Judgments - Moore Stephens (a firm) (Respondents) v Stone Rolls Limited (in liquidation (Appellants)

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140.  The decision in Belmont was not entirely straightforward, but in my view it was correct. The case can be understood only by reference to the fuller statement of its facts in the judgments in the second appeal to the Court of Appeal, Belmont Finance Corporation v Williams Furniture Ltd (No 2) [1980] 1 All ER 393. The first appeal was from Foster J’s order striking out Belmont’s claim on the ground that it was seeking to rely on its own illegality. The second appeal, paradoxically, was from the same judge’s dismissal of the claim at trial, on the ground that what had taken place was a bona fide commercial transaction involving no illegality.

141.  The alleged illegality was in the company providing financial assistance for the purchase of its shares, contrary to what was then section 54 of the Companies Act 1948. That provision is one reflection of the basic principle of company law requiring a limited company to maintain its capital: see the explanation by Lord Watson in the leading case of Trevor v Whitworth (1887) 12 Ch App 409, 423-424. The general prohibitions on a limited company purchasing its own shares, or providing financial assistance for their purchase by another person (both now subject to carefully limited exceptions) have the purpose of preserving the limited company’s capital for the protection of those who trade with it.

142.  For present purposes there are two essential points to note in regard to the complicated manoeuvres undertaken in Belmont. First, there was a purchase (of the shares in Maximum) at a gross overvalue, and this (quite apart from section 54 of the Companies Act 1948) was a breach of fiduciary duty by those of Belmont’s directors who were complicit (see especially the judgment of Goff LJ in Belmont (No 2) at p 411). Secondly, as part of the same prearranged plan the £0.5m extracted from Belmont was then recycled by purchasing the shares in Belmont, so infringing section 54. The former shareholders in Belmont did not suffer under the prearranged scheme, since they wanted to sell the company and were no worse off through the purchase of Maximum at an overvalue (but they were held accountable as constructive trustees). The real victims, after predictions as to Maximum’s profit-earning capacity proved mistaken, were Belmont’s creditors (and especially its depositors, who apparently took priority to the debenture-holders).

143.  Looking at the earlier Belmont decision again in the light of the fuller facts in Belmont (No 2) I think that Buckley LJ was right to say that Belmont was a victim. It lost over £0.4m in assets (though its former shareholders did not suffer that loss until the court made them accountable) and, on the Hampshire Land principle, the guilty knowledge of some of the directors was not to be attributed to Belmont. Section 54 was certainly enacted to protect company funds and the interests of shareholders as well as creditors, as Scarman LJ said in Wallersteiner v Moir [1974] 1 WLR 991, 1032-1033 but I do not see that this undermines the reasoning of Buckley LJ (who referred to Wallersteiner v Moir at p 261).

144.  In all these cases there was a company which was the victim of a fraud or serious breach of duty, and the court held that it was not to be prejudiced by the guilty knowledge of an individual officer who could not be expected to disclose his own fault. (The fact that duties were owed to two different companies in Hampshire Land and Houghton is, I think, an irrelevant coincidence). This principle is sometimes referred to in the United States of America as the “adverse interest” exception to the usual rule of imputation (see for instance Rudolph and Tanis, “Invoking In Pari Delicto to Bar Accountant Liability Actions Brought by Trustees and Receivers” (2008) ALI-ABA Study Materials). It is applied, typically, in cases in which the corporate victim is the claimant and the defence seeks to rely on the corporate victim’s notice, knowledge or complicity. It will be necessary to consider some recent English cases which do not fit so neatly into the same mould.

145.  In reviewing some of the recent cases Rimer LJ expressed surprise (in para 71 of his judgment) at the Hampshire Land principle being referred to in the context of fixing liability on a party. He saw the principle as “primarily concerned not with a company’s liabilities to others but rather with its claims against others.” Most of the early cases do fall into that category (though in Houghton NLW’s claim was a counterclaim against a third party which was seeking delivery of bills of lading). But I can see no reason why the principle should be limited to claims. It is, as I have said, a general principle of agency which can apply to any issue as to a company’s notice, knowledge or complicity, whether that issue arises as a matter of claim or defence.

