted to the whole of FPL's gross profits as recorded in its published accounts for the relevant periods, even though broken down under specific headings such as Lost Contracts and Lost Uplifts.
- The findings of fact by the judge upon which Mr Dagnall relied as proving Mr Clegg's case for an account of all FPL's profits were these:
i) Both GAP and FPL ran steel trading businesses with no relevant geographical difference between them.
ii) GAP did not consent to any derogation favourable to Mr Pache from the ordinary duty of a director to avoid conflict between his interest and the interests of his company so as to require him to bring to his company (i.e. GAP) all business opportunities which GAP might be interested in exploiting.
iii) FPL was, throughout, Mr Pache's alter ego, in other words a corporate cloak for the exploitation by Mr Pache of a steel trading business for his own benefit.
iv) Mr Pache actively concealed his interest and involvement in FPL from GAP, in the form of Mr Clegg, even though the original reason for the concealment of his beneficial interest in FPL related to the claims of a former wife.
- In addition Mr Dagnall relied upon the absence of any evidence that FPL either had a separate non steel trading business from which it made significant profits, or any evidence that its activities during the relevant period were other than wholly directed by Mr Pache.
- Mr Dagnall relied upon conventional, long established, legal principles for this part of his appeal. He submitted that profits derived by Mr Pache as fiduciary, through FPL as his alter ego from transactions in which GAP might possibly been interested (whether or not GAP would or could have undertaken them itself) are to be brought into account: see Bhullar v Bhullar [2003] BCC 711 at paragraphs 27 to 41. In relation to the burden of proof, he submitted that the present case fell well within the "Armory v Delamirie" principle, as applied by Longmore LJ in Keefe v The Isle of Man Steam Packet Company Limited [2010] EWCA Civ 683 at paragraph 19, namely that a defendant who has in breach of duty made it difficult or impossible for a claimant to adduce relevant evidence must run the risk of adverse factual findings.
- Mr Dagnall demonstrated from passages in Mr Pickles' report that his expert analysis that, from a pure accountancy perspective, Mr Clegg's schedules did not prove his case in relation to accountable profits, was itself based in part upon Mr Pickles' view that the schedules did not (and of course could not) prove that GAP would in fact have undertaken, or even been able to undertake all or any particular number of the transactions identified. But, as he also demonstrated, Mr Pickles was at pains to emphasise that he did not regard it as his job to undertake the court's function of deciding to what extent the breach of fiduciary duty rendered the profits accountable, as a matter of law.
- I have found it easy to understand why the judge approached the matter in the way he did, having regard to the way in which Mr Clegg's case was presented in a manner so heavily dependent upon his detailed schedules, and in the light of the case management direction that those schedules should be subjected to the independent analysis of a single joint expert. Furthermore, (albeit without any transcript of the proceedings at first instance) it seemed to me for a time that the case might only have been presented to the judge on a basis of building the account of profits, brick by brick, by proof of sufficient connection with a breach of fiduciary duty on a transaction by transaction basis. But Mr Dagnall satisfied me that the case was also put in that much simpler, more general and legally principled way (as he presented it on appeal), at least in the closing written submissions to which the parties and the court had recourse on the final day of the trial, headed "Summary of the case in law against first and third defendants".
- In relation to this ground, Mrs Pache maintained her original evidential case, now by way of submissions, that the two companies' businesses were insufficiently similar, and she pointed out that GAP could not in reality have carried on the whole of FPL's steel trading business as well as its own without substantially greater facilities, including staff facilities, than it actually had. Understandably, she did not engage with Mr Dagnall's submissions of legal principle, and could not do anything to undermine the judge's findings of essential fact as outlined above.
- In my judgment this ground of appeal succeeds, in the sense that, although the judge was right to require a further account, it should have been directed on the basis of a starting point that all FPL's profits during the relevant period should be accountable, subject to the exclusion of such transactions or profits as the defendants could show were independently undertaken or earned, in the same way that a living trustee ordered to deliver an account would have to justify any personal benefits obtained from the matters undertaken by him. Having regard to Mr Pache's active steps taken to conceal entirely his personal interest and involvement in FPL's steel trading business during all but the last year of the relevant period, it seems to me that justice requires that the account be taken in this way, thereby reducing the burden of proof upon Mr Clegg in relation to individual transactions, and that it would be by no means punitive to the Pache defendants for it to be taken on that basis, even though the defaulting fiduciary, who might have been best placed to justify any exclusions, has since died.
