Mellor & Ors v Partridge & Anor

Partridge Fine Arts plc (“PFA”), established in 1900, was an old established and very well-known New Bond Street dealer in antiques and fine art which by 2005 had fallen on hard times. In that year, after previous unsuccessful attempts to sell it, Amor Holdings Ltd (“Amor”) made a bid for the majority of its share capital on the terms of an offer letter (“the Offer Letter”). Amor was a newly incorporated company set up for the purposes of the acquisition by Messrs Mellor, Jemmett and Law. They guaranteed a number of obligations undertaken by Amor towards the shareholders in PFA. Despite the efforts of the buyers, and in particular of Mr Law, PFA did not prosper. On 20 July 2009, PFA entered administration; and on 12 July 2011 it went into liquidation.

Messrs Mellor, Jemmett and Law now make claims against Messrs John Partridge (“John”) and his son Frank Partridge (“Frank”). After various procedural vicissitudes (which I need not recount) the relevant claim form was issued on 31 January 2012. Their claims are of three different kinds:

Claims which they advance in their personal capacity;

Claims which they advance as assignees of claims that were claims vested in Amor; and

Claims which they advance as assignees of claims that were claims vested in PFA.

John and Frank applied for summary judgment on all the claims made against them. That application came before Beatson J (as he was then) who summarily dismissed some of the claims, but refused to dismiss others on the summary basis. Both sides now appeal. Our task is not to decide whether the claimants are right. Our task is to decide which parts of the case (if any) are fit to go to trial. If I may repeat something I have said before (Easyair Ltd v Opal Telecom Ltd [2009] EWHC 339 (Ch), approved by this court in AC Ward & Son v Catlin (Five) Ltd [2009] EWCA Civ 1098):

Stripped to its bare essentials the claimants’ personal claim against John is that:

In the course of negotiations John:

Dishonestly told them that PFA had a long-standing and ongoing relationship with the Getty Museum when in fact that relationship had terminated on bad terms some twenty years earlier (“the Getty representation”);

Repeatedly told them of PFA’s high standing and reputation in the specialist market, thereby implicitly representing that that reputation was justified, without revealing that it was liable to be undermined or destroyed if certain alleged systematic fraudulent trading practices of both John and Frank were to come to light (“the reputation representation”);

Encouraged them to rely on financial information provided by PFA (including balance sheets and stock valuations) when that financial information did not enable the discovery of the financial effect of the alleged fraudulent trading practices, and in particular did not enable them to discover that PFA might be vulnerable to claims from dissatisfied customers alleging that PFA had sold them fakes (“the balance sheet representation”);

Stated in the Offer Letter that the “only contracts, not being contracts entered into in the ordinary course of business”, that had been entered into between 18 November 2003 and 12 December 2006 and that “are or may be material” were two particular agreements. In fact there are two other highly material agreements, namely an agreement with a dissatisfied customer to compromise a claim over the authenticity of two commodes known as the Bantry House Commodes, and an agreement under which Frank resigned as a director of PFA.

These misrepresentations were fraudulently made;

These misrepresentations caused the individual claimants to guarantee Amor’s obligations to shareholders, which they would not have done if they had known the truth.

The claim that the claimants pursue as Amor’s assignees is essentially the same, except that the inducement alleged is that Amor was induced by the misrepresentations to make its offer for the majority shareholding, which it would not have done if it had known the truth.

The losses claimed under this head fall into two broad categories. First, there is the amount paid to shareholders for the acquisition of the shares. Part of this was paid by Amor and part by Messrs Mellor and Jemmett when their guarantee was called on. The second broad category is losses arising out of further payments made for the benefit of PFA and, in Mr Law’s case, the lost opportunity to develop an alternative business. I will return in more detail to the categories of loss in due course.

The claim that the claimants pursue as assignees of PFA is that the alleged systematic fraudulent trading practices amounted to breaches by John and Frank of their contractual and fiduciary duties to PFA. The pleaded claim is that the consequence of these breaches was that PFA was (or became) worthless as a going concern.

I need hardly add that both John and Frank vigorously deny the accusations levelled against them. Nothing in this judgment should be taken as a finding that these allegations are true.