Sole actors and secondary victims

146.  Mr Brindle has relied on the Hampshire Land principle to insulate S & R, for the purposes of the ex turpi causa rule, from Mr Stojevic’s fraudulent conduct. Mr Sumption QC, for Moore Stephens, has in the Court of Appeal and before the House deployed two lines of argument against that. The first is that the principle has no application in a case where the person or persons with ownership and control of the company are entirely complicit in the fraud, so that there is no single individual connected with the company who can be regarded as an innocent party deceived and prejudiced by the fraud. This is, in the terminology used in the United States, the “sole actor” exception to the “adverse interest” rule—which is itself an exception to the ordinary rules of imputation. In England the phrase “one-man company” is sometimes used, but it is an imprecise expression which calls for explanation. The other line of argument is that the Hampshire Land principle does not apply to cases where the victim of the fraud is not the company itself, but a third party. This leads on to arguments as to whether the company in question, although not a primary victim, should be regarded as a secondary victim (and so within the principle).

147.  In the Court of Appeal Rimer LJ (with the concurrence of the other members of the Court) rejected the first line of argument (paras 45 and 46) but acceded to the second (paras 65 to 73). I would add, however, that Rimer LJ’s summary of his reasoning, (in para 73 of his judgment, quoted in para 169 below) begins with a couple of sentences which suggest to me that his discussion on the “victim” issue may have begun to raise some degree of doubt about his conclusion on the “sole actor” issue. I shall discuss these issues in turn. But as some of the modern cases touch on both issues it is convenient to summarise them first, in chronological order.

The modern cases

148.  Both sides relied on the decision of the Court of Appeal in Attorney General’s Reference (No. 2 of 1982) [1984] QB 624. This was concerned with a point of criminal law:

“Whether a man in total control of a limited liability company (by reason of his shareholding and directorship) is capable of stealing the property of the company; and whether two men in total control of a limited liability company (by reason of their shareholdings and directorships) are (while acting in concert) capable of jointly stealing the property of the company.”

Two men, who were between them in total control of a company, had plundered its assets in extravagant living and it was insolvent to the extent of about £2.5m. The case was largely concerned with the application to that situation of the language of section 2(1)(a) and (b) of the Theft Act 1968. For my part I do not think that the decision assists either side. It is really concerned with the correct construction of a criminal statute and its application to a situation which Parliament may not have contemplated when the Theft Act 1968 was being enacted.

149.  Brink’s-Mat Ltd v Noye [1991] 1 Bank LR 68 was not cited to the Court of Appeal (indeed Mr Sumption told us that it seems never to have been cited in any reported case before). Brink’s-Mat was bailee of very valuable gold bullion stolen in a notorious armed robbery which took place in 1983. Two of the conspirators, Chappell and Palmer, smelted and recast some of the bullion and used a company, Scadlynn Ltd, to sell the recast gold (some was sold to its true owner, Johnson Matthey). Scadlynn had a small issued capital owned by Chappell and Palmer. Between September 1984 and the end of January 1985 over £10m was withdrawn in cash from Scadlynn’s account with Barclays Bank. Brink’s-Mat sued Chappell, Palmer, Scadlynn and Barclays Bank. The issue before the Court of Appeal was a proposed re-amendment of the statement of claim to add new claims against Barclays Bank. These were claims for wrongs to Scadlynn which Brink’s-Mat claimed to be able to enforce as beneficiary under a constructive trust. That was the very unusual context in which Mustill LJ said (at p 72):

“Here the corporate entity named Scadlynn was, however odd the notion may seem at first sight, the victim of wrongful arrangements to deprive it improperly of a large part of its assets: see Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250, at pp 261-262. If the facts were such that the bank should have recognised the possibility of such an impropriety, and if the scope of the bank’s duty of care was wide enough to impose an obligation to take steps to forestall it, I see no reason why the cause of action should not be enforced by Scadlynn for the ultimate benefit of the creditors who would look to those assets for satisfaction of their debts.”

Similarly Nicholls LJ said (at 73):

“On the facts alleged in the proposed amendments, Scadlynn was at all material times being used by Chappell and Palmer and others for a fraudulent purpose, viz, to realise the proceeds of sale of the robbery. But the plaintiff was not implicated in any such fraudulent purpose. On the contrary, along with the owners of the gold, the plaintiff was the intended victim of the scheme. Likewise, Scadlynn itself was an intended victim, in that Scadlynn was being used as a vehicle for committing a fraud on its creditors and a fraud on those beneficially interested in property held by Scadlynn. In those circumstances the fraudulent purposes of those controlling Scadlynn are not to be imputed to the company itself: see Belmont Finance Corpn Ltd v Williams Furniture Ltd [1979] Ch 250, per Buckley LJ at pp 261-262.”