- I reach that conclusion subject to an important reservation. Mr Dagnall put his case on appeal (as did Mr Clegg's schedules) on the basis that the accountable profit from relevant transactions could properly be identified as FPL's gross profit. That might indeed be an appropriate basis for the identification of profit in a case where specific parts of a profit making business are claimed or found to fall within a liability to account, out of a larger business which is otherwise immune from that liability. The difference between the gross profits attributable to the accountable part and the net profits of the business as a whole will largely be referable to the defendant firm's fixed general overheads. But where the case is that the whole of the defendant firm's profits are accountable, I can see no reason for excluding those fixed overheads and expenses which make up the difference between gross and net profits. Mr Dagnall submitted that there was no reason to suppose that GAP's fixed establishment (including staff) could not have undertaken all FPL's business, perhaps with the addition of a little overtime, but I regard that submission as wholly unrealistic.
- Mr Dagnall was asked whether, if the court was generally in his favour on this ground of appeal, but against him on the gross profit basis which he sought, he would prefer an account on the basis of net profits, or one which left that question to be determined, but still by reference to all FPL's business transactions. It is no criticism of him that he was reluctant to answer that question on the hoof. In a written submission following the end of the hearing (which provided helpful details of FPL's net pre-tax profits as stated in its accounts) Mr Dagnall indicated his client's preference for gross profits, and even for the judge's own basis for the taking of the account, rather than net profits on the whole of FPL's trading. But he offered no reasoned basis for an account otherwise than on the basis of net profits, and did not in terms seek to withdraw this first, and main, ground of appeal. I would therefore direct that the basis upon which profit should be identified is net profits, before tax and depreciation, if the whole of FPL's business is accountable, but that Mr Clegg should not be shut out from contending on the taking of the account for some other basis if a significant part of FPL's business is shown by Mrs Pache not to be accountable.
- Subject to that reservation, I would allow Mr Clegg's appeal under this ground.
Ground B (2) – The Commissions paid by PSL to FPL
- As Mr Dagnall acknowledged, this ground would only matter if he did not succeed on ground B(1), as he has done. This is because those payments, whether to be regarded as secret commissions, bribes or otherwise, undoubtedly formed part of FPL's business income during the relevant period and would therefore fall within a general account of the type which I have described.
- It is therefore unnecessary to address this separate ground of appeal further, save to note that, doing the best I can, the judge's analysis may support a conclusion that he and Mr Clegg were not at idem as to the particular income stream to which the submissions on this issue were directed.
Ground B (4) – Deduction for the Contribution Claims
- The judge concluded that, from the time in late in 2007 when Mr Clegg became aware of Mr Pache's interest and involvement in FPL's steel trading business, he was himself in breach of fiduciary duty, because he did nothing thereafter to prevent its continuation. At paragraph 62 he relied upon the dictum of Popplewell J in MSI v Raven [2013] EWHC 3147 (Comm) to the effect that a director who has knowledge of his fellow director's misapplication of company property and stands idly by, taking no steps to prevent it, will thus not only breach the duty of reasonable care and skill (which is not fiduciary in character) but will himself be treated as party to the breach of fiduciary duty by his fellow director in respect of that misapplication by having authorised or permitted it.
- The judge gave effect to that principle by treating Mr Pache and Mr Clegg as jointly and equally responsible for the loss to GAP constituted by FPL's relevant trading profits for the period following September 2007, and therefore reducing Mr Clegg's recovery as GAP's assignee in respect of that period by 50%.
- Mr Dagnall criticised this approach as wrong, both on the evidence and the law. As to the evidence he submitted, with some force, that as the 50% shareholder and as one of only two directors of GAP (the other being Mr Pache) there was nothing that Mr Clegg could do about Mr Pache's misconduct of the affairs of a separate company, namely FPL, short of commencing a derivative action on behalf of GAP or, as he himself put it in evidence, "collapsing" GAP. The case was far removed from one in which a director knew that his fellow director was misappropriating assets, and could by reporting the matter to the board or taking other steps falling short of litigation, insure that the misappropriation was brought to an end.