At root these allegations are based on a series of transactions which are alleged to support the conclusion that John and Frank conducted a systematically fraudulent business. It is important to stress that the pleaded transactions are said to be examples only. In his witness statement Mr Law says:

The pleaded transactions are as follows (for the most part taken verbatim from the judge’s judgment):

It is alleged that in the 1980s, John sold a pair of counterfeit chairs to the Getty Museum for £175,000; that the Museum made a complaint shortly after delivery but John refused to refund the price. The result was that what had been a long-standing relationship between the Getty Museum and PFA came to an end. It is not pleaded that John knew or suspected that the chairs were counterfeit; only that he had been procured to act by a Mr Hobbs, who it is alleged was a notorious dealer in counterfeit furniture. Frank is not involved in this allegation.

In 1991 PFA sold to a Mr Relyea a painting entitled A View of Cannes as by Sir Winston Churchill. It is alleged that the painting was a known fake obtained from a Mr Sellin, now deceased, who the claimants allege was a known source of works of art of dubious origin. It is alleged that when John sold the painting to Mr Relyea, he dishonestly redacted all reference to the painting's provenance and catalogue. It is alleged that Mr Henderson, at that time a director of PFA, informed John that the painting was a fake. The judge found that the claim that PFA or John had redacted the painting’s provenance was inconsistent with documents showing that the contents of the invoice to Mr Relyea were the same as the catalogue entry for the La Gallais auction house's October 1989 auction in Jersey, where the painting was sold. That was the provenance provided to John Partridge by Mr Sellin. There is no appeal against that finding which is a rejection of the claimants’ case in that respect. Mr Relyea raised a question about the painting’s provenance in October 1998. By mid-1999 inquiries made by PFA of Lady Soames and Mr David Coombs, an expert on Churchill paintings, revealed doubts about its authenticity. By then PFA could not provide a better provenance than the one on the invoice. Despite all this Mr Relyea has made no claim against PFA. The judge held that any claim would be statute barred; and there is no appeal against that conclusion. Although Frank features on the periphery of this transaction there is no specific allegation of wrongdoing against him. The allegation against John is that by his actions he acted in breach of his fiduciary and contractual duties to PFA.

The third transaction concerns what are known as the Cave armchairs. PFA purchased these from Christies’ in 1992. The first allegation is that, after they had not sold for a considerable time, in order to make them more saleable Frank and John arranged for a cherub design on them to be replaced with a floral design, and at the same time altered the designs of the legs. This is said to be contrary to the British Antique Dealers Association’s by-laws. The second allegation is that the chairs were sold at some time in about 2004 to Lord Kalms without disclosing the alterations. It is alleged that by their actions both John and Frank acted in breach of their fiduciary and contractual duties to PFA. The judge referred to an interview with Lord Kalms in which the latter indicated that he was not interested in taking proceedings even if the chairs were fake. There is no appeal against the judge’s inference of fact.

The fourth transaction concerns three tables sold to a very good customer of PFA: Mr Mavromatis. They are referred to in the pleadings as the First and Third Gueridon Tables and the Red Japanned Table. The first table was bought by Frank for PFA at a Christies’ auction for about £13,500. The allegation is that, in order to lend credibility to an intended deception, Frank had the table restored at a cost of some £11,000 so as to be able to pass it off as a genuine 18^th century Gueridon; and then in September 1999 sold it to Dartmouth, a company controlled by Mr Mavromatis. The allegation is that Frank either knew the table to be counterfeit or took insufficient steps to establish whether it could be described in the way that it was. It is also alleged that John knew that the table was not a genuine 18^th century Gueridon. It is alleged that by their actions both John and Frank acted in breach of their fiduciary and contractual duties to PFA. The second of the three tables was genuine and nothing turns on that. However, it is alleged that the third table was a counterfeit reproduction of the second (genuine) table which Frank procured to be made. It is alleged that John must have known of the counterfeiting no later than the date of the sale of the third table to Mr Mavromatis. It is alleged that by their actions both John and Frank acted in breach of their fiduciary and contractual duties to PFA. The Red Japanned Table was sold in January 1999 to Dartmouth, a company owned by Mr Mavromatis, for £135,000. It was sold as made by Bernard II van Risamburgh. It is alleged that Frank knew the table to be counterfeit or alternatively took insufficient steps to establish whether it could be sold as described. The allegation against Frank is that by his actions he acted in breach of his fiduciary and contractual duties to PFA. There is no specific allegation against John in relation to this transaction. The judge continued at [30]:

It is alleged that in December 1999, John Partridge sold a number of items including two pairs of Boulle pedestals and a pair of Boulle commodes to a Mr Greenberg, representing them to be authentic Boulle items from the period of Louis XIV and Louis XVI, rather than reconstructions incorporating 18^th century elements. In October 2000, John Partridge sold Mr Greenberg a marriage coffre, which it is alleged he wrongly described as being Louis XIV circa 1700 rather than Regency, circa early 19^th century. The pleaded allegation is that John Partridge knew these items were counterfeit and not from the period as described, or alternatively dishonestly elected to take no or insufficient steps to establish whether they could be so described. When, in about February 2003, Mr Greenberg raised the issue of the age of these items with PFA, Frank Partridge was involved in negotiations with him. During these he offered to deal with the matter by buying back the items for approximately £800,000.