150.  In Berg, Sons & Co Ltd v Mervyn Hampton Adams (1992) [2002] Lloyd’s Rep PN 41, Berg was, on any view, a one-man company. Mr Golechha was the only active director and sole beneficial owner of its shares. Berg became insolvent (without fraud being proved or, so far as I can see, alleged) and its liquidator sued some former partners in the auditors, Dearden Farrow. Hobhouse J held that the auditors had negligently treated certain bad debts as recoverable, but that only nominal damages could be recovered. The reason was explained by Hobhouse J, at p 54:

“In the present case it has not been proved that there was any fraud by Mr Golechha in relation to the 1981 audit, still less that at that time Mr Golechha was practising any fraud on his principal, Berg. There was no entity which it can be said he misled or in relation to which it can be said that he was acting fraudulently in relation to the audit in October 1982. However one identifies the company, whether it is the head management, or the company in general meeting, it was not misled and no fraud was practised upon it. This is a simple and unsurprising consequence of the fact that every physical manifestation of the company Berg was Mr Golechha himself. Any company must in the last resort, if it is to allege that it was fraudulently misled, be able to point to some natural person who was misled by the fraud. That the plaintiffs cannot do.”

Hobhouse J distinguished Belmont because there was no conspiracy to defraud Berg. He referred to Attorney General’s Reference (No 2 of 1982) as “nearer to the point” but only, as I understand it, because in that case also there was no individual victim. But again the case was distinguishable because it involved fraud, and there was no fraud against Berg.

151.  Group Josi Re v Walbrook Insurance Co Ltd [1996] 1 WLR 1152 was concerned with contracts of reinsurance which (lacking statutory authorisation) were void for illegality. It is of interest as being the first of the modern cases decided after Meridian. After referring to Meridian Saville LJ said (at p 1170):

“In the present case the reinsurers rely upon cases where knowledge has been attributed, while the reinsured rely upon cases dealing with what has been called ‘the fraud exception’ or the rule in Re Hampshire Land Co [1896] 2 Ch 743, i.e. cases where knowledge of the fraudsters of a fraud on a corporation has been unsuccessfully sought to be attributed to the corporation.

Mr Bartlett [for the reinsurers] accepted that there were circumstances in which the ‘fraud exception’ meant that knowledge was not attributed. In his submission, the essence of the relevant principle is that the court will not infer that a company has knowledge of a fact known to an agent or director of the company where, because of the agent’s or director’s fraud or other breach of duty to the company, it would be contrary to justice and common sense to draw such inference.

For the purposes of this case at least, I am prepared to proceed on the basis of this proposition.”

152.  Arab Bank plc v Zurich Insurance Co [1999] 1 Lloyd’s Rep 262 involved a fraudulent valuation made by a managing director, Mr Browne (who was not however the directing mind and will of his company, JDW). Both JDW and Mr Browne were separately covered by a fidelity policy, subject to a proviso excluding from indemnity “any person knowingly committing, making or condoning [a dishonest or fraudulent] act.” This context had an important bearing on the way in which Rix J approached the issue of attribution (see at p 279, where he said that the position might have been different with a “one man company”). But Rix J also discussed the “victim” issue. He observed at pp 282-283:

“There remains the question, . . . whether the Hampshire Land doctrine is confined to cases of fraud where the principal is himself the victim of the fraud, or whether, as Mr Justice Vaughan Williams put it in Hampshire Land itself, the doctrine extends to other breaches of duty where common sense would destroy the inference of transfer of knowledge. In the typical case in which the doctrine has been applied, Houghton, Belmont, PCW and Group Josi Re, fraud has been found or assumed. In the present case, fraud is also assumed, but the primary victim of the fraud has been the lending institution which has relied on the valuation. I would accept, however, the plaintiffs’ submission that JDW was also a victim, even if only a secondary victim, of the assumed fraud. One consequence of that assumed fraud has been JDW’s liability to the plaintiffs, albeit in negligence. Moreover, even if it could be said that JDW, unlike the plaintiffs, was not the victim of Mr Browne’s fraud, Mr Browne has, on the assumed facts, been guilty of dishonesty, and one can hardly visualise a graver dereliction of his duty to his company. Although the cases often involve fraud, Hampshire Land itself did not necessarily do so, and I note that in Group Josi Re, Lord Justice Saville was prepared to accept as a working definition of the scope of the principle the cases of ‘the agent’s or director’s fraud or other breach of duty to the company’ (at p 367). In my judgment, Mr Browne’s fault comes within the concept of an agent’s fraud on his principal, but, even if it does not, his fault is such a breach of duty to JDW as in justice and common sense must entail that it is impossible to infer that his knowledge of his own dishonesty was transferred to JDW.”

