Independent Trustee Services Ltd v GP Noble Trustees Ltd & Ors

Each of the parties to this appeal is the victim of a fraud. Between August 2007 and April 2008 a total of some £52m was misappropriated from various occupational pension schemes by their UK corporate trustees, GP Noble Trustees Limited (“GPN”) and BDC Trustees Limited (“BDC”). Following a trial in May 2010 Peter Smith J held that the frauds had been orchestrated by Mr Anthony Morris who set up a number of offshore companies into which the bulk of the trust assets were transferred. He also directly received a total of £4.89m of the misappropriated funds.

The appellant, Independent Trustee Services Limited (“ITS”), was appointed as trustee of the pension schemes by the Pensions Regulator in July 2008 and in November 2008 commenced proceedings against Mr Morris and 17 other defendants for the recovery of the trust assets. Judgment was handed down by Peter Smith J on 1^st July 2010 in which he held that Mr Morris was liable for £52m plus interest for dishonest assistance and was liable to account for the £4.89m which he had knowingly received. A full account of the fraud and of Mr Morris’s participation in it is contained in the judgment (see Independent Trustee Services Limited v GP Noble Trustees Limited & Ors [2010] EWHC 1653 (Ch)) but no further detail is necessary for the purposes of this appeal.

In September 1988 Mr Morris had married the respondent, Mrs Susan Morris. There are three children of the marriage. Mr and Mrs Morris separated in December 2003 and Mrs Morris commenced divorce proceedings in November 2004. A decree nisi was pronounced on 10^th February 2005.

In April 2001 Mr Morris had set up a company (The Money Portal PLC (“TMP”)) which had been capitalised by a loan raised on the security of the matrimonial home. Mr Morris owned about 27% of the issued share capital of the company which in March 2003 he placed into a Gibraltar-based settlement (the JVK Settlement) in favour of himself, his wife and their children. Following the breakdown of the marriage, Mrs Morris (and later the children) were excluded as beneficiaries and Mrs Morris believed that her husband was taking steps to dispose of the TMP shares. A freezing order was therefore obtained from Singer J in the ancillary relief proceedings on 14^th September 2005 which prevented Mr Morris from disposing of or dealing with the shares in TMP or any monies received from the company.

The ancillary relief proceedings were eventually compromised following negotiations between solicitors which culminated in the signing of minutes of order in January 2007. On 11^th February 2007 District Judge Black made an order which embodied the agreed terms and which recited that Mrs Morris accepted the provision made by the order in full and final satisfaction of all claims for lump sum, property adjustment and pension sharing orders which she might be entitled to bring against her husband. The order transferred the matrimonial home to Mrs Morris; directed Mr Morris to pay to Mrs Morris £300,000 by 31^st March 2007 and a further £900,000 by 31^st December 2007; and provided for periodical payments to Mrs Morris (including for the benefit of the children) together with the payment of school fees.

The decree absolute was pronounced on 12^th February 2007.

Later that year Mrs Morris saw a document which disclosed the transfer of significant sums of money between accounts held by Mr Morris in Switzerland. She was also told by her children that their father (who, by now, was living in Australia with his new partner) seemed to enjoy a standard of living which was inconsistent with his financial position as disclosed in the ancillary relief proceedings. Her evidence is that Mr Morris also told the children that he was about to sell his shares in TMP for £70m. What Mr Morris had not disclosed in the ancillary relief proceedings was the receipt of some £5.1m from the JVK Settlement in 2006. In April 2007 he received a further £9.8m from the same source.

On 1^st February 2008 Mrs Morris issued an application in the Family Division in which she sought an order that the order of DJ Black of 11^th February 2007 (“the 11^th February order”) be set aside and that there should be a re-hearing of her application made on 15^th September 2005 for ancillary relief. The grounds of the application were that her former husband had failed to make full disclosure of his assets in his form E and form M1 or of any significant changes in his financial position between the service of the form E and the making of the 11^th February order.

By now (unbeknown to Mrs Morris) the misappropriation of assets from the pension funds had begun. £30m was extracted on 14^th August 2007 followed by a further £22m in April 2008. As of then Mr Morris had still not paid the lump sums due under the 11^th February order by 31^st December 2007 and there were also significant arrears in the periodical payments. By 10^th July 2008 the total amount due, inclusive of interest, was £1,481,012.

On 14^th July 2008 Mrs Morris applied to Hedley J and obtained a worldwide freezing order against Mr Morris up to a limit of £25m which included his house in Australia and the monies held in his bank accounts wherever situate. On the same day Mr Morris paid to Mrs Morris’s solicitors the sum of £1,481,920 in respect of the arrears due under the 11^th February order using money held by Glencalvie Limited, one of his companies. In his judgment against Mr Morris and the pension fund trustees referred to earlier, Peter Smith J held that these monies were traceable out of the £52m extracted from the pension funds and that is common ground on this appeal. It is, however, also common ground that the source of the funds was unknown to either Mrs Morris or her solicitors at the time.

By July 2008 the misappropriation of the £52m was the subject of a criminal investigation and on 7^th October 2008 a restraint order was made against Mr Morris pursuant to s.41 of the Proceeds of Crime Act 2002. In the meantime, the freezing order granted by Hedley J in the ancillary relief proceedings was continued until further order. Finally, on 6^th November 2008 ITS commenced its own proceedings in the Chancery Division against Mr Morris and the former pension fund trustees having obtained a freezing order against Mr Morris in the sum of £52m on 4^th November.

Mrs Morris’s application to set aside the order of 11^th February was heard by Moylan J on 28^th April 2009: see [2009] EWHC 2156 (Fam). He decided that she should be given permission to make the application out of time and that there had been significant and material non-disclosure of assets by Mr Morris including the receipt by him of the £5.1m in late 2006 after the service of his form E statement of assets.

As the judge himself explained, an order for financial provision will only be set aside for material non-disclosure if it can be said that the non-disclosure complained of has led the court to make an order substantially different from the one which it would have made had the disclosure been given. But Moylan J was satisfied that this condition was met in the present case. He said that:

His judgment was given effect in an order finally drawn up on 9^th June 2009. This provided in paragraph 2 that:

On 7^th October 2009 Mr Morris applied to adjourn the hearing of the ancillary relief application until after the determination of the claim by ITS in the Chancery Division (“the Chancery Action”) and the criminal prosecution. The application was refused by Holman J who directed a hearing to take place on 13^th January 2010 preceded by a directions hearing on 26^th November 2009. He also ordered Mrs Morris to give notice of her renewed application for ancillary relief to ITS and the SFO and gave them permission to intervene in the proceedings if so advised. They were to attend the directions hearing but ITS was enjoined in the meantime from taking any steps to obtain judgment against Mr Morris in the Chancery Action.

At the directions hearing on 26^th November some of the issues which arise on this appeal began to emerge. Mr Spearman QC on behalf of ITS submitted to the judge that his client wished to trace its claim to the trust monies misappropriated from the pension funds into the £1.481m received by Mrs Morris on 14^th July 2008. ITS would contend that the rescission of the order of District Judge Black enabled it to assert a claim to those monies free of any defence which Mrs Morris might otherwise have that she had received the payment as a bona fide purchaser for value under the terms of the agreement to compromise her claim for ancillary relief. By the same token Mr Morris would not be entitled to credit in respect of the £1.481m against any higher sum which he might be ordered to pay when the ancillary relief application was re-heard. As trust money belonging to the pension funds, the £1.481m could not be brought into account either as part of the assets of the marriage or as a payment on account. On this basis ITS sought an order either that the hearing of the ancillary relief application should be postponed until after judgment in the Chancery Action or, alternatively, that Mrs Morris should not be permitted to take enforcement proceedings which were adverse to the ITS claim. In any event it sought the discharge of the injunction of 7^th October 2009 which prevented it from pursuing Mr Morris to judgment.

What Mr Spearman therefore proposed and Holman J approved was that the parties should attempt to reach an agreement under which ITS would have its claims to beneficial ownership of the £1.481m determined in the Chancery Action but Mrs Morris would be able to pursue her claim for ancillary relief without waiting for the Chancery Action to be disposed of. The solution achieved was embodied in a consent order made by Holman J on 13^th January 2010. After reciting the various applications I have referred to and the response of each party to them, the order provides that :

The substantive hearing of the ancillary relief application then proceeded, and on 19^th January Holman J gave judgment and made a new order that Mr Morris should pay a lump sum of £6m by 1^st April 2010 and £68,100 in respect of the arrears of periodical payments and school fees. By paragraph 2 of his order he also directed that the orders for periodical payments and school fees contained in paragraphs 3 and 4 of District Judge Black’s order should continue until payment of the lump sum of £6m and any accrued interest.

In his judgment (see [2010] EWHC 575 (Fam)) Holman J outlined the history of the matrimonial proceedings and the circumstances giving rise to the order of Moylan J setting aside the original order for ancillary relief made by the District Judge. He then described the competing claims to the £1.481m and the agreed order which arose out of the directions hearing:

On this basis the judge calculated the wife’s total assets (excluding the £1.481m) as £716,000 and those of the husband as £13.116m most of which was derived from the payments out of the JVK Settlement.