The sixth transaction concerns the Bantry House Commodes. In 1989, s S Franses Ltd, which had acquired the two commodes in Ireland, sold a half interest in them to PFA for £32,800. The commodes were restored that year. S Franses Ltd and PFA shared the cost. It is alleged that this restoration involved the removal of a fruitwood veneer and its replacement with ebony. The commodes did not sell, and in 2001 Frank Partridge told Mr Franses's son that the previous restoration was unsatisfactory and that further work was needed. He proposed that they be sent to Paris and decorated with Boulle at a cost of about £100,000, which he said should have been done originally. Mr Franses did not believe that there had been original Boulle on the commodes, and suggested that consideration be given to less drastic restoration work. The disagreement about what work was needed and what had been authorised led to the purchase by PFA of S Franses Ltd's half interest in the commodes. The work was then done and the commodes were offered for sale as "a very rare pair of Louis XIV Boulle and tortoiseshell commodes…circa 1710". They were sold in 2002 to a Mr Wexner for £600,000. Mr Wexner's agent, Alex di Carcaci, negotiated the price with John. Frank informed Mr di Carcaci, that existing Boulle decoration had been "re-laid" and "re-engraved", and that the items had been bought from a private collection in Paris. Subsequently, Mr Wexner complained about these items. PFA settled his claim in February 2009 on terms that Mr Wexner kept the items and was permitted to select stock from PFA’s shop floor to the value of £420,000, which he duly did.

The judge’s first mention of the misrepresentation claims was as follows:

However, although this passage is expressed in general terms, it is clear from later passages in his judgment that the judge was confining himself at this point to the Getty representation and the reputation representation. Moreover, the judge also held that part of the claim was unsustainable because of the principle that a shareholder is unable to recover for reflective loss. I shall return to this principle when I have considered the remaining alleged misrepresentations.

So far as the balance sheet representation was concerned the judge held that the claim was unsustainable. He expressed his conclusion thus:

The cross-reference to [58] is an explanation of what the judge meant in [65] by his statement: “given the absence of any real possibility of such liabilities.” So one must look to see what he said in [58]. In that paragraph he said:

The last of the alleged misrepresentations was the material contracts representation. The judge said this:

Mr Brisby argues that the judge should have struck out the claim based on the Getty representation and the reputation representation. He had an overarching point on causation, which I will deal with in due course. But in addition he said:

The reputation representation was literally true. PFA did enjoy an impeccable reputation;

That reputation remained intact until PFA entered administration; and even during the course of the administration the administrators were able to sell PFA’s goodwill (which was in effect its reputation) for a six figure sum;

Mr Law knew about PFA’s reputation independently because he was in the trade, and thus did not rely on John’s representation. It was his own evidence that the fact of PFA’s reputation was the very reason he was interested in buying the company;

What the claim amounted to was an attempt to impose on the seller of shares a duty of disclosure, which offended the basic principle: buyer beware.

I do not think that it is quite so simple. First, a representation which is literally true may nevertheless be a misrepresentation if relevant facts are concealed. Second, allied to this proposition is the proposition that a representation may be implicit. Often the two will overlap. A half truth may amount to deceit if it is suggestive of a falsehood and intended so to be. Thus in Nottingham Patent Brick & Tile Co v Butler (1866) 16 QBD 778 a statement by a solicitor that he did not know of any restrictive covenants (but who did not reveal that he had not looked at the deeds) was held to have been a misrepresentation. In Spice Girls Ltd v Aprilia World Service BV [2002] EWCA Civ 15 [2002] EMLR 27 an express representation that the Spice Girls were “committed” to a contract carried with it the implied representation that the representor did not know of any matter which might falsify the assurance. What the court must consider is what a reasonable person would have inferred was being implicitly represented by the representor’s words and conduct in their context. These are fact sensitive questions which, in my judgment, can only be fairly determined at trial. Third, in Gordon v Selico Co Ltd [1986] 1 EGLR 71, 77H Slade LJ, giving the judgment of the Court of Appeal, said that the principle “buyer beware” “has no application where a purchaser has been induced to enter the contract of purchase by fraud”. Accordingly I agree with the judge that the allegations based on the Getty representation and the reputation representation should be allowed to go to trial.