- As a matter of legal principle, Mr Dagnall submitted that, even if the judge was entitled to treat Mr Clegg, from September 2007 onwards, as being in breach of fiduciary duty jointly with Mr Pache, so that GAP had, in principle, a claim against Mr Clegg as well as Mr Pache, that said nothing about how the burden of joint liability for that breach should be shared between them. Mr Pache had, on the uncontentious facts, both personally committed and received all the benefit from all the relevant breaches of duty, whereas Mr Clegg had committed none of them nor received any benefit from them.
- I find the second of Mr Dagnall's submissions on this point to be compelling. The way in which the matter presented itself to the judge was complicated by the fact that one of the two directors supposedly jointly liable to GAP had taken an assignment of the beneficiary company's cause of action. But any attempt to measure, as between Mr Pache and Mr Clegg, the burden of responsibility for the breaches of fiduciary duty constituted by Mr Pache's conduct of the affairs of FPL during the period when both directors knew about it can only sensibly, in my judgment, come down 100% on Mr Pache's shoulders. Far from encouraging or consenting to Mr Pache's misconduct, Mr Clegg protested it, was told to mind his own business, and was thereafter ignored by Mr Pache so far as concerns his continued conduct of steel trading through FPL. Since it was common ground before the judge, and not challenged on appeal, that the loss to GAP should be treated (for the purposes of equitable compensation) as equivalent to the profit derived by FPL from Mr Pache's misconduct, it follows that there is no basis for identifying any significant share of liability for GAP's loss as falling on Mr Clegg's shoulders rather than upon those of Mr Pache.
- Accordingly, I would allow the appeal on this ground as well, and remove the judge's direction that the accountable profits during the period following September 2007 should be reduced by 50%.
Ground B (5) – Deduction for £375,000 being paid by the FPL Defendants
- This heading (which I derive from Mr Dagnall's skeleton argument) is a slight misnomer because, as already noted, the judge subsequently reduced the amount of this deduction from £375,000 to the smaller sum of £197,499.97, which was the sum actually paid by the FPL defendants on account of Mr Clegg's claims. Nonetheless the issue of principle remains the same, namely: should the judge have required the identification of the profits pool needed to support Mr Clegg's claims under schedules A2, A3 and K to be reduced by a deduction equivalent to the amount paid by the FPL defendants pursuant to the Settlement?
- It needs to be borne in mind that the judge approached this issue on the assumption that there was no reason to suppose that the Settlement payment obligation undertaken by the FPL defendants on the first day of the trial would not be performed in full. Paragraphs 17 and 91 of his judgment suggest that the judge regarded it as plain that the payment of £375,000 was, in substance at least, to be paid by way of an accounting of profits by FPL to Mr Clegg as assignee of GAP.
- Again, Mr Dagnall challenges the judge's approach both on factual and legal grounds. As to the facts he submits that the £375,000 was agreed to be paid on account of all Mr Clegg's claims against the FPL defendants, who included not merely FPL but also PSL, Mr Caldwell and Mr Hillier, and that those claims were not limited to an account of profits but extended to common law damages claims based on the assertion that the defendants' misconduct had caused GAP to fall into administration, with its attendant costs, and to lose the entirety of the value of its business running to millions of pounds.
- As to the law, Mr Dagnall submitted that, where a creditor receives from a debtor a payment of a single sum on account of a number of different claims, which the debtor does not apportion to any one or more of them, then the creditor may apportion them among those claims as he thinks fit. He relied in particular on the dictum of Eder J Otkritie International Investment Management Limited v Urumov [2014] EWHC 755 (Comm), at paragraph 13, to the effect that a claimant does have a choice as to how recoveries are to be appropriated, so long as the choice is not obviously unsustainable.