The trial of the Chancery Action took place in May 2010 and judgment was reserved and handed down on 1^st July. But at the conclusion of the trial on 24^th May Peter Smith J indicated that he could see no defence to a claim for the £31m which had been recovered to date and which had been paid into court as a result of an order made by HH Judge Thornton QC in January 2009 varying the terms of the original restraint order made in the criminal proceedings.

The judge therefore made an order declaring that various identified sums (now comprised within the £31m) were held on trust absolutely for the pension schemes and that other sums also held in court should be paid out as equitable compensation for Mr Morris’s dishonest assistance in the fraudulent breaches of trust which had occurred. These sums included an amount of £1,978,162.66 and one of US$330,699.98 which had been recovered from an account in the name of Mr Morris at Credit Suisse. For convenience, I will refer to them as the Credit Suisse monies.

These were not sums to which ITS made any proprietary claim on the basis that they had originally been extracted from or represented the proceeds of assets extracted from the pension funds as part of the fraud. They were therefore assets of Mr Morris which would have been available to meet his liabilities to other creditors including those to Mrs Morris under the new order for ancillary relief made on 19^th January. The Credit Suisse monies had been frozen by the bank itself when the original freezing order obtained by Mrs Morris in the renewed ancillary relief proceedings had come to the attention of the bank. They were then subject to the freezing orders made in the Chancery Action. Mrs Morris was not given notice of the judge’s proposed order of 24^th May and only discovered that it had been made when informed of it by the solicitors for ITS. The judge very fairly accepted that the failure to ensure that Mrs Morris was notified of his intended order was due to a mistake on his part. The consequence was that ITS had recovered the Credit Suisse monies under a final order of the court and they were no longer therefore available to satisfy the lump sum order which she had obtained unless Mrs Morris could succeed in setting the order of 24^th May aside.

She therefore applied for such relief on 30^th June 2010 relying on CPR 40.9 or, alternatively, CPR 3.1(7) as giving the court power to set aside the order. Her primary contention was that an award of the entirety of the Credit Suisse monies to ITS would breach the pari passu rule for the distribution of assets between unsecured creditors which had come into play as a result of Mr Morris’s impending bankruptcy. But the judge rejected this argument whilst accepting that he did have jurisdiction to entertain her application.

At the same hearing ITS made its own application to recover the £1.481m received by Mrs Morris under the 11^th February order. This was also dismissed by the judge for reasons which I will come to shortly. Both parties appealed but Mrs Morris’s appeal was compromised shortly before the hearing and I need say no more about it. What remains for decision is the challenge by ITS to the judge’s rejection of its claim to the £1.481m held by Mrs Morris.

As mentioned earlier, it is common ground that the source of the £1.481m payment was the £52m extracted by Mr Morris and his associates from the pension funds. ITS can therefore assert its beneficial interest in those monies by tracing them into funds held by anyone who is not able to present a valid equitable defence to the claim. In the case of Mrs Morris, her only defence was that she was a bona fide purchaser for value without notice. She had given value in the form of agreeing not to pursue any further claims for ancillary relief in return for the lump sum and other orders contained in the 11^th February order.

ITS does not quarrel with that and, had the 11^th February order and the compromise it embodied remained in place, it accepts that it could not enforce its tracing claim against the £1.481m. Its application to the judge was based on the fact that Mrs Morris had succeeded in having the 11^th February order set aside by Moylan J which she needed to do in order to be able to renew her application for ancillary relief. The effect of this is said to be that she can no longer rely on the bona fide purchaser defence to its claim and therefore cannot object to ITS’s right to trace into the monies which she holds.

Both before the judge and in his skeleton argument for this appeal, Mr Spearman submitted that the effect of Moylan J’s order was that Mrs Morris took back the consideration which she had provided by agreeing to the 11^th February order and therefore ceased with retrospective effect to be a purchaser for value. Her claims to ancillary relief were thereby resuscitated and restored so that, at least from the date of the consent order of 13^th January 2010, she continued to hold the £1.481m subject to the beneficial title of the pension schemes. The new order of Holman J for ancillary relief made on 19^th January did not alter this because (under the 13^th January order) the £1.481m was not taken into account as part of the assets of Mr Morris available for distribution and, as a result of the judgment of Peter Smith J of 1^st July 2010, it cannot now be so.

Part of the reasoning in support of these submissions is based on an analogy with the position which obtains when a contract is rescinded for misrepresentation. There is, submits Mr Spearman, a giving and taking back on both sides which necessarily includes a re-vesting of any beneficial interest in property which passed under the rescinded transaction. He relies on the principles outlined by Rimer J (as he then was) in Shalson v Russo [2005] Ch 281 to the effect that, on a rescission of the contract, the court will treat the equitable title as re-vesting in the party who has been defrauded of his property and can therefore compel its re-transfer. In a case such as this where the property has passed from the person guilty of making the representation or non-disclosure then the same result can be achieved through a process of restitutio in integrum by the court making consequential orders for the re-vesting of the property: see Alati v Kruger (1955) 94 CLR 216 at page 223 approved by the Court of Appeal in O'Sullivan v Management Agency and Music Ltd [1985] QB 428 at page 437.

The judge did not accept that assets received from the representor were necessarily re-vested in him on the rescission of the contract. His analysis was as follows:

Later in his judgment he said this:

I find some of the judge’s reasoning difficult to follow not least because, by the time of the hearing of ITS’s application, the result of the renewed application for ancillary relief was known. Although the judge refers to the order of 13^th January 2010, he appears to place no weight on the fact that, under that order, no claim was made to the £1.481m as part of the husband’s assets and the monies could not be taken into account unless ITS failed to establish its beneficial title to them. It is also not clear why the judge thought that the only claim which ITS could bring was one through Mr Morris. Although he had paid the £1.481m to Mrs Morris under the order of 11^th February, he never acquired a title to those monies free of the beneficial interest now asserted by ITS on behalf of the pension schemes and if the legal title vested in Glencalvie Limited he had no title to the monies at all. ITS is not therefore limited to the title which Mr Morris can assert against his former wife. It can enforce its own title against the monies subject only to her being able to claim that she is a purchaser for value. No question of set-off can therefore arise.

I do, however, accept that the analogy with a rescinded contract is an imperfect one and, in my view, does not accurately describe the process which is involved when the court is asked to set aside an order for ancillary relief made in terms which the parties have on advice agreed.

First and foremost, the making of any order for ancillary relief involves an exercise by the court of its statutory jurisdiction under the Matrimonial Causes Act 1973. The court therefore has to be satisfied that the provision made under the order is a proper exercise of those powers. The function of the court is not merely to rubber stamp the agreement which the parties have made. It is therefore a different exercise from what occurs when parties to a contractual or similar dispute reach a settlement which the court gives effect to by the consent order which it makes. This is made clear in the judgment of Thorpe LJ in Xydhias v Xydhias [1999] 1 FLR 683 at page 691:

At page 692 he went on:

The statement by Thorpe LJ (at page 691) that the only way of making an agreement to pay money enforceable between husband and wife was to convert it into an order of the court has been criticised in a subsequent decision of the Court of Appeal as too wide: see Soulsbury v Soulsbury [2007] EWCA Civ 969; [2008] Fam 1. But nothing in the later judgment detracts from the proposition that the making of the order has to be a proper and fully informed exercise of the powers contained in the 1973 Act and that, once made, it is the order which therefore governs the rights and obligations of the parties.

The emphasis on the order rather than on the prior compromise as governing the parties’ rights in the future is obviously relevant when one comes to consider the consequences of it being set aside for misrepresentation or material non-disclosure. It is well established that an order for ancillary relief may be set aside on either ground: see Robinson v Robinson [1982] 1 WLR 786; Jenkins v Livesey [1985] 1 AC 424. The basis for setting aside the order on these grounds is that the court has been deprived by the non-disclosure or the falsity of the material which has been disclosed of the ability to exercise its powers correctly under the 1973 Act by taking all relevant matters into account.

Because the parties’ rights are regulated by the order it would seem to follow that their entitlement to assets transferred under an order which is set aside and therefore ceases to have effect from non-disclosure cannot continue to be based on the order once it is revoked. The only way in which they can seek to retain those assets is by persuading the court to re-exercise its discretion in their favour on the renewed application for ancillary relief.

In this case, as indicated in the passage from his judgment which I have quoted, Moylan J set the 11 ^th February order aside. One of the issues which has arisen, although a subsidiary one, is whether the apparent retention of the order for periodical payments means that the judge did not set aside the entirety of the 11 ^th February order. The practical consequence of a finding that paragraphs 3 and 4 of the 11 ^th February order continued in effect is that the part of the £1.481m which represented the arrears of periodical payments would be unaffected by Moylan J’s order and would therefore remain protected from the claim now made by ITS.