The main thrust of the claim based on the balance sheet representation is that the company’s accounts (and in particular its balance sheets both in 2004 and in 2005) failed to reflect its contingent liability to compensate customers to whom it had mis-sold goods. However, there is an additional plea which merits separate consideration. This comes from paragraph 56 (4) of the Particulars of Claim which reads:

There is evidence in the shape of minutes recording board meetings of 17 December 2003 and 28 January 2004 that where the board were aware of potential claims from dissatisfied customers (in this case Mr Greenberg) they actively considered the making of provision in the company’s accounts. No such provisions were made in either the 2004 or the 2005 balance sheets. The judge’s first reason for rejecting the claim was that the 2005 balance sheet was available. But that does not answer the point that the 2005 balance sheet (like the 2004 balance sheet) did not show any contingent liability for such claims, apart from that of Mr Greenberg which had been settled by the date of the 2005 balance sheet. In my judgment the judge’s first reason can apply only to the specific plea relating to Mr Greenberg, which I have quoted. The judge’s second reason was that a stock valuation by Sotheby’s was available by the time of the offer. But the complaint is not that the stock was overvalued. The complaint is that PFA had contingent liabilities to pay compensation to defrauded customers, which would not be reflected in any valuation of stock in the company’s possession, because by definition the allegedly counterfeit stock had already been sold. Again, the judge’s second reason can apply only to the items repurchased from Mr Greenberg, which were in fact written down in the stock valuation. The judge’s third reason was that “given the absence of any real possibility of such liabilities” there was no need to make such provision. Here I think the judge has not fully reflected the chronology. In the amplification of his reasoning in [78] he cross-referred to [58]. The latter paragraph considers whether at the date of the claim form in 2012 there was a real prospect of claims by dissatisfied customers. But the balance sheet representation relates to the period 2004 and 2005, many years earlier. In fact both Mr Wexner and Mr Mavromatis made complaints after the date of the balance sheets; although in neither case did they lead to litigation. So the question is: should the balance sheets have made provision for such potential claims in 2004 or 2005? I do not consider that we can confidently answer that question: no. In my judgment there is a real prospect that the general claim based on the balance sheet representation will succeed. However, as regards the specific claim pleaded in paragraph 56 (4) of the Particulars of Claim I consider that the judge was right in his conclusion that that claim has no real prospect of success. I would therefore strike out that sub-paragraph of the Particulars of Claim.

So far as the material contracts representation is concerned the starting point is the written representation listing the contracts which were said to be the “only” material contracts. The judge did not hold that the Greenberg settlement was not a material contract. His reason for rejecting the claim was that the means of discovering the existence of the Greenberg settlement was available; and that if the buyers did not avail themselves of the opportunity that was, in effect, their problem. However, I do not consider that that is the right approach. Mr Tager QC relied on the principle stated in Clerk & Lindsell on Torts (20^th ed) para 18-34:

In my judgment that passage accurately states the law. It follows, in my judgment, that the judge’s reason for striking out the claim based on the material contracts representation cannot be sustained; and Mr Brisby QC did not attempt to sustain it on that ground. Instead he argued that the judge’s decision should be upheld for other reasons, namely:

The Greenberg settlement was a contract entered into in the ordinary course of business; and

In any event it was not a material contract.