- I have no difficulty in accepting Mr Dagnall's principled starting point, but its application does not in my judgment lead to the conclusion that the judge's requirement for a deduction of the amounts actually paid under the Settlement was wrong. The starting point is to analyse what other claims than the claim for an account of profits against FPL were in fact settled by the FPL defendants by the payment of £375,000 and to ask whether any of them escape from the "obviously unsustainable" category where an attribution may not now be made. Some of them were claims against PSL, but the judge rejected all of those in his judgment, and this has not been appealed. In the end Mr Dagnall was constrained to accept during his submissions in reply that the only significant other claim, apart from the account of profits against FPL, was the claim for damages based on the proposition that Mr Pache's misconduct had caused GAP to lose its business and fall into administration.
- Mrs Pache drew our attention to statements in the Administrator's report in relation to GAP's administration, apparently approved by Mr Clegg at the time, that its failure had been due to the downturn in the steel market that occurred in 2008 (which, incidentally, halved the value of GAP's stored steel during a very short period), so that the claim that Mr Pache was in any way responsible for GAP's failure was fanciful. By this time Mr Clegg knew in general terms what Mr Pache had been up to in relation to trading through FPL, so could have prayed that in aid if he thought it relevant to GAP's failure.
- Mr Dagnall responded that it by no means followed that GAP would still have collapsed, if the steel trading business which was then being carried on by FPL had been carried on in addition by GAP, due to a proper performance by Mr Pache of his fiduciary duty to bring those business opportunities and transactions to GAP. In my view this response is speculative at best.
- The starting point of this analysis is the assumption (necessary for the purposes of Mr Dagnall's successful pursuit of his first ground of appeal) that the businesses of GAP and FPL were sufficiently similar for Mr Pache to have been obliged to offer the FPL business opportunities and transactions to GAP. On that basis I can see no reason to displace the natural assumption that FPL's steel trading would have been, broadly speaking, as badly affected by the downturn in the market as GAP's was in fact, so that the accretion of a larger, but equally adversely affected business, would not have been likely to have saved GAP from collapse. A large house will fall down just as much as will a small house, if both are built on the same subsiding ground.
- Although it might be said that FPL's survival in business until a later date than GAP's failure might suggest otherwise, I bear in mind in this context that the judge had a much greater familiarity with the underlying realities of this case, and with the Settlement, than it would be possible for this court to acquire in a day and a half, in particular in the complete absence of the FPL defendants. Accordingly I would not be prepared to depart from the judge's underlying assumption that, in substance, the £375,000 was promised to be paid (and the smaller sum actually paid) on account of the liabilities of the FPL defendants in relation to FPL's profits, so that I would dismiss the appeal on this ground.
Ground B(6) – Not including the money still to be paid under 2010 Agreement (Schedule K)
- This ground concerns the Estate's liability to account in relation to FPL's payments of money (assumed to be drawn from its accountable profits) agreed to be paid indirectly to Mrs Pache pursuant to the 2010 Agreement, but not yet paid. It has nothing to do with the separate appeal about the judge's rejection of any personal liability on Mrs Pache's part.
- In the event it is not a ground which Mr Dagnall actively pursued, because of his very sensible recognition that FPL's descent into insolvent administration means that there is no more than a fanciful prospect that Mrs Pache will ever receive more than the £50,500 already paid pursuant to the 2010 Agreement. It is on that basis hard to see how the incurring by FPL of a purely theoretical contractual obligation to Mr Pache to pay more to his wife can have any significance in the case, as between Mr Clegg and the Estate. For what it is worth, I would dismiss the appeal on this ground as well.
Ground C – Claims against Mrs Pache in relation to the 2010 Agreement Payments
- For reasons already given, this ground of appeal is now confined in its substantive effect to the £50,500 which Mr Clegg claimed against Mrs Pache upon the basis of knowing receipt and unjust enrichment, but which the judge rejected.
- I have already noted that the much larger claim against Mrs Pache personally in respect of the payments made for her provision of secretarial and other services to FPL was rejected by the judge upon the grounds that she had given value for those payments by her services, without knowing or having notice of any claim that in procuring FPL to make those payments to her, Mr Pache had acted in breach of fiduciary duty. She was, in short, equity's darling.
- In sharp contrast, there can be no doubt that, in relation to the £50,500 which she indirectly received under 2010 Agreement (and the indirect receipt of which she does not challenge) Mrs Pache was a pure volunteer. The payments were expressed in the 2010 Agreement to be made on account of liabilities of FPL to Mr Pache, not to Mrs Pache. For this purpose, the question whether Mr Pache had any entitlement to them as against FPL is irrelevant. The underlying assumption (to be proved or not by the account of profits exercise) is that the money used belonged beneficially to GAP and that, in any event, as the judge found, FPL was no more than Mr Pache's alter ego.