My own view is that Moylan J set aside the entirety of the 11 ^th February order. That is what he was asked to do and what he had to do in order to free Mrs Morris from the effects of that order. Although in terms the preservation of paragraphs 3 and 4 of the 11 ^th February order, it was in substance the making of a new interim order for periodical payments in identical terms. The same must go for Holman J’s order of 19 ^th January 2010 which continued the order for periodical payments until payment of the lump sum of £6m which has not so far occurred. But the continuation of the order for periodical payments does not in any event impinge on title to the £1.481m. One of the judge’s reasons for concluding that title to the £1.481m did not automatically re-vest in Mr Morris when the lump sum order of the District Judge was set aside was that it might become liable in his hands to the claims of his other creditors on his bankruptcy. Although this would undoubtedly be an unfortunate consequence of the setting aside of the order, it seems to me that this could follow if (unlike in this case) the contest for the asset lay between the wife and the husband’s unsecured creditors. In Hill v Haines [2007] EWCA Civ 1282 the Court of Appeal had to consider whether the husband’s trustee in bankruptcy could recover property transferred to his wife as part of an order for ancillary relief under s.24 of the Matrimonial Causes Act 1973 on the ground that it was a transaction at an undervalue. That question was answered in the negative on the basis that the property transferred was to be treated as the equivalent in value to the rights of the relevant spouse to share in the assets of the marriage. Sir Andrew Morritt C said that:

To the same effect Thorpe LJ at paragraphs 43-47 said that:

These extracts from the judgments are important for present purposes because they indicate that an order for ancillary relief may not be immune from challenge by a trustee in bankruptcy if it subsequently transpires that the wife gave less in value than she received or there was collusion between the parties. The judge was therefore wrong in my view to hold that the rescission of an order for ancillary relief on grounds of non-disclosure necessarily preserved the wife’s entitlement to the assets already transferred to her. Once the lump sum or property transfer order is set aside by the wife or the trustee (on an application under s.339 of the Insolvency Act) the court can be asked by the trustee to order the re-transfer of the assets into the husband’s estate and the only answer available to the wife is to renew her own claim for ancillary relief against the same assets. The judge will then be faced with competing claims between the wife and the husband’s creditors of a kind which is not unfamiliar.

I do not, however, accept the submission that the setting aside of the order for ancillary relief has the effect of automatically re-vesting title in the husband. The judge was, I think, right on this point. Title is not, without more, re-vested in the husband any more than the original order vested title in the wife. When the order is set aside it is for the court to give effect to that order by making whatever consequential orders are necessary to restore the parties to their former positions. In each case the parties are ordered to transfer or re-transfer the property in question and it is the act of transfer which passes or restores the transferee’s title.

In the present case Moylan J (for perfectly obvious and understandable reasons) did not order Mrs Morris to re-transfer the £1.481m or the matrimonial home to her former husband and I accept Mr Lewis QC’s submissions that the title to these assets which she gained on their earlier transfer was not re-vested in him whether beneficially or otherwise. But in my view that is immaterial to the outcome of this appeal. The claim by ITS to the £1.481m is based on its own beneficial title derived from the pension schemes and, as explained earlier, it can enforce that title independently of and in priority to any claim by the husband’s estate on the basis of the judgment against Mr Morris of 1^st July. The real issue therefore is not whether the £1.481m has re-vested in Mr Morris, but whether Mrs Morris can resist the claim of ITS to the money in her possession by continuing to assert that she is a purchaser for value.

After we had made our judgments available to the parties for correction we received a request from Mr Twigger QC (who had been recently instructed on behalf of Mrs Morris) to postpone their handing down until he had been given the opportunity of making further submissions on a point that was not argued during the hearing of the appeal. This is whether the receipt of the £1.481m by Mrs Morris as a purchaser for value without notice continued to govern her title to those monies notwithstanding the subsequent rescission of the 11^th February order. Mr Twigger drew our attention to a statement in the 7^th edition of Megarry & Wade on The Law of Real Property (at 8-025) that:

In order to understand the scope of this submission we reluctantly agreed to allow Mr Twigger to put in further written submissions on the point and invited Mr Spearman to reply to them. This has resulted in our receiving extensive written arguments on behalf of Mrs Morris and two further bundles of authorities. Regardless of the merits of the point now raised, I am bound to record that it is completely unacceptable for the Court of Appeal to be faced with this situation following the conclusion of the oral argument and it is only the potential importance of the point for other cases that has persuaded me that we should receive argument on an issue which could and should have been dealt with as part of the substantive appeal.

In its simplest form, Mr Twigger’s submission is that once the £1.481m had been paid to Mrs Morris under the order of 11^th February, any subsisting equitable title of ITS was lost and cannot be resuscitated by the rescission of that order. The premises for this conclusion can be broken down into a number of statements of principle.

the question of notice is to be determined at the time when the legal estate passes (i.e. the date of purchase): see e.g. Macmillan Inc v Bishopsgate Investment Trust plc (No. 3) [1995] 1 WLR 978 at p. 1000;

as between vendor and purchaser, title passes even if there is a subsequent total failure of consideration and is not re-vested in the vendor: see Westdeutsche Landesbank Girozentrale v Islington BC [1996] AC 669 which confirmed that a claimant under such a contract did not have a proprietary remedy based on a resulting trust because the relevant time for testing the conscience of the transferee was that of his receipt of the property which pre-dated the failure of consideration;

where a bona fide purchaser subsequently transfers the property to a volunteer or even to persons with notice of a prior equitable interest, those transferees nevertheless take free of such interests: see Wilkes v Spooner [1911] 2 KB 473 where (at p. 483) Vaughan-Williams LJ said that:

On the basis of these principles, Mr Twigger submits that any beneficial title in the £1.481m which ITS could have asserted was extinguished when Mrs Morris received the money from her husband pursuant to the 11^th February order and that her successful application to have that order rescinded so as to be able to pursue a fresh claim for ancillary relief did not change the position. There was (for the reasons I have explained in paragraph 43 above) no automatic re-vesting of title in Mr Morris (and therefore in ITS) and Mr Twigger submits that no trust arose in favour of ITS so as to give it a proprietary interest which it could therefore enforce against the money remaining in Mrs Morris’s hands. Absent such a proprietary interest, its claim to trace the £1.481m must fail.

I have no difficulty in accepting the first three of these propositions but it is misleading to treat the fourth as unqualified. As Vaughan-Williams LJ pointed out in Wilkes v Spooner (which is the basis of the principle set out in Megarry & Wade), an established exception exists in the case of an actual or constructive trustee who subsequently re-acquires the property from the bona fide purchaser. In such cases the original title of the beneficiary is not permanently extinguished by the sale to the bona fide purchaser and is either revived or remains enforceable against the trustee. Had Mrs Morris transferred the £1.481m back to her husband following the rescission of the 11^th February order ITS could therefore have maintained its tracing claim against the money in his hands.

The thrust of much of Mr Twigger’s new argument is that any deviation from the principles I have set out would create uncertainty for third party purchasers who have acquired title from persons in the position of Mrs Morris. They would, he submits, acquire only defeasible interests rather than a title absolute if the rights of the original beneficial owner could be revived by a subsequent failure of consideration or its equivalent. That seems to me to overstate the problem. Regardless of whether Mrs Morris’s title could subsequently be impugned, any transferee from her for value without notice would continue to be protected in their own right. They would be able to rely upon their own status as bona fide purchasers for value without notice in relation to any claim by ITS and their title would continue to remain unimpeachable regardless of any change in Mrs Morris’s position in relation to the money remaining in her hands. This is the point made by Rimer J in Shalson v Russo in the passage quoted earlier from the judgment of Peter Smith J.

The issue therefore is whether Mrs Morris should be entitled to rely on the protection of the 11^th February order to confirm her status as a bona fide purchaser when she has herself taken steps to have it set aside. Despite Mr Twigger’s recent submissions, I remain of the view that she lost that protection when the order was rescinded and that she is not able to rely upon it in the current proceedings. As explained earlier, the order can only be set aside if it can be shown that the non-disclosure or misrepresentation was such as to make it an invalid or incomplete exercise of the statutory powers contained in the Matrimonial Causes Act. The rescission of the order undoes that exercise of discretion and leaves the court free to re-exercise the discretion on a properly informed basis.

Mr Twigger likens the position to one involving a subsequent failure of consideration but that is not, in my view, the right analogy. So far as any contractual analogy is appropriate, the most relevant one is the rescission of a contract of sale for fraud. If Mrs Morris had acquired the property of ITS under a contract of sale with her husband which was later rescinded for fraudulent misrepresentation, I do not see how she could thereafter rely upon that contract as giving her a clear title to the assets she acquired. Her election to rescind the contract would have reversed the process by which such a title was acquired and thereby exposed the property remaining in her hands to the prior equities which affected it.

Rescission avoids the contract ab initio. In relation to assets transferred to the representor, the better view (encapsulated in the authorities reviewed by Rimer J in Shalson v Russo) is that title re-vests in the representee retrospectively once the election to rescind the contract is made. A convenient statement of principle can be found in the judgment of the Court of Appeal in Twinsectra Limited v Yardley [1999] Lloyd’s Rep Bank 436 at pages 461-2:

The necessary condition for obtaining the assistance of equity in the rescission process is that the representee should make counter-restitution. In a contractual case this will ordinarily involve him restoring to the representor any benefits which he has himself received under the contract or their equivalent value.