In support of the first of these propositions Mr Brisby submitted that the contract was simply one for the purchase of furniture by PFA. Since buying and selling furniture was PFA’s ordinary business, the contract was one that was entered into in the ordinary course of business. Alternatively, the compromise of a claim by a disgruntled customer was likewise to be regarded as a contract made in the ordinary course of business. In my judgment these propositions can only be made good (if at all) at trial. We have seen some (but by no means all) of the documentation relating to Mr Greenberg’s complaint. It is clear from his e-mail of 20 February 2003 that he was alleging the possibility of counterfeiting; and from his e-mail of 15 April 2003 that he was questioning PFA’s probity. We have also seen the board minutes of 17 December 2003 and 28 January 2004 which suggest (to put it no higher) that what was described as “the Greenberg problem” was the cause of Frank’s resignation as a director. Had the Greenberg problem simply been part of the ordinary course of business, there would have been no reason for him to resign. This seems to me to be a case where reasonable grounds exist for believing that a fuller investigation into the facts of the case would add to or alter the evidence available to a trial judge and so affect the outcome of the case. So far as Mr Brisby’s second argument is concerned, he concentrated on the quantum of the settlement, compared with the turnover of PFA at the relevant time. However, the evidence of Mr Henderson (a former director of PFA) is that in the light of PFA’s turnover and profitability at the time a settlement of the magnitude of that given to Mr Greenberg would have made the difference between a small profit and a large loss. In addition materiality may have a broader meaning than the mere significance of the quantum. It would surely be material to know that a recent allegation of deliberate counterfeiting had been compromised. Mr Greenberg’s allegation in the present case may not quite reach that point; but it cannot simply be dismissed. In his written argument Mr Brisby submitted that the Greenberg compromise could not have been material from the perspective of the prospective sellers of the shares to whom the offer was addressed. I do not regard this as self-evident. A shareholder in a company recently accused of counterfeiting whose reputation might be at risk might well regard that as an additional reason to accept an offer for his shares. Finally the representation does not merely encompass contracts that are material: it also extends to contracts that may be material.

I provisionally conclude, therefore, that all the claims in misrepresentation should, in principle, be allowed to go to trial. However, Mr Brisby had additional points which, he said, should alter this provisional conclusion.

First, Mr Brisby argues that the judge was wrong not to strike out the claims based on all the alleged misrepresentations on the ground that the losses claimed were not caused by the misrepresentations but by the insolvency of PFA which, in turn, came about because of factors unrelated to the misrepresentations. He emphasised the distinction between the occasion of a loss on the one hand, and the cause of a loss on the other. On which side of the line any particular case fell was, ultimately, a question to be decided according to common sense: Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360, 1375A. That was a case in which the buyer of shares in a company sued the company’s auditors for negligence. The losses claimed were trading losses incurred after the share purchase. This court held that those losses were not losses caused by the negligence but by the continuation of trading. It is also important to note the cross-appeal in that case. It was alleged that as a result of the auditors’ negligence in overstating the company’s profits the buyer had paid more for the shares than it would have done in the absence of negligence. The judge had refused to strike out that part of the claim; and his decision was upheld by this court. Clearly the court considered that there was no causation problem in relation to that head of damage: the issue was whether the auditors owed a duty of care to the buyers; and on the facts it was held that they did.

Second, Mr Brisby argued that where a loss came about as a result of a series of causes then the legally potent cause was the first in time if all causes were tortious. But if later causes in the series were not tortious (and not other wrongs) then a subsequent cause is the legally potent cause. He relied in this respect on the decision of the House of Lords in Carslogie SS Co Ltd v Royal Norwegian Government [1952] AC 292 which is adequately summarised for present purposes in Clerk & Lindsell on Torts (20^th ed) para 2-97:

Third, as mentioned, the judge held that part of the claim based on the Getty representation and the reputation representation was unsustainable because of the principle that a shareholder is unable to recover for reflective loss. The first problem is to ascertain which parts of the claim the judge struck out on this ground. The relevant part of the judge’s order (settled by counsel) states:

However, it is difficult to identify from the terms of the order precisely which parts of the pleaded case have been struck out on this ground. Indeed Mr Brisby and Mr Tager were unable to agree on what the effect of this part of the order was. The existence of the principle that a shareholder cannot recover personally in respect of loss suffered by the company whose shares he holds is not in doubt. The question is whether it applies in this case and if so to which losses claimed. An order which simply recites the principle is of no practical help to the trial judge. Mr Brisby asserted (or conceded) that this principle could have no application to the personal claims brought by Mr Mellor and Mr Jemmett, despite the fact that the order refers indiscriminately to “the Claimants”, and I am content to proceed on that basis.

The judge directed himself by reference to the summary of principle in Gardner v Parker [2004] EWCA Civ 781 [2005] BCC 46 at [33]. In that case Neuberger LJ said:

In Johnson v Gore Wood & Co [2002] 2 AC 1, 35 Lord Bingham extracted three propositions from the authorities. Mr Brisby had reservations about the third of them, but otherwise accepted that they were correct. I need only quote the first.

