Practice and procedure – Claim – Strike out – Claimant seeking account of alleged secret profits obtained by defendants on sale of property – Claimant arguing defendants liable to account for all profits received by second defendant – Defendants applying to strike out claim on basis that open offer to settle exceeded maximum sum recoverable on claim – Whether court should exercise power to strike out claim – Application dismissed
The claimant company was incorporated to purchase a property at 18 Victoria Park Square, London E2. The first defendant and his company acted as buyer’s agents first for the claimant’s directors and then for the claimant in relation to the purchase.
The claimant contended that, in breach of fiduciary duty and of the obligation imposed by section 21 of the Estate Agents Act 1979, the first defendant caused the second defendant, of which he was the sole shareholder, to obtain a secret profit.
The claimant alleged that the first defendant entered an arrangement whereby the second defendant would pay £5,000 to the seller and then share the costs and profits of buying the property and selling it on. A reduction in the option price meant that the seller bought the property for £2.9m. There was £800,000 of profit on the onward sale to the claimant, £400,000 of which was the undisclosed profit realised by the second defendant. Therefore, the defendants were liable to account for all profits received by the second defendant.
The claimant anticipated that the defendants might have acquired assets or investments using monies paid out of a current bank account linked with a business reserve account and asserted a right to trace into such property for the purposes of pursuing a proprietary remedy.
The defendants applied to strike out the claim on the basis that their open offer of settlement exceeded the maximum sum which the claimant could recover on its claim.
Held: The application was dismissed.
(1) The substantive issue was whether the law was settled on the question whether a beneficiary under a constructive trust was entitled, as against a wrongdoing fiduciary or recipient of trust property, to trace into property acquired by the trustee from a mixed fund in circumstances where the value of the mixed fund had never fallen below the value of the trust property.
The defendants contended that there was binding authority to the effect that, as the value of the monies in the current account and reserve account, when viewed as a single account, never fell below the value of the trust monies wrongfully received by the second defendant, the claimant was not permitted to seek a proprietary remedy against any property bought by the second defendant out of the current account. Accordingly, the claimant was not permitted to “cherry pick” its remedy. What was in issue for present purposes was the right of the claimant to seek a proprietary remedy through tracing.
(2) Where trust monies were mixed with the trustee’s own monies, and the trustee spent or dissipated some of that mixed fund, the spent funds were attributed first to the trustee’s monies, leaving the trust monies intact: Re Hallett’s Estate (1880) 13 ChD 696 applied.
Where mixed trust and personal monies were used to purchase an asset by way of substitution, and the trustee then dissipated what remained, the trustee was deemed to have used trust money to buy the asset. The beneficiary was entitled to a charge, or lien, on the property purchased for the trust money laid out in the purchase or investment. The interest of the trustee was thus subordinated to that of the beneficiary.
(3) It was well-established that the court should be reluctant to exercise its power to strike out or to give summary judgment on a controversial question in a developing area of the law, as it was desirable that any further development of the law should be based on the actual and not hypothetical facts. Academic commentators in the field clearly did not consider the relevant question to be settled: Altimo Holdings and Investment Ltd v Kyrgyz Mobil Tel Ltd [2012] 1 WLR 1804 considered.
In Turner v Jacob [2006] EWHC 1317 (Ch), the judge commented that where the trustee maintained in the account an amount equal to the remaining trust fund, the beneficiary’s right to trace was limited to that fund. It was not open to the beneficiary to assert a lien against an investment made using monies out of the mixed account unless the sum expended was such that it must have included trust monies or the balance remaining in the account after the investment was then expended to become untraceable: Shalson v Russo [2005] Ch 281 considered.
The question here was whether a High Court judge hearing the trial of the present claim would necessarily be bound by those comments, or whether it was realistically possible that a different view might be taken.
(4) The evidence in the present case was incomplete and had not been tested. There had been no disclosure of what the payments out of the second defendant’s current account in the period after the relevant receipt were for or to whom they were made. On the basis of the defendants’ position that the two bank accounts should be treated as one, the combined balance of the two accounts had remained above the initial receipt of trust monies. There was no scope for the application of the lowest intermediate balance rule to limit the value of the trust monies which could thereafter arguably be traced into acquired assets.
It was likely that if cherry picking was allowed, there might be some temporal limit on it. It was also not without significance that the judge in Turner v Jacob expressly contemplated the possibility that the right to trace would in fact lie into a property other than that into which the claimant in that case sought to trace.
In the absence of any disclosure by the defendants of where the monies went, the court had to assume that it was at least possible that some of the monies from the mixed current account were used to purchase assets or acquire investments.
Accordingly, the controversial question of the extent to which a tracing beneficiary could cherry pick as against a wrongdoing trustee should be determined based on the facts as found at trial, and not on the basis of the limited evidence currently before the court. Accordingly, the application would be dismissed.
Aidan Casey KC (instructed by Nicholas & Co Solicitors) appeared for the claimant; Stephen Cogley KC and Sanjay Patel (instructed by RWK Goodman LLP) appeared for the defendants.
Eileen O’Grady, barrister
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