A convenient statement of the processes involved is set out in the judgment of Dixon CJ in Alati v Kruger (supra) at p. 457 which, as mentioned earlier, was cited with approval by the Court of Appeal in O'Sullivan v Management Agency and Music Ltd . He said in relation to assets required by the defendant party that:

If in a case of this kind the representee had transferred to the representor assets which were themselves subject to a prior equity in his hands but which were received by the representor as a bona fide purchaser for value, I cannot see how on the subsequent rescission of the contract for misrepresentation the representee could rely on the status of the representor as a bona fide purchaser for value in relation to the prior equitable interests of the third party in order to defeat those interests once title had been re-vested in him. If the contract is avoided ab initio he should in principle take back the asset subject to the prior equities.

In relation to assets which the representee has obtained from the representor under the rescinded contract, the same consequence ought in principle to apply. The representee could, as a result of electing to rescind, be required to return any assets transferred to him under the contract and in the representor’s hands they would be subject to any prior equities.

The rescission of an order of the court is not an identical process. There is no automatic re-vesting although the same can be achieved by subsequent orders of the court. But where there are similarities is in the effect which the order for rescission has. The order of 11^th February was set aside by Moylan J and thereupon ceased to have any effect. The ability of Mrs Morris to re-new her ancillary relief claim depended upon there having been no effective exercise of the statutory powers under the 11^th February order. In Jenkins v Livesey [1985] 1 AC 424 Lord Brandon said (at pages 437 and 440) that unless the court is provided with complete and up-to-date information on matters that are relevant to the exercise of its discretion under s.25 of the Matrimonial Causes Act then it cannot lawfully exercise that discretion. It must follow that there was no proper exercise of that power in this case and that by setting the 11^th February order aside the court recognised it as a nullity.

It was submitted to us that an order of a court of competent jurisdiction continues to have effect until set aside whether on appeal or, in this case, on grounds of material non-disclosure: see Isaacs v Robertson [1985] 1 AC 97. That is undoubtedly true in the sense that a person commits no wrong by acting in reliance on the order and must continue to comply with it until it is set aside: see Hillgate House Ltd v Expert Clothing Services & Sales Ltd [1987] 1 EGLR 65. Similarly property rights created in favour of third parties in reliance on the order in the interim period would remain valid notwithstanding its subsequent rescission: see London Borough of Brent v Botu [2000] All ER (D) 298. But once it is set aside the order cannot be relied upon by the parties to it as determinative of their rights and Mrs Morris is not entitled, in my view, to claim that she was a purchaser for value by reason of the order any more than she would be entitled to rely upon a contract which she had succeeded in having set aside for fraud. The fact that Moylan J did not order the re-transfer of the £1.481m to Mr Morris is irrelevant. What matters is that the order of 11^th February has gone and with it Mrs Morris’s right to rely upon it.

Therefore, although it is accepted that Mrs Morris falls to be treated as a bona fide purchaser in relation to her acquisition of the £1.481m under the 11^th February order, I am not persuaded that her position following the rescission of that order should be strictly equated even with the position that would obtain under a contract rescinded for fraud. As explained earlier in this judgment, her rights to retain the £1.481m depended not upon the agreement which preceded the 11^th February order but on the order itself. The rescission of that order restored Mrs Morris to the position she was in before the order was made which was a pre-requisite to her ability to restore her application for ancillary relief. Consistently with this, she could not, in my view, rely upon that order for the purpose of maintaining status as a bona fide purchaser for value and so treat the £1.481m as an asset of the marriage which would be taken into account for the purpose of her new application. As the dicta in Hill v Haines indicate, the effect of rescission is to set the order aside for all purposes.

Nor in fact did Mrs Morris rely on the 11^th February order in her renewed application for ancillary relief. The course she took was to agree that the £1.481m should not be treated as an asset of the marriage unless and until it was determined in the Chancery Action that it was not an asset “to which ITS would have had a proprietary claim”. In July 2010 Peter Smith J decided that the £1.481m did represent part of the assets of the pension funds and Mrs Morris did not intervene at the trial of the action to assert the title she now relies upon even though she was given permission to do so.

The court has therefore already recognised the rights of ITS in the order which it made on 13^th January 2010 and has thereby given effect to the rescission of the 11^th February order. In the light of these events we are not faced with issues about whether a trust has arisen in favour of ITS (whether resulting or constructive) but with the much simpler issue of whether Mrs Morris can now rely on the bona fide purchaser defence based on the 11^th February order. If, as I believe, that defence is not now open to her then she has no answer to the tracing claim in the light of the decision of Peter Smith J in the Chancery Action. The answer to Mr Twigger’s submission that ITS can only re-assert its beneficial interest in the £1.481m if the court re-imposes such a trust on the money remaining in Mrs Morris’s hands is the one given by Lloyd LJ in his judgment (particularly at paragraph [113]); namely that the title of the pension funds has continued to subsist and in the present circumstances is no longer capable of being defeated by the bona fide purchaser defence. His judgment contains an illuminating analysis of the law on this point which I agree with.

There is no doubt that the consequences of this were both unforeseen and unintended when the application was made to set the District Judge’s order aside. Mrs Morris is now left to compete with the other creditors for a share in her husband’s assets. But, as a matter of authority and principle, that is in my view the consequence of Moylan J’s order and issues of discretion do not really arise. Mr Spearman submits that his client’s claim ought in any event to be preferred because it prevents Mr Morris from being able to use the proceeds of his fraud to meet his personal liabilities. If policy considerations of that kind are decisive of the appeal I can see much force in that argument. But, in the event, it is unnecessary for him to rely upon it.

I would therefore allow the appeal.

Mr Twigger’s new submissions raised two further matters which I must deal with. Mrs Morris has now put in evidence detailing what has become of the £1.481m since she received it. Some of this money has been used to purchase her current home and to meet other liabilities. As a result, there are issues between the parties as to whether Mrs Morris has any personal liability to account for the £1.481m and whether the claim by ITS (if limited to a proprietary claim) can succeed against all or any of her current assets.

The scope of this appeal has been limited to a consideration of whether the judge was right to dismiss ITS’s claim on the basis that Mrs Morris remains the lawful owner of the £1.481m free of any prior equity in favour of ITS. The judge dealt with this as in effect a preliminary issue about beneficial entitlement. We have not been addressed on any issues of personal liability or on whether Mrs Morris has any other answers to the tracing claim.

It goes without saying that the ability of ITS to trace the £1.481m into the hands of Mrs Morris on the basis of a subsisting beneficial interest may not be sufficient in itself to impose upon her a personal liability. The rescission of a contract for misrepresentation or breach of fiduciary duty does not impose a retrospective liability for breach of trust: see Bristol & West Building Society v Mothew [1998] Ch 1. If ITS intends to pursue such a claim it will have to be properly pleaded and determined in subsequent proceedings in the Chancery Division. The judge who conducts that hearing will have to determine the extent to which the £1.481m paid to Mrs Morris remains traceable and whether ITS has a remedy (either for an account or the payment of interest) in respect of any monies which are irrecoverable as part of the tracing process.

The task of this court is simply to determine whether Mrs Morris has a defence to any tracing claim on the basis that she received the £1.481m as a bona fide purchaser for value without notice. To that end, the order should simply declare that ITS is beneficially entitled to the traceable proceeds of the £1.481m and remit all consequential matters to the Chancery Division. In the first instance it should return to a Master for further directions.

Mr Twigger accepts that if we conclude that the bona fide purchaser defence is not available to Mrs Morris, ITS will ultimately be able to show that some of her assets constitute the traceable proceeds of the £1.481m. He does not therefore oppose an order for an interim payment of £500,000 from Mrs Morris’s S&W savings account and I would make an order for such a payment within 21 days.

I agree with both judgments.

Lord Justice Patten has set out the facts and the issues in this appeal, and has explained its history, which accounts for the regrettable lapse of much more time than normal between the hearing of the appeal and the delivery of judgment.

The arguments addressed on the respondent’s behalf by Mr Twigger in his written submissions elaborated on points which had been touched on in the skeleton argument for the respondent submitted by Mr Lewis, but which were not the subject of any oral argument at the hearing. In those circumstances, it might have been proper for the court to decline to accept the further submissions. I agree with the comments of Patten LJ on this situation at paragraph [46] above. Some of the problems which can arise from the draft judgment procedure have recently been discussed by Kirsty Hughes at (2011) 127 LQR 565. She observes at page 585 that the procedure has serious implications for the judicial process and otherwise which need to be fully considered. That observation is no doubt well justified, but this is not a suitable occasion to contribute to that consideration.

Mr Twigger’s points developed the original submissions on behalf of the respondent with a deeper analysis, raising several new points. The case is unusual in factual respects, and there is no close analogy in any previous decided case of which we have been made aware. We were provided with a number of authorities including some academic writings. I have carried out some independent research, following up leads found in the authorities supplied. I have not found any text in which the particular point is foreseen or addressed in the observations of judges or academic writers. It is therefore necessary to have recourse to basic principles.