I begin by considering the more straightforward heads of loss claimed: namely the amount that Messrs Mellor and Jemmett paid under the guarantee and the amount that Amor in fact paid for the shares. As far as Mr Brisby’s first argument is concerned, the disposal of the cross-appeal in Galoo is binding authority against him. But in any event, assuming that I have common sense, it seems to me to be common sense to say that if I am tricked into buying an asset, my laying out of the purchase price has been caused by the trickery. I may well have to give credit for the true value of the asset I have bought, but that is a different principle. As Cockburn CJ put it in Twycross v Grant (1877) 2 CPD 469:

So far as the second argument is concerned, it focuses on events subsequent to the purchase. To take the analogy of the ship that sinks, the complaint in this case is that the buyers were tricked into buying the ship in the first place. I do not think that this carries the argument any further.

So far as the argument based on reflective loss is concerned my difficulty is to see how this principle applies to the facts. Messrs Mellor and Jemmett never became shareholders in PFA. Mr Law did, but much later on as part of a damage limitation exercise. So their claims are not claims made as shareholders, and no part of their claim relates to the value of any shares. Their claim is that they were induced by misrepresentation to enter into a guarantee and that their loss is what they paid out under it. Moreover the money they paid was paid to shareholders in PFA: it was nothing to do with the company itself.

So far as Amor is concerned, it is true that it acquired shares. But Amor’s complaint is not that it suffered loss in its capacity as a shareholder; but that it was induced to become a shareholder by misrepresentation. At the time when the misrepresentations were made it was not a shareholder. Consequently any duty owed to it by John Partridge was not a duty owed to a shareholder, but a duty owed to a prospective buyer of shares. It is true that the damage alleged consists of the payment of the purchase price for the shares. But that is simply the consequence of a previous breach of duty committed at a time when it was not a shareholder. As in the case of the personal claimants the money it paid was paid to shareholders in PFA: it was nothing to do with the company itself.

At the very least this is not a case in which “there is no reasonable doubt”. I would allow all the claims against John for misrepresentation to proceed to trial, to the extent that the loss claimed consists of the purchase price paid by Amor and the amounts paid out under their guarantees by the personal claimants.

The personal claimants make an additional claim in paragraph 57 (4) of the Particulars of Claim. This alleges that complaints of various disgruntled shareholders have caused the Takeover Panel to investigate the manner of the purchase of PFA’s shares. The very fact that the Particulars of Claim themselves plead that the investigation was caused by complaints by shareholders demonstrates that there is no legally potent causal link between the misrepresentations and the investigation. There is no real prospect of success in recovering this head of loss. I would therefore strike out paragraph 57 (4). Paragraph 58 claims an indemnity against further liabilities under the guarantee. But no such liability has been identified (apart from whatever may emerge from the Takeover Panel’s investigation). I would strike out this paragraph too.

Paragraph 58A advances a series of further losses incurred by Mr Law. Part A gives details of a number of loans which were routed through Amor and were used to finance PFA. These loans are said to have been guaranteed by Mr Law or to have been made by Mr Law to Amor. The loans in question are pleaded in paragraphs 58A Part A (1), (2), (4), (5) and (7). There are at least two reasons why in my judgment these claims are unsustainable.

In order to explain this I must recount a few more of the facts. When Amor acquired the shares in PFA it did not have the ready cash to do so. Instead what was agreed was that PFA would sell some of its stock and would lend the proceeds of sale to Amor in order to enable it to make the purchase. This had the consequence that at the date of the administration Amor owed PFA nearly £5.5 million. Mr Law subsequently signed a statement of affairs listing PFA’s creditors. Amor was not among them. This fact is a serious evidential problem in the way of establishing that the loans were ever made. In his written submissions in reply Mr Tager said that John and Frank should not be entitled to rely on this allegation because it was raised for the first time very shortly before the hearing below. I will assume that this point is well-made and that the evidential problem can be overcome. However, assuming that this serious evidential problem can be overcome, now that PFA is in liquidation rule 4.90 of the Insolvency Rules 1986 means that there is an automatic set-off of mutual debts. Since the loans pleaded in these paragraphs come nowhere near the amount owed by Amor to PFA it follows that Amor has in effect been repaid what it was owed. Second, the making of loans to PFA after the share purchase in order to finance its continued trading falls within the category of trading losses which are ruled out by the decision in Galoo. The purchase of the shares was the occasion of the loan but the alleged misrepresentations did not cause the loans to be made.