153.  McNicholas Construction Co Ltd v Customs & Excise Commissioners [2000] STC 553 is the first of the cases in which Rimer LJ was surprised to find Hampshire Land being used in the context of a claim against a company. McNicholas was a civil contractor and often had contracts to dig trenches for cable ducts. It had some employed staff but also used gangs of self-employed labourers. Customs & Excise suspected that McNicholas was paying fraudulent invoices for VAT on services which had never been provided, and was then claiming to deduct this as input tax. Customs & Excise raised assessments to recover lost tax and (so far as the assessments went back more than three years) had to establish dishonesty on the part of McNicholas. The Tribunal found that some of its site managers were complicit in the fraud, and that their dishonesty was to be attributed to McNicholas for the purposes of the VAT legislation.

154.  Dyson J dismissed McNicholas’s appeal. He approved the Tribunal’s reliance on the context of the VAT legislation as calling for a special rule of attribution. He also made some interesting observations touching on the “victim” issue (para 55):

“In my judgment, the tribunal correctly concluded that there should be attribution in the present case, since the company could not sensibly be regarded as a victim of the fraud. They were right to hold that the fraud was ‘neutral’ from the company’s point of view. The circumstances in which the exception to the general rule of attribution will apply are where the person whose acts it is sought to impute to the company knows or believes that his acts are detrimental to the interests of the company in a material respect. This explains, for example, the reference by Viscount Sumner in J C Houghton and Co v Nothard, Lowe and Wills Ltd [1928] AC 1 at p19 to making ‘a clean breast of their delinquency'. It follows that, in judging whether a company is to be regarded as the victim of the acts of a person, one should consider the effect of the acts themselves, and not what the position would be if those acts eventually prove to be ineffective.”

I have to say that I find it difficult to understand, as a matter of fact, why the fraud was “neutral” from the point of view of McNicholas. But the important point is Dyson J’s view that in principle “in judging whether a company is to be regarded as the victim of the acts of a person, one should consider the effect of the acts themselves, and not what the position would be if those acts eventually prove to be ineffective.”

155.  The last of the recent cases is the decision of the Court of Appeal in Bank of India v Morris [2005] BCC 739, one of the many cases concerned with the fallout from the collapse of BCCI. Mr Samant, a senior manager (but not a director) of the Bank of India, committed it to a series of transactions which amounted to assisting BCCI to defraud its creditors. The Court of Appeal upheld Patten J, who had held Bank of India liable under section 213 of the Insolvency Act 1986. Again, the statutory context guided the court’s approach to the appropriate rule of attribution. Patten J had been right to follow McNicholas (para 118):

“As in McNicholas, the acts of Mr Samant were not in fact targeted at BoI. He was acting for, and in what he apparently believed to be the interests of, BoI in seeking to gross up the balance sheet for the purposes of the year end accounts. The potential liability of BoI under s213 is irrelevant in deciding whether BoI was a victim of Mr Samant and whether his knowledge should be attributed to it for the purposes of s 213.”

156.  The Court of Appeal also commented on Arab Bank (para 124):

“In our judgment, the facts and the contractual context make Arab Bank a different case. It did not lay down a general principle of attribution of knowledge which governs this case of statutory liability to make compensation to victims of fraudulent trading. Arab Bank is not, as Mr Moss contended, authority for the proposition that knowledge of fraud can only be attributed to a company if the individual with the relevant knowledge was a director or directing mind of the company, or where it can be inferred from all the circumstances that the individual transferred his knowledge to the company or to its directing mind and will; nor is it authority for the proposition that there can be no attribution of knowledge where the company is a ‘secondary victim’ of the individual’s wrongdoing or breach of duty.”