The essence of the situation is as follows:

The first and second defendants, GP Noble Trustees Ltd and BDC Trustees Ltd, held assets as trustees of nine pension schemes, which were invested in a conventional manner. In breach of trust, they liquidated the assets, or most of them, and paid the funds away. So far as concerns the money now at issue, they paid £22 million to a company controlled by Mr Morris, referred to as MUFF, the 18th Defendant. (This was the second stage of the operation by which a total of £52 million was extracted from the pension funds.) MUFF in turn paid £1.495 million, partly directly and partly indirectly, to another company, Glencalvie Ltd, the 25th Defendant (also controlled by Mr Morris). That company then paid £1,481,920.53 to Mr Morris’ solicitors, Alexiou Fisher Phillips, on 14 July 2008. This was to be (and was) paid straight to Mrs Morris’ solicitors, in satisfaction of the liability under the consent order which had been made by DJ Black in February 2007. All of these payments and transfers were in breach of trust. Therefore, at least until the moment of payment to Mrs Morris’ solicitors, the beneficial interest of the beneficiaries under the pension scheme trusts survived the various dispositions. No holder of the money up to that moment could have resisted ITS’ claim.

If the matter had rested there, however, Mrs Morris’ title to the funds would have been unassailable. She had no notice of the breach of trust at the time when her solicitors received the money on her behalf and, because the payment to her was made in satisfaction of Mr Morris’ liability under the court order, she acquired the legal title as a purchaser and for value (see Hill v Haines [2008] Ch 412 as to value in this context). So she was in the category of bona fide purchaser for value without notice. As such she would have had a complete defence to a claim against her in respect of the funds which she had received.

In February 2008 she had applied to the Family Division for an order setting aside the consent order of DJ Black, on the ground of non-disclosure of assets on the part of Mr Morris, namely the proceeds of the sale of, and generally the value of, his interest in the Money Portal Ltd. There is no reason to suppose that this was other than a genuine, proper and successful business.

In November 2008 the appellant, ITS, the new trustee of the nine pension schemes, brought proceedings against the former trustees, Mr Morris and many others (but not Mrs Morris), to reclaim the assets.

In April 2009 Moylan J set aside the consent order made by DJ Black, directed a rehearing of the ancillary relief application, and ordered Mr Morris to pay periodical payments in the meantime. He did not order Mrs Morris to pay anything back to Mr Morris. No doubt it was expected (rightly in the event) that on a rehearing Mr Morris would be ordered to pay a larger sum to her. Nevertheless, the consent order having been set aside, the basis on which the payment had been made to her was removed.

During 2009 ITS discovered the facts which showed that trust money was the direct source of the £1.48 million paid to Mrs Morris’ solicitors. Notice of the trustee’s claim was given to Mrs Morris by a letter to her solicitors dated 18 November 2009. The precise date on which she first had notice of the claim does not matter for present purposes, though it may do so at a later stage; for now I take it to have been by way of that letter. She was aware before receipt of that letter of the investigation into Mr Morris’ dealings with the assets extracted from the pension funds, and of the claim by ITS against the former trustees, Mr Morris and others, but (as I understand it) not until then of any assertion that the money that she had received had come from the pension funds. There has not yet been any investigation of what happened to the £1.48 million in Mrs Morris’ hands in the meantime.

If the £1.48 million had been paid to Mrs Morris without having been required under the court’s order (an unlikely hypothesis, of course, but useful to test the position) she would not have given value, and she would therefore have been a volunteer, albeit innocent. The beneficial title of the beneficiaries under the pension schemes would still have subsisted in the money after the payment to her. Therefore, she would not have had a defence to a proprietary claim by the trustee for the recovery of the money. Being innocent, she would not, on the other hand, be liable to a personal claim.

Thus, to the extent that she had any of the money, or its traceable product, in her hands at the time she received notice of the trustee’s claim, she could be ordered to pay it over to the trustee. On the other hand, to the extent that, before she had notice of the claim to the funds, she had disposed of any of the money without receiving traceable proceeds, she would not be liable to the trustee. That is shown by the decision of Millett J in Agip (Africa) Ltd v Jackson, [1990] Ch 265 at 290-1, and by that of Sir Robert Megarry V-C in Re Montagu’s Settlement Trusts [1987] Ch 264. Millett J held that a volunteer who has received trust property is not liable to account for the trust property if he has parted with it without having previously acquired knowledge of the existence of the trust. Thus, it is clear that, if the proprietary claim against the respondent is justified, it only extends to money (or its traceable proceeds) which was in her hands at the time she was given notice of the trustee’s claim. This could be significant as regards the relief to which the trustee would be entitled. (It is not necessary for present purposes to consider what amounts to sufficient notice to the holder of the assets in this context.)

So, in the case of an innocent volunteer recipient of money which is the product of a breach of trust, the legal title is in the recipient but the equitable title remains in the beneficiaries of the relevant trust throughout. Conventionally, in a situation where the legal title to an asset is held by A but the beneficial ownership is in B, A is regarded as holding the asset on trust for B. To say that, however, is only the beginning of the analysis because it does not tell you what duties A owes to B in respect of the asset. The fact that A is not liable to account to B for the asset if A has parted with it (without receiving traceable proceeds) at a time when he had no knowledge of B’s interest shows that this is not a case of a trustee who is subject to strict liability.

This situation is inherently unstable in two respects. For so long as A has no notice of B’s interest, B’s interest is fragile because A may dispose of the property in a way which leaves no traceable product. On the other hand A’s immunity from claims in respect of his dealings with the assets is also at risk because it can be brought to an end (for the future) if notice is given to him of B’s interest.

In Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 (which I will call Westdeutsche Landesbank) Lord Browne-Wilkinson said at page 707 that innocent receipt by A of property in which B has a beneficial interest, A being unaware of that interest, “does not by itself make [A] a trustee despite the severance of the legal and equitable titles”. He said this on the premise, stated at page 703, that if A held on trust despite his ignorance and therefore innocence, he would be personally liable, regardless of fault, for any subsequent payment of the money to any third party even though at the time of the payment he was still innocent of B’s interest. He recognised at page 707E-F that whether A is regarded as a trustee may be no more than a semantic question, so long as it is accepted that A’s accountability does not extend to property which left A’s hands before he had notice of B’s interest. I take note of a warning on this point in Underhill & Hayton, Law of Trusts and Trustees, 18^th edition, at paragraph 28.4.

Despite what Lord Browne-Wilkinson said, it seems to me that it is appropriate to speak of A holding on trust for B in this situation, provided that one is not misled into thinking that to call the relationship one of trustee and beneficiary tells you, of itself, what the duties and liabilities of the trustee are. Since the trust arises from the asset having been extracted, in breach of trust, from a fund held on express trusts, it seems correct to characterise the trust as a constructive trust, rather than a resulting trust.

Thus, if the respondent had not given value for the payment, she would, in my view, have been a trustee of the money, that is to say a constructive trustee, holding it on trust for the beneficiaries under the pension fund trusts. She would have been under no relevant duty as regards the money until she had notice of the interest of the beneficiaries. Once she had such notice, she would be under a duty not to part with the remaining funds (and the traceable proceeds in her hands of any which had already gone) otherwise than by restoring them to or for the benefit of the beneficiaries, in the present case by payment to the new trustee, the appellant. That is the equivalent of the relief to which the appellant would be entitled by way of its proprietary claim.

I am fortified in my respectful disagreement with Lord Browne-Wilkinson’s observations in Westdeutsche Landesbank by a reading of “Restitution and Constructive Trusts”, by Sir Peter Millett, (1998) 114 LQR 399, at 403 to 405, by the observations of the Privy Council in Hardoon v Belilios [1901] AC 118, at 123, by Simon Gardner’s Introduction to the Law of Trusts (3^rd edition, 2011) at pages 25 to 27, by Remedies for Knowing Receipt, by Charles Mitchell and Stephen Watterson, in Constructive and Resulting Trusts, ed. Charles Mitchell (2010), page 115, particularly at pages 116 to 120, and the cases there cited, which include observations of Millett LJ, in passing, in R v Chester and North Wales Legal Aid Area Office, ex parte Floods of Queensferry Ltd [1998] 1 W.L.R. 1496 at 1500H, and by paragraphs 28.1 to 28.10 of Underhill & Hayton, Law of Trusts and Trustees, 18^th ed. I have also gained assistance on the points arising on the appeal generally from several of the papers collected in Breach of Trust, ed. Peter Birks and Ariane Pretto (2002), in particular Overreaching by David Fox and Transfers by Lionel Smith.

In Foskett v McKeown [2001] 1 AC 102, at 108-9, Lord Browne-Wilkinson said that equitable interests of beneficiaries in an equivalent position to those of the beneficiaries of the pension fund trusts in the present case “are also enforceable against whoever for the time being holds those assets other than someone who is a bona fide purchaser for value of the legal interest without notice or a person who claims through such a purchaser”. It may not matter whether the holder of the legal title who is liable to be sued so as to enforce such rights is or is not to be categorised as a trustee. What does matter is the recognition of the right to sue and thereby to enforce those rights, in relevant circumstances. Even if Mrs Morris (as, hypothetically, a volunteer) was not to be regarded as having been a trustee before she had notice of the beneficiaries’ interest, or for that matter later, that would not affect the nature of the duties to which she would have been subject at the different stages, before and after having notice, as set out in paragraph [76] above.

One of Mr Twigger’s new points was a contention that, first, Mrs Morris cannot have been a trustee at a time when she was entitled to dispose freely of the assets received and to mix them with her own assets and, secondly, that because she was in that position before she had notice of the claim that the money had been the subject of a breach of trust, she cannot later have become a trustee, either upon the setting aside of DJ Black’s order or upon receiving notice of the trustee’s claim. In the light of what I have said about the position of an innocent volunteer recipient of trust assets transferred in breach of trust, before he has notice of the trust interest, it does not seem to me that the first part of this proposition is correct. Since such a volunteer cannot be made accountable for relevant assets disposed of at a time when he had no notice of the adverse interest, even though the beneficial interest of the beneficiaries continued to exist, the volunteer is (for the time being) able to mix the trust assets with his own, with impunity, and to dispose of them freely, despite the beneficiaries’ continuing beneficial interest. So in that situation the volunteer, even if regarded as holding the property on trust, is not constrained by any imposed duty as regards his free powers of dealing with the assets, until he has notice of the inconsistent interest of the beneficiaries. Of course, if he gives a relevant asset away, the beneficiaries may be able to follow it into the hands of the later recipient, and if he disposes of it for value, then he may receive another asset which would represent the trust property in his hands, and the beneficiaries may then be able to assert a claim to that asset by way of tracing. Once he has notice of the beneficiaries’ adverse interest, he is no longer free to deal with the assets as he pleases. At that stage there is no conceptual difficulty or oddity in calling him a (constructive) trustee, at least as from that time.

However, it seems to me that it is not particularly sensible, for present purposes, to focus on whether, and if so when and in what circumstances, the recipient of trust assets is properly to be characterised as a trustee. It is more useful to address directly the question whether the prior equitable interests of the beneficiaries under the original trust can be asserted against the recipient.

That depends on whether the respondent can successfully deploy the defence that she is a bona fide purchaser for value without notice. It is clear that this is a defence for her, the onus being on her to raise it and to establish it; it is not up to the claimant to prove that she does not have that status. This is not a case in which anything is likely to turn on evidential points, but it seems to me that it is important to keep it in mind that this is how the point works.

So, the question is whether she can establish that defence when the value that she gave at the time of receipt of the legal title to the money was given under a transaction (I use the word in a broad sense, with support from Hill v Haines [2008] Ch 412) which was voidable and has since then been avoided. It may or may not matter at whose instance it was avoided, but in the present instance it was at her initiative.

The question whether the recipient of the legal title had notice is to be determined at the time of acquisition of that title, at the latest. The cases in which an earlier date may be relevant do not matter for present purposes and I will ignore that possibility. I am not aware of any circumstances in which the question whether the recipient had notice could be affected by anything that happened later. That is because it is a question of fact.

Mr Twigger’s argument was that whether the purchaser gave value ought to be tested as at the same date. He pointed out that it is settled that a purchaser for value without notice can give an effectively valid and clear title by a subsequent transfer, even if the transferee under that disposition does have notice of the beneficiaries’ title: see Wilkes v Spooner [1911] 2 KB 473. There is one exception to this, namely that the party whose breach of trust gave rise to the problem cannot acquire a clear title by selling to a purchaser for value without notice and then acquiring the property back from that person; this point is recognised in Wilkes v Spooner by Vaughan Williams LJ at 483, quoted by Patten LJ at paragraph [47(3)] above.

Ignoring that exceptional case, the policy behind this principle is that otherwise the title of the purchaser, having acquired for value without notice, would be capable of being blighted by the later assertion of the breach of trust. The point is made in Megarry & Wade, Law of Real Property, 7^th edition, in the passage quoted by Patten LJ at paragraph [45] above. Consistently with this, Mr Twigger relied on a number of statements in the cases to the effect that, once the property is in the hands of a purchaser for value without notice the equitable title of the beneficiaries is extinguished: see Re Diplock [1948] Ch 465 at 539, interpreting Lord Parker’s speech in Sinclair v Brougham [1914] AC 398, and Foskett v McKeown [2001] 1 AC 102 at 129 where Lord Millett said that a proprietary claim “is subject to the bona fide purchaser for value defence which operates to clear the defendant’s title.”

The point is expressed rather graphically by Lionel Smith in The Law of Tracing (1997) at page 386 as follows:

Undoubtedly the giving of value would normally be determined, one way or the other, as at the moment of acquisition of the legal title. That is because, normally, once value has been given it is not taken away or given back. Transactions by which value passes are not normally set aside at a later stage. However, there are circumstances in which a transaction can be set aside, either to recognise that it was void from the start, or if it is voidable for some reason and an aggrieved party with the necessary standing chooses to avoid it. What we have to address on this appeal is the effect of the avoidance of a relevant transaction, where the earlier subsistence of the transaction was what enabled a recipient to show that value was given for the receipt.

I am not aware of any case or text in which this point has been considered. It was not addressed by any of the judges or writers cited at paragraphs [90] and [91] above. Accordingly what they said cannot be regarded as decisive on the point. The relevant passages do not deal with the case of the property being re-acquired by the original fraudster. Equally, they do not deal with the case now under examination, where the transaction by which value was given has since been set aside.

In the present case, the situation is a little more complex than that of a contract or other dealing between two parties. There had been an agreement between Mr and Mrs Morris, but the making of the consent order was not (as it would have been in some other areas of the court’s jurisdiction) purely contractual. It depended on the court’s willingness to exercise its statutory jurisdiction under the Matrimonial Causes Act 1973, as Patten LJ has explained at paragraph [34] and following paragraphs above.

Nevertheless, it seems to me that the analogy with a contract or other consensual disposition, set aside as being voidable for misrepresentation or on some other ground, is of some value in determining the effect of the setting aside of the consent order.

In principle it seems to me that there is much to be said for the proposition that, where a defendant relies on the defence of having been a bona fide purchaser for value without notice at the time of receipt, and for that purpose has to show that value was given under a transaction, but by the time that the point is raised the relevant transaction has been set aside, then it is no longer open to the defendant to deploy that defence successfully or, at any rate, that the fact that the transaction has been set aside, and the circumstances in which it was, are relevant to the enquiry as to whether value was given for the transfer of the legal title. Otherwise, the question whether the defence can be made good would have to be determined on a false basis, ignoring not only the factor vitiating the original transaction but also the fact that the transaction has been set aside on the ground of that factor, and the parties to that transaction restored, so far as they can be, to their original positions, as if the transaction had never taken place.

Mr Twigger submitted that this is not so, and that if the defence was open to the defendant immediately after the time of receipt, then subsequent changes, including the setting aside of the relevant transaction, make no difference. He argued that this should be so as a matter of policy in the interests of certainty. He postulated that, if later events could be relevant to the issue of value, someone who had for years had a valid title could suddenly find that his title had disappeared. By analogy he argued that authorities concerned with what counts as value in the context of a purchase of land all focus on the substance of the transaction by which title passed. That is no doubt correct. However, the special case which we have to consider is also one in which what is in issue is the transaction under which title was acquired, but in the unusual situation in which that transaction has later been set aside.

Mr Twigger put forward a different hypothetical factual example, namely a case where money which (unknown to the seller) has been stolen is used to purchase shares in a company which, a year later, becomes insolvent, so that the shares then turn out to be worthless. It could not be suggested that, because of the later change in value, the seller of the shares had not given value at the time of the transaction. There would be nothing in those circumstances which could allow attention to be given to anything other than the circumstances as they were at the time of the original transaction. That case has nothing to do with the present issue. The same would be true if the contract under which value passed was later discharged for the future upon acceptance by one party of the other’s repudiation. That, too, would have only prospective effect and could not falsify or undermine the proposition that value had been given at the start.

The decision in Westdeutsche Landesbank, as to the absence of a proprietary remedy where a transaction turned out to have been affected by one party’s lack of capacity to enter into it, also featured in Mr Twigger’s submissions. The transaction was void, but legal and beneficial title had passed under it despite the lack of capacity. I do not find that a helpful analogy because in that case there was no doubt that, before the transaction, each party had the entire legal and beneficial title to the assets which passed from it under the transaction, and the entire title did pass. That was not so in the present case.

Mr Morris never had a legal title to the money which was paid to Mrs Morris. Glencalvie Ltd had the legal title, until the money was paid to Mr Morris’ solicitors. They held it for a very short period of time, and did so on behalf of Mr Morris as their client.

Because there had been no authorised disposition of the money under the trusts, the beneficial interest of the beneficiaries under the pension fund trusts was unaffected and could be asserted despite the subsequent dealings, unless and until the property came into the hands of someone able to establish the defence of bona fide purchaser for value without notice. Accordingly, neither Glencalvie Ltd nor Mr Morris had any beneficial interest in the property. Glencalvie Ltd held the property as constructive trustee for the benefit of the original beneficiaries. The same would have been true of Mr Morris if the money had ever been in his ownership at all.