Paragraph 58A Part A (3) alleges that Mr Law’s parents lent money to PFA and that Mr Law promised to repay them. Again there is no trace of any such loan in the statement of affairs signed by Mr Law, but again I will assume that this evidential problem can be overcome. However, Mr Law has not in fact repaid his parents, so that he has not yet suffered any loss. Moreover, in my judgment this loan (and Mr Law’s consequential liability) is also barred by the principle in Galoo. The misrepresentations were the occasion of the loans, but not the cause of them. Paragraph 58A Part A (6) alleges a loan by Seaturn Holdings Ltd partly to Amor and partly direct to PFA, both loans having been guaranteed by Mr Law. The loan routed through Amor is covered by what I have already said. As far as the direct loan to PFA is concerned, once again there is no trace of it in the statement of affairs signed by Mr Law. But in any event there is no evidence that Seaturn has called on Mr Law to honour his guarantee. And again any loan by Seaturn (and Mr Law’s consequential liability) is also barred by the principle in Galoo.

Paragraph 58A Part A (8) alleges that AIB lent PFA the sum of £600,000 guaranteed by Mr Law, and that Mr Law is liable to AIB under that guarantee. The loan was made to enable PFA to continue to trade. This head of loss is also ruled out by the decision in Galoo.

Paragraph 58 Part B pleads that Mr Law lost the opportunity to spend his time and money running his own companies instead of attempting to rescue PFA. He claims the income he would have made for the period between 2006 and 2015. In this connection Mr Tager relied on the decision of David Richards J in 4 Eng Ltd v Harper [2009] Ch 91. In that case 4 Eng had been induced to buy a company called Excel as a result of fraudulent misrepresentation. The company had been looking at an alternative acquisition, namely Tarvail. Having considered a number of cases the judge held that in principle such a head of loss was recoverable. He quoted in particular an observation of Lord Steyn that:

In the cases that David Richards J considered the claim was made by a buyer of the shares (or business) and the loss claimed was the profit that the buyer would have made in an alternative business. But in our case Mr Law was not the buyer of the shares in PFA. There is no claim that but for the deceit Amor would have made profits elsewhere. There is no claim that Mr Law was in any way legally bound to attempt to rescue PFA, which was known to be loss-making at the date of the share sale. Whether he did so was his own choice. I do not consider that Mr Law can bring himself within the scope of the principle. I would therefore hold that the claims in paragraph 58A Part B have no real prospect of success.

Paragraph 58A Part C makes claims in relation to a series of liabilities incurred by Mr Law. For the most part they fall foul of the ruling in Galoo, for the reasons I have already given. There is, however, one possible exception. In sub-paragraph (11) it is pleaded that Mr Law paid the legal costs incurred by Amor in its initial purchase of the shares. That seems to me to be recoverable in principle (or at least arguably so). Mr Brisby drew our attention to the rubric at the beginning of paragraph 58A which describes Part C as being “liabilities that Mr Law incurred and defrayed on behalf of Partridges.” This is clearly an inappropriate description of the expenditure described in sub-paragraph (11). The cost incurred by Amor in buying shares from other shareholders is nothing to do with PFA itself. But I would give the claimants the opportunity to formulate an appropriate amendment relating to that head of loss.

Subject to that I would strike out paragraph 58A of the Particulars of Claim.

Paragraph 58B of the Particulars of Claim sets out Amor’s losses. Sub-paragraph (1) claims the price it paid for the shares, which I have already dealt with. Thus paragraph 58B (1) stands. Sub-paragraph (2) pleads a loan that was made to Amor which in turn it lent to PFA. For the reasons I have given this head of loss is irrecoverable. Sub-paragraphs (3) to (8) plead alternative claims which are (in effect) the mirror of Mr Law’s claims in paragraph 58A Part A. For the reasons I have given these heads of loss are not sustainable.

Paragraph 58B (9) pleads:

Although it is not entirely clear what these services were, I infer from the chronology that these were costs incurred in the due diligence carried out before the purchase of the shares. If so, then they are in principle recoverable.

Accordingly I would strike out sub-paragraphs (2) to (8) inclusive of paragraph 58B, but otherwise allow the claims made in that paragraph to go to trial.

That leaves the claims assigned to the claimants by PFA itself. The judge allowed some of the claims against John to go to trial, but struck out all the claims against Frank. This produced a rare measure of agreement between Mr Tager and Mr Brisby. Both agreed that the claims against John and Frank should be treated in the same way. But there the agreement ended. Mr Tager said that all of them should be allowed to go to trial. Mr Brisby said that all of them should be struck out.