Discussion of the ‘sole actor’ exception

157.  The ‘sole actor’ exception was applied (although not by that name) by the Privy Council (on appeal from Brunei) in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378. The airline had been defrauded by Mr Tan who was the principal director and shareholder in a travel agency company called Borneo Leisure Travel (“BLT”). The only other director and shareholder was Mr Tan’s wife. BLT owed fiduciary duties to the airline for money which it received, but misappropriated it for its own purposes. Lord Nicholls of Birkenhead formulated the issue (p.384) as “whether the breach of trust which is a prerequisite to accessory liability must itself be a dishonest and fraudulent breach of trust by the trustee.” He answered that question in the negative, adding (at p 392) “although this will usually be so where the third party who is assisting him is acting dishonestly” (as Mr Tan was). But as BLT was a one-man company it was itself dishonest (at p 393):

“Set out in these bald terms, [Mr Tan’s] conduct was dishonest. By the same token, and for good measure, BLT also acted dishonestly. [Mr Tan] was the company, and his state of mind is to be imputed to the company.”

Belmont was referred to in the Judicial Committee’s judgment, but only on the issue of the degree of improbity required for accessory liability.

158.  Berg was another clear case of a one-man company. It was not a case involving fraud, but Hobhouse J’s judgment explains why it can be seen as a sort of mirror-image of the Hampshire Land situation. In Hampshire Land the company secretary had been guilty of a serious breach of duty which he could be expected to keep quiet about, and not disclose to the directors and members of the building society. His guilty knowledge was not therefore attributed to the building society. In Berg, by contrast, Mr Golechha knew all about the irrecoverable loans, and there was no other individual concerned in the management or ownership of his company from whom his knowledge could be concealed, because there simply was no such individual—"a simple and unsurprising consequence,” as Hobhouse J put it, “of the fact that every physical manifestation of the company Berg was Mr Golechha himself.”

159.  In situations like those in Royal Brunei and Berg denial of attribution on “adverse interest” grounds would not serve the ends of justice. It would on the contrary operate as a reversion to the views of Lord Bramwell in Abrath v North Eastern Railway Company, reducing a one-man company to a mindless creature in the eyes of the law. Instead it has the mind of its human embodiment, though that is not treated as a separate mind for the purposes of the crime of conspiracy (R v McDonnell [1966] 1 QB 233, 245).

160.  As I have said, the concept of a one-man company calls for some explanation. It was severely criticized by Lord Macnaghten in the leading case of Salomon v Salomon & Co Ltd [1897] AC 22, 53:

“It has become the fashion to call companies of this class ‘one man companies.’ That is a taking nickname, but it does not help one much in the way of argument. If it is intended to convey the meaning that a company which is under absolute control of one person is not a company legally incorporated, although the requirements of the Act of 1862 may have been complied with, it is inaccurate and misleading: if it merely means that there is a predominant partner possessing an overwhelming influence and entitled practically to the whole of the profits, there is nothing in that that I can see is contrary to the true intention of the Act of 1862, or against public policy, or detrimental to the interests of creditors.”

161.  But Salomon’s case was not concerned with the attribution of any state of mind to Mr Aron Salomon’s company. On the contrary, it was argued (successfully at first instance and in the Court of Appeal: Broderip v Salomon [1895] 2 Ch 323) that the company was a sham, a mindless mask for Mr Salomon as the real owner of the business. In this appeal, by contrast, the issue is the attribution to S & R of a dishonest state of mind. Where that is the issue the notion of a one-man company does become meaningful, as Royal Brunei demonstrates. In this context I would treat the expression as covering cases where there is one single dominant director and shareholder (such as Mr Tan in Royal Brunei, Mr Golechha in Berg, or Mr Stojevic in the present case) even if there are other directors or shareholders who are subservient to the dominant personality (such as Mr Tan’s wife in Royal Brunei, the inactive solicitor-director in Berg, or S & R’s nominee directors). I would also treat it as covering cases where there are two or more individual directors and shareholders acting closely in concert, such as the anonymised directors in Attorney General’s Reference (No 2 of 1982) or Mr Chappell and Mr Palmer in Brink’s-Mat. It may be simplest to propose a test in negative terms, on the lines of what Hobhouse J said in Berg, that is a company which has no individual concerned in its management and ownership other than those who are, or must (because of their reckless indifference) be taken to be, aware of the fraud or breach of duty with which the court is concerned.

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