To avoid or mitigate the effect of this, Mr Twigger pointed out that in any case of a voidable transaction liable to be rescinded, and even in case of a disposal in breach of trust, the transfer of the property does have some effect unless and until it is challenged. In a case such as the present there would be no likelihood that, once a new trustee was in place, the assets dealt with in breach of trust would not be pursued, as best they could be, into the hands of those who had dealt with them or received them. That would not always be the case, even in a case of breach of trust. A dealing with trust assets might be in breach of trust but nevertheless profitable, as in the case of a successful though unauthorised investment, and the beneficiaries might choose to ratify the trustee’s improper dealing and claim the benefit of the assets acquired, which would be inconsistent with following the money used for their acquisition. (Of course such following would only be possible, at all, if the seller had notice of the breach of trust.)

Support for Mr Twigger’s argument in this respect might be found in the judgment of Potter LJ in the Court of Appeal in Twinsectra Ltd v Yardley quoted by Patten LJ at paragraph [53] above, and in particular the proposition that, until rescission, in the case of a transaction which is voidable for misrepresentation, the original owner has no proprietary interest in the subject matter of the dealing, but has only a “mere equity” consisting of his right to set aside the transaction. On that basis it could be argued that even Glencalvie Ltd could pass some sort of a beneficial title to a transferee, and a transferee who was a bona fide purchaser for value without notice would acquire an indefeasible title as a result. In that sense, it might be argued that it (and correspondingly Mr Morris) should be regarded as having had a beneficial title, albeit subject to the prior equity of the beneficiaries to require them to account as culpable recipients.

The significant distinction between cases such as those under consideration in Twinsectra v Yardley (and in Bristol and West Building Society v Mothew [1998] Ch 1, see Millett LJ at 22-23, to similar effect) and the present case is that in those cases the transferor under the voidable transaction had the whole legal and beneficial title to start with, just as the bank did in Westdeutsche Landesbank. It seems to me that it is wrong, for present purposes, to draw an analogy from that type of case, where the victim of the misrepresentation has a “mere equity” of rescission, to the case of breach of trust. In the latter case the beneficiaries have more than a mere equity; they still own their beneficial interests in the trust property unaffected by the disposition made without authority under the trust. A trustee does not own the beneficial interest in the property and cannot pass it to a transferee unless he does so by an act authorised under the trust which overreaches the interest of the trust beneficiaries. I note that the passage cited by Potter LJ from the fifteenth edition of Underhill (paragraph (f) at page 372) is part of the treatment in that edition of the category of constructive trusts arising from fraud or unconscionable conduct (article 35). It is quite distinct from the treatment, in article 34, of constructive trusts imposed on strangers holding trust property or its traceable proceeds. In the latest edition, the eighteenth, the then article 34 has now become article 28, and the equivalent of the then article 35 is article 30, but that does not include any text corresponding to that set out (almost verbatim) by Potter LJ at the end of the passage quoted by Patten LJ above.

In a different area of the law, a person in possession of land, even though unlawfully as against the true owner, has the right to exclude others and can pass the benefit of his period of possession to an assignee, with a view to establishing a title by adverse possession. In the same way, a person who holds under a title acquired in breach of trust, even if not a bona fide purchaser for value without notice, has, in a sense, a kind of a title which can be passed to others and which could, in practice, remain undisturbed by any claim by a party entitled to complain of the breach of trust, even if the title has not passed through someone who has the benefit of the status of bona fide purchaser for value without notice.

Nevertheless, it seems to me that the possibility of that occurring in practice does not falsify the proposition that a transferee of the legal title to property under a disposition made in breach of trust, or a successor in title to such a person, does not have the beneficial title to the property, which remains held on the original trusts, unless either the transferee, or a successor in title, was a bona fide purchaser for value without notice. The trustee acting in breach of trust can transfer the legal title, but cannot vest the beneficial interest in the property in a bona fide purchaser for value without notice, since he does not own that title and is not acting in a way which enables him, under the trust, to overreach the beneficiaries’ equitable interest. Despite that inability, the availability of the bona fide purchaser defence means that a transaction in favour of a bona fide purchaser for value without notice is as effective as it would be if he could vest the beneficial title in the purchaser. Thereafter the purchaser can deal with the asset free from any prior claim of the beneficiaries. That, however, does not provide the answer to the question arising in the circumstances of the present case.

The limit of the exceptional circumstances posed by the present case is that, if the transaction under which value was given at the time of the acquisition of title has subsequently been set aside, and if the adverse claim by the third party (here the trustee on behalf of the original beneficiaries) is made after that has happened, then (if the appellant is right) the question whether value has been given is to be addressed with the benefit of knowing that the transaction has been set aside.

In any given case, much may depend on the details of what has happened by way of the rescission or setting aside of the transaction. I will turn to the details of the present case in due course. But for the moment I address Mr Twigger’s submission which was that, whatever the details may be, the rescission or setting aside is irrelevant to the claim by the beneficiaries against the third party, here Mrs Morris. Because she has once had the status of bona fide purchaser for value without notice, he contended that she is thereafter immune from a claim against her, whatever may have happened thereafter.

It is not the present case, but his proposition would presumably apply even if the conduct which led to the transaction being set aside was that of the recipient of the legal title. Any misrepresentation or other conduct of the recipient which led to the transaction being set aside at the instance of the party who had transferred the legal title would, in itself, be entirely separate and distinct from the circumstances which gave the beneficiaries a right to pursue the assets into the hands of their recipients. In theory (I accept that it may not be at all likely to arise often in practice) an ancillary relief order might be set aside because the recipient had not complied with the duty of full disclosure, for example if a wife had not disclosed funds received from a large lottery win or an inheritance. If an order made in those circumstances were set aside at the instance of the husband, and if it had in the meantime been satisfied by a payment arranged by the husband but using money which he had obtained or procured in breach of trust, it is hard to see why the value given by the wife in those circumstances should be regarded as concluding the issue of recovery by the beneficiaries of the trust for once and for all. The wife would not have committed any wrong as against the beneficiaries, but her entitlement to use the bona fide purchaser for value without notice defence would be difficult to maintain if the value had been given under a transaction whose benefit she herself had obtained by misrepresentation and non-disclosure, and which had been set aside on that ground.

The present case is probably less unusual, in that the party whose non-disclosure rendered the consent order liable to be set aside is also the party who (quite separately) procured the breach of trust on the basis of which the beneficiaries’ equitable entitlement to the property subsists unless and until defeated by the bona fide purchaser for value without notice defence. It is important to bear in mind the distinction between the conduct which vitiated the transaction (the consent order) as between Mr and Mrs Morris and the entirely separate wrongful conduct of Mr Morris as against the beneficiaries of the pension fund trusts.

It is up to the party to the transaction who has been adversely affected by the non-disclosure to decide whether or not to apply to have the order set aside. If it were a case of a disposition under a normal contract (or otherwise for value) rather than under a matrimonial consent order, it would be for the party aggrieved by the misrepresentation or other vitiating factor to decide whether or not to rescind the transaction and, as necessary, to have recourse to the court to give effect to his or her rights accordingly. If, despite having discovered the misrepresentation, the aggrieved party were to choose not to rescind, the situation would not change as regards the availability of the bona fide purchaser for value without notice defence. It is only if that party (here the respondent) chooses to have the transaction set aside, in the hope (here) of getting a better outcome on a re-hearing, (and, in this type of case, if she succeeds) that the question arises whether the defence is still available.

In relation to the argument that to allow the setting aside of the transaction to be taken into account might render titles precarious even after a long time, it is, of course, possible that a breach of trust might come to light only after some considerable time, so that the rights of the aggrieved beneficiaries might be asserted only after a good deal of time had elapsed. That might, therefore, lead to a transferee’s title being challenged after some years. However, if the transferee was innocent, in the sense of having no notice of the breach of trust at the time of acquiring the legal title, intervening dealings with the property before the time when notice was given would not give rise to any claim against the transferee, except to any traceable proceeds of the disposition, and any person who had in the meantime acquired legal title to any part of the property for value without notice would himself be safe in his possession because he himself would have the defence. In relation to any innocent transferee, the procedures for following and tracing would be applied in a different and less stringent manner as compared to those which would operate if the transferee is not innocent, where there would be less reason to be sensitive in relation to that process.

As it seems to me, if the defence of bona fide purchaser for value without notice depends, as regards value, on a transaction which has been set aside by the time the defence falls to be raised, the fact of the setting aside should be capable of being relevant to whether the defence can be made out. I do not accept Mr Twigger’s argument that this involves imposing a trust on the recipient in circumstances in which that cannot properly be done, for the reasons given at paragraphs [77] to [84] above. Nor is he correct to speak of the equitable title to the beneficiaries in the original trust being revived or re-vested. Rather, that title has continued to subsist in the meantime and it is no longer capable of being defeated by the bona fide purchaser defence, any more than it would be if the property were again in the hands of the person guilty of the original breach of trust. Neither in principle nor in practice can I see any sound reason for the court being required to shut its eyes to the fact that, by the time the point arises, the transaction on which the recipient of the property depends to show that he or she is a bona fide purchaser for value without notice has been set aside, at the instance of whichever party, on grounds such as misrepresentation, non-disclosure or any other such vitiating factor, so that it is to be treated, as far as possible, as if it had never happened, or at any rate had never had any legal effect.