Mr Brisby’s principal argument was that these claims were statute barred. Frank ceased to be a director of PFA in February 2004. John ceased to be a director on 9 January 2006 (when the whole of the then existing board resigned). The claim form was not issued until 31 January 2012, more than six years later. The Particulars of Claim allege that Frank and John were in breach of their contractual and fiduciary duties to PFA; but those duties must have been broken (in Frank’s case) no later than February 2004 and (in John’s case) no later than 9 January 2006.

The relevant limitation periods in play are:

It is also necessary to refer to section 32 which provides so far as relevant:

If a claim falls within section 21 (1) it may still be defeated by the equitable defence of laches.

The first question is: what is the nature of the pleaded claim? In particular does it allege a fraudulent breach of trust? It is, in my judgment, clear from the decision of this court in Paragon Finance plc v D B Thakerar & Co [1999] 1 All ER 400 that a mere allegation of breach of fiduciary duty is not an allegation of a fraudulent breach of that duty. It is equally clear from that decision that the introduction of an allegation of intentional wrongdoing is the introduction of a new cause of action. In my judgment the current Particulars of Claim do not allege a fraudulent breach of fiduciary duty vis-à-vis PFA itself. For example paragraph 31B of the Particulars of Claim alleges that John failed to inform the board of various matters; but it does not allege that the failure to inform the board was dishonest. Likewise paragraph 31C alleges that Frank failed to inform the board of various matters but it, too, does not allege that the failure was dishonest. These allegations are equally consistent with an inadvertent breach of duty. The same observations apply to paragraphs 35D, 38C, 38D, 41D, 41E, 44B, 48C, 51B and 54A of the Particulars of Claim. Allegations that Frank and John acted in excess of their authority are likewise allegations that are consistent with inadvertence or negligence.

Prima facie therefore, in so far as the claims are claims of breach of contract they are caught by section 5; and in so far as they are claims for breach of fiduciary duty they are caught by section 21 (3). To this there is one exception. In relation to the third Gueridon table (which had been sold to Mr Mavromatis) paragraph 40 (4) of the Particulars of Claim alleges that the money paid by Mr Mavromatis was misappropriated by Frank and John. Mr Brisby accepted that this was a claim to the recovery of trust property which fell within section 21 (1) (b); but he submitted that it was unsustainable on the facts.

There has been no application to amend the Particulars of Claim to plead any alternative formulation of the claims. Any such application would have to be made, in the first instance, to the Queen’s Bench Division and not to this court. It would also have to confront the decision of this court in Cia de Seguros Imperio v Heath (REBX) Ltd [2001] 1 WLR 112, the possibility of a defence of laches and the principle that amendments will not be allowed if they would prejudice a limitation defence.

The question, then, is whether section 32 comes to PFA’s rescue.

The claimants have adduced the evidence of Mr Henderson, who was a senior director of PFA between May 1988 and 31 March 2001. Mr Henderson gave evidence of the general practice of both John and Frank. He said:

Mr Henderson also gave evidence about two candelabra which he thought were two elements fused together but which John was selling as eighteenth century. Mr Henderson’s evidence is that Mrs Morton came to see him about that. He reported this to John “who was furious and shouted me down”. He goes on to say:

According to Mr Henderson, Mr Tollemache, the managing director of PFA, also confronted John, but was sent away with “a flea in the ear”.

Mr Henderson also gave evidence about two of the specific transactions pleaded in the Particulars of Claim. Mr Henderson saw the painting “A View of Cannes” which was hanging in PFA’s dining room. He remarked generally to members of the board and to John in particular that he had reservations about its authenticity. When he heard that it was on consignment from Mr Sellin (whom Mr Henderson said was known to have counterfeited goods on several occasions) he said to John “I rest my case”. He also says that, having consulted a leading expert at Sotheby’s, he reported to John that the picture was a fake.

So far as the first Gueridon table is concerned, Mr Henderson gives evidence of the extensive alterations that were carried out to it in Paris. He goes on to say:

Although it is true to say that Mr Henderson does not give evidence about all the pleaded transactions, the pleaded transactions are relied on as examples of what are alleged to be “systematic fraudulent trading practices”. It is plain on the basis of Mr Henderson’s evidence that at least two members of the board (himself and Mrs Morton) and probably a third (Mr Tollemache) knew of the systematic practices. Mrs Morton remained a director of PFA until 9 January 2006.

In those circumstances it is unnecessary to embