Eagle Trust Plc v S.B.C. Securities Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 15 January 1991 |
| Date | 15 January 1991 |
| Court | Chancery Division |
Trusts - Constructive trust - Fraud - Payment of debt from alleged misapplication of trust money - Recipient's suspicion over payer's ability to raise payment - Duty to inquire whether money properly paid - Whether recipient personally liable as constructive trustee
The plaintiff company, in the course of a take-over bid for another company, made an issue of new shares, which the defendant company agreed to underwrite. The defendant then arranged for its liability to be sub-underwritten by others, including an employee of the plaintiff. The plaintiff subsequently alleged that the employee had misappropriated £13.5m. of its funds in order to meet his sub-underwriting obligations to the defendant, which had in turn used the money to discharge its obligation to the plaintiff as underwriters. It issued a writ alleging that the defendant was liable to account as a constructive trustee, on the grounds that it ought to have known, or to have been put on inquiry, that the sums paid to it were the plaintiff's own money.
On the hearing of a motion by the defendant to strike out the statement of claim as disclosing no cause of action: —
Held, that where a payment was made in the ordinary course of business in the discharge of a liability, the recipient could be made liable as a constructive trustee to restore the money if it could be shown that he had actual knowledge that the money had been misapplied in breach of trust, or had wilfully shut his eyes or had wilfully and recklessly failed to make such inquiries as an honest and reasonable man would make; that such knowledge might be inferred in the absence of any evidence or explanation by the recipient if the circumstances were such that an honest and reasonable man would have drawn an inference that the payment was in probability misapplied trust money and would not have accepted it, or would not have applied it in discharge of the liability until satisfied that the payer was entitled to use the money; and that on the facts pleaded, since the defendant could be said to have had no more than a suspicion as to how the payment had been arranged, in circumstances where an honest and reasonable man would not have made further inquiry, the plaintiff's action would be bound to fail and the statement of claim would accordingly be struck out (post, pp. 489H–490A, 506C–F, 508C–E).
Per curiam. A stranger cannot be made liable for knowing assistance in a fraudulent breach of trust unless knowledge of the fraudulent design can be imputed to him. There must be something amounting to want of probity on his part. Constructive notice is not enough, though knowledge may be inferred in the absence of evidence by the defendant if such knowledge would have been imputed to an honest and reasonable man (post, p. 496B–C).
The following cases are referred to in the judgment:
Agip (Africa) Ltd. v. Jackson [
Baden v. Société Générale pour Favoriser le Développement du Commerce et de l'Industrie en France S.A. (Note) [
Bailey v. Barnes [
Belmont Finance Corporation Ltd. v. Williams Furniture Ltd. [
Belmont Finance Corporation Ltd. v. Williams Furniture Ltd. (No. 2) [
Blundell, In re; Blundell v. Blundell (
Carl Zeiss Stiftung v. Herbert Smith & Co. (No. 2) [
English and Scottish Mercantile Investment Co. Ltd. v. Brunton [
Green v. Weatherill [
Karak Rubber Co. Ltd. v. Burden (No. 2) [
Manchester Trust v. Furness [
Montagu's Settlement Trusts, In re [
Nelson v. Larholt [
Reckitt v. Barnett, Pembroke and Slater Ltd. [
Selangor United Rubber Estates Ltd. v. Cradock (No. 3) [
Thomson v. Clydesdale Bank Ltd. [
Westminster City Council v. Croyalgrange Ltd. [
Williams v. Williams (
The following additional cases were cited in argument:
Barclays Bank Plc. v. Quincecare Ltd.,
Feuer Leather Corporation v. Frank Johnstone & Sons [
Greer v. Downs Supply Co. [
Lipkin Gorman v. Karpnale Ltd. [
Westpac Banking Corporation v. Savin [
Williams and Humbert Ltd. v. W. & H. Trade Marks (Jersey) Ltd. [
MOTION
The defendant, S.B.C. Securities Ltd., moved pursuant to
The facts are stated in the judgment.
Jonathan Sumption Q.C. and Mark Hapgood for the defendant.
Peter Goldsmith Q.C. and Michael Brindle for the plaintiff.
15 January 1991. VINELOTT J. read the following judgment. This is an application by a company now known as S.B.C. Securities Ltd. but known at the material time as S.B.C.I. Savory Milln Ltd. to strike out the statement of claim in an action brought against it by Eagle Trust Plc. on the ground that the statement of claim discloses no cause of action. I will refer to these companies as Savory Milln and Eagle respectively. Before describing the claim advanced in the statement of claim and the allegations on which it is founded, I should emphasise, to avoid any possible misunderstanding, that this is not the trial of the action and that the truth of those allegations has not been established. Many of the allegations and the inferences which it is sought to draw from them are disputed. The question in this application is whether, if this action were to proceed to trial and if Eagle were to establish the truth of all allegations made and if Savory Milln were to adduce no evidence, Eagle would be entitled to the relief claimed.
The allegationsThe relevant allegations are: (a) on 14 October 1987 Eagle announced the terms of an offer for the acquisition of the entire issued share capital of Samuelson Group Plc. The offer was of six new Eagle shares for each Samuelson share. It was accompanied by (i) a cash alternative of 180p for each Samuelson share and (ii) a rights issue addressed to shareholders of Eagle of new shares of Eagle priced at 30p for each new share.
(b) By an underwriting agreement dated 12 October 1987 Savory Milln had agreed to underwrite the cash alternative and the rights issue. The total potential liability of Savory Milln under the underwriting agreement was £56m. — £35m. in respect of the cash alternative and £21m. in respect of the rights issue, less the fees which Savory Milln were entitled to retain.
(c) On 19 October, before the offer documents had been sent out, prices on the London Stock Exchange fell heavily: it is commonly known as Black Monday.
(d) After 12 October Savory Milln, for its own protection, arranged to sub-underwrite its liabilities to Eagle in respect of the rights issue. Paragraph 6 of the statement of claim contains a list of sub-underwriters said to have been introduced by or through John Ferriday, the chief executive of Eagle. The list includes a firm of solicitors practising in Birmingham, Martin Boston & Co., or its senior partner, Martin Boston, in respect of 11 million shares of Eagle, and a firm of provincial stockbrokers, Earnshaw Haes, in respect of 21 million shares. It is said in paragraph 7 of the statement of claim that in circumstances unclear to Eagle the list changed. In the revised list the reference to Martin Boston & Co. and Martin Boston is deleted, the number of shares underwritten by Earnshaw Haes is increased from 21 to 26 million, and Ferriday, whose name was not included in the original list, appears in the revised list as underwriting 25.5 million shares. There are other differences between the two lists. The liability of a company called Coast Securities Ltd. is reduced from 20 million to 3 million and the liability of a firm called Jeffries & Co. from 16,450,000 to one million. In the revised list two banks, Standard Chartered Bank and Bank of Bermuda appear as sub-underwriters in respect of two million and 10 million shares respectively. The total number of shares underwritten is slightly reduced from 69,450,000 to 69,050,000.
(e) The relevant changes are elaborated in paragraphs 8 and 9 of the statement of claim, where it is said, in paragraph 8, (a) that Martin Boston & Co. and Martin Boston were released from their sub-underwriting obligations pursuant to a letter written by them to Savory Milln in which it was alleged that Ferriday had agreed to indemnify Martin Boston & Co. and Martin Boston, that Ferriday had denied to Savory Milln and to Eagle's then solicitors that he had given any such...
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