If, on the facts of the given case, the setting aside of the transaction does deprive the holder of the assets of the defence of bona fide purchaser for value without notice, then I accept that a claim such as that made by ITS in the present case would have a different outcome according to whether it is asserted before or after the setting aside of the transaction by which value was given for the acquisition of the legal title. I do not see this as a valid objection to the principle that the setting aside of such a transaction can be relevant. It is commonly the case that similar proceedings brought at one time or at another may have different outcomes because of changes in circumstances in the meantime. If the beneficiaries’ claim is asserted before the transaction is set aside, presumably the recipient will not take any steps to have it set aside, or at any rate the possibility of such a claim being successfully asserted will be taken into account in deciding whether to seek to have it set aside. I assume that it is relatively unlikely in practice that the other party to the transaction would seek to have it set aside, but if there is a proper basis for that to happen, I would have less sympathy with the position of the recipient, being at risk in this way as well.

Of course there is a practical difference between rescission of a contractual disposition on the one hand, and the setting aside of an order for ancillary relief as here. In the former case the parties are likely to be restored to their position as it had been before the contract, so with no contract in force as between them (unless they had other prior contractual relations). In the latter the parties are left with the rights to apply for ancillary relief against each other, those rights no longer being merged in and taking effect under the court’s order. It would therefore be for one party or the other to pursue an application for ancillary relief to a re-hearing, as happened in the present case. The existence of (here) Mrs Morris’ right to a re-hearing and the prospect, as it appeared to Moylan J, that she might well do a good deal better at that stage, accounts for her not being required to repay the benefit already received, or any part of it, whereas restitution of benefits under a contract would be required on both sides as a consequence of rescission.

The fact that Mrs Morris was left in possession of the sum already received pending the re-hearing of her application is of course a relevant factor in the present case. It does not seem to me that, of itself, it shows that she was still a bona fide purchaser for value without notice, when she had taken back the value given, by succeeding in her application to set aside the consent order. That brings me on to the circumstances of the present case, and to the question of the relevance, if any, of the setting aside of DJ Black’s order. For that purpose it is necessary to bear in mind the terms of the orders made.

The original consent order made by DJ Black provided, so far as relevant, that Mr Morris must (1) transfer to Mrs Morris all his interest in the matrimonial home (known as Park House), (2) pay her £1,200,000 in two instalments by given dates in 2007, (3) (by virtue of an undertaking) pay off a mortgage and a charge secured on Park House, (4) pay periodical payments to her and (5) pay the school fees of the children. He transferred his interest in Park House in accordance with the first paragraph of the order. Mrs Morris later sold that property. The £1.48 million covered the £1.2 million lump sum, and sums overdue in respect of the other liabilities (including paying off the sums secured on Park House).

The order of Moylan J on 28 April 2009 was expressed to set aside DJ Black’s order “save to the extent that the provision therein for periodical payments of maintenance do remain in force on an interim basis until the final hearing”.

On the substantive re-hearing of Mrs Morris’ application before Holman J in January 2010, he ordered Mr Morris to pay her a lump sum of £6 million, and ordered that until such payment the provision for payment of maintenance and school fees in DJ Black’s order should continue in force, and that arrears under those provisions should be paid forthwith. On payment in full of the sums due under those provisions (which, of course, has not happened and will not happen), the order for payment of maintenance in DJ Black’s order was to be discharged.

No reference was made in the orders subsequent to that of DJ Black to Park House, which had been vested in Mrs Morris alone and sold by the time of the later orders. It must have been taken for granted that this was past history and that its fate was not in issue. Although DJ Black’s order had been set aside, therefore, apparently in full (leaving aside the maintenance payments), it should not be regarded as having been set aside as regards the order in paragraph 1 as regards Park House. As for the maintenance payments, I agree with Patten LJ, at paragraph [40] above, that Moylan J is to be understood as having set aside the whole of DJ Black’s order, but as having made a fresh order for maintenance payments, on an interim basis (as was made explicit), pending the re-hearing, which was to include the hearing of Mrs Morris’ application to vary the maintenance payments. Therefore, although Holman J’s order referred expressly to paragraph 3 of DJ Black’s order, it seems to me that it is to be taken as referring, in reality, to the interim reinstatement of that obligation by Moylan J’s order.

Mrs Morris relies strongly on the fact that Moylan J’s order left her in undisturbed possession of the money which had been paid to her by then. As Peter Smith J said at his paragraph 45, that was not in any way surprising. Unless something quite unforeseen had arisen, Mrs Morris was going to be better off after the re-hearing than under the previous order. Whatever she had received would be taken into account on the re-hearing, and in the ordinary way what had already been paid would be taken as having been paid on account of the eventual liability.

That it was not so treated was the result of the intervention of ITS with its claim in the Chancery Division, and the order of Holman J dated 13 January 2010 under which, first, the £1.48 million was left out of account as between Mr and Mrs Morris, pending the trial of ITS’ claim, and secondly if (as happened) ITS was able to make good its proprietary claim to that money, then it was not to be treated as part of Mr Morris’ financial resources nor could Mr Morris take credit for its payment to her.

That order also provided for each of ITS and Mrs Morris to be entitled to apply to the court to determine which of them was beneficially entitled to that payment, so the fact of that order having been made is to be taken as without prejudice to each party’s contentions against the other.

In the light of what I have described, it seems to me that the effect of Moylan J’s order was (1) to leave in place the order as regards the transfer of Park House (which had happened) but (2) to set aside all other aspects of the consent order dated 11 February 2007, (3) to impose on Mr Morris an obligation to continue the maintenance payments (money and school fees) as had been ordered by DJ Black, but now on an interim basis which might be altered in the end, and (4) to direct a re-hearing of Mrs Morris’ ancillary relief application as well as a hearing of her application to vary the maintenance payments. What order she would end up with by way of ancillary relief remained to be determined at the re-hearing. In all probability it would be larger than the amount originally ordered, but events might intervene to alter that position. To take only two examples, Mr Morris might have died in the meantime or have become bankrupt. Mrs Morris took the risk of either of those events, or of any other factor which might affect the outcome of her application.

Hill v Haines shows that, if Mr Morris had become bankrupt in the meantime then (ignoring for the present the claim by ITS) his trustee in bankruptcy would have had a claim to recover funds from Mrs Morris which she would have had to have sought to meet by the renewal of her application, as Patten LJ says at paragraph [42] above. If he had died, then she may have had another remedy under the Inheritance (Provision for Family and Dependants) Act 1975. However, either way, the position would have been at large and it could not necessarily be assumed that she would have been able to retain all that she had received under the order which by then had been set aside. Therefore, while it was unlikely that her possession of that which had been paid over to her would be disturbed as a result of the setting aside of the order and the eventual re-hearing, it was not impossible. Nothing in the sequence of orders that I have recited, after that of DJ Black, was conclusive in any respect at all as to that eventual outcome. It gave her no independent right to retain the money already received as against Mr Morris or anyone claiming under him, such as a trustee in bankruptcy or personal representatives, even though it did not require her to part with it at that time. I agree with what Patten LJ says on this at paragraphs [58] to [60] above. I also agree with him that the position as between Mr and Mrs Morris, with which he deals at paragraphs [43] and [44], is irrelevant to the issue as between ITS and Mrs Morris.

In those circumstances, it seems to me that the setting aside of DJ Black’s order was relevant both in principle and in practice to the position as between Mrs Morris and ITS thereafter. Before the order of Moylan J she was able to assert and establish that she was a bona fide purchaser for value without notice. Afterwards she could not do so, because the transaction under which she had given value had been set aside and was of no effect; as between her and the other party, Mr Morris, it was as if it had not happened.

If she had not had notice until after the re-hearing, then it seems to me likely that she would have been able to rely on the defence again, assuming that the order then made entitled her to retain the money already paid. In establishing her right to retain that sum, no doubt on account of a higher sum awarded to her, the court would have decided what her rights were and her retention of the money would have stood in the same position as if Mr Morris had then and there paid it over to her under the new order. To have become aware of the breach of trust after that time would not have affected her position as having given value at that time, without notice of the breach of trust.

However, because Mrs Morris acquired notice of the breach of trust affecting the £1.48 million and the beneficiaries’ claim on that basis, asserted by ITS, at a time when her beneficial retention of the money was not justified by any order of the court, and the order under which she had received it had been set aside, it seems to me that it is not now open to her to make good the defence that she was a bona fide purchaser for value without notice to ITS’ claim.

For the reasons set out above, I agree with Patten LJ that the appeal should be allowed. As he says, issues remain to be considered as to what effect this has on Mrs Morris’ position, having regard to what she had done with the money received before the date on which she first had notice of ITS’ claim. Whatever that date may be, it seems to me that she is only accountable for any part of the £1.48 million which was in her hands at that time, and for the traceable proceeds then in her hands of any of that money which she had disposed of in the meantime. That being so, I agree with Patten LJ that this court should declare the position accordingly, and should remit the case to the Chancery Division so that the further investigation can be made which is necessary for a final determination as to what Mrs Morris must pay to ITS. I also agree that, in the meantime, the interim order should be made which he mentions in paragraph [69].