- It is not at all easy to understand on what basis the judge rejected the claim that Mrs Pache repay the £50,500. He deals generally with the claims against Mrs Pache personally in paragraphs 105 to 128 of his judgment, addressing both knowing receipt and unjust enrichment in relation to evidence from Mrs Pache (which he accepted) that in relation to the payments which she received generally, she gave value for them. In relation to those payments, his analysis is not challenged on appeal.
- The judge's only specific reference to the £50,500 (specified in Schedule K) is in paragraphs 125 (under the heading Findings of Fact), where it is merely mentioned as one of a number of items, but without separate analysis, and in paragraph 128, under the heading the Claim in unjust enrichment, as follows:
"In my judgment no claim for restitution on the basis of unjust enrichment (or money had and received) lies in respect of payment for work done or in respect of sums paid under schedule K. I am not satisfied that there is any basis on which it could be said that the schedule K sum amounts to an unjust enrichment. I can see no basis on which the retention of the money can be regarded as unjust."
- Mr Dagnall submitted that his client had a plain claim both in knowing receipt and unjust enrichment in relation to the £50,500, provided of course that the money from which the payment was made was, or represented, profits attributable to Mr Pache's breach of fiduciary duty, a condition yet to be tested by the taking of the account of profits to which his earlier grounds of appeal relate. He sought to take the court through some of the recent authority on the endlessly developing and contentious subject of unjust enrichment but, to my mind, the basis of Mr Clegg's claim in this respect is simple, and long established. It is, in substance, a Re Diplock [1948] Ch 465 claim. Where a trustee pays trust property in breach of trust to a person who is in fact a stranger to the trust (rather than a beneficiary) and who receives it as a pure volunteer, then the recipient is bound by the beneficiaries' interest in the property paid, so that the beneficiary may make a proprietary claim for its return, or a tracing claim for its proceeds, or a claim into a fund within which the recipient has mixed the property with his or her own property. There is no requirement that the recipient have notice of the beneficiary's interest at the time of receipt, providing that the recipient knows about it before disposing of the property.
- The recipient may have a defence to a personal claim against the volunteer if she disposes of the property before acquiring notice of the beneficiary's interest in it. In the context of unjust enrichment the recipient may be able to show a relevant change of position. But neither of these defences were advanced by Mrs Pache, who has not (so far as this court was told) identified what she did with the £50,500, although it appears that she may have invested it in a business of her own.
- Mrs Pache maintained at the trial, and the judge accepted, that she had no notice, at any time during her husband's lifetime, that payments which he arranged for FPL to make to her, including the £50,500, involved a breach of fiduciary duty on his part.
- Nonetheless it was for Mrs Pache to put forward, if she could, at trial some defence to liability as a volunteer, or change of position defence to liability in unjust enrichment. It does not appear from her defence that she did so. I bear in mind that her defence appears to have been prepared by her personally, rather than settled by counsel or some other qualified lawyer, but she did apparently have some element of legal assistance until very shortly before the trial.
- In those circumstances I consider that Mr Clegg's appeal on this final ground ought to be allowed.
Conclusion
- I would therefore resolve this appeal, ground by ground, in the way set out under the previous sections of this judgment. If my Lord and my Lady agree, the court will wish to have written submissions upon the precise terms of any consequential order. So far as costs, both here and below are concerned, Mr Dagnall sensibly refrained from any submissions about his costs appeal until a decision had been reached about his substantive appeals, so that written submissions will be needed as to costs as well. For those purposes Mr Dagnall should go first, and serve his submissions on Mrs Pache, and she should have five full working days to respond, with Mr Dagnall having a further 3 working days to reply if so advised. Exceptionally, since Mrs Pache is a litigant in person, the court will also consider any written application from her (but not from Mr Dagnall) that further argument on these matters be dealt with at an oral hearing.
Lady Justice Thirlwall:
- I agree.
Lord Justice McCombe:
- I also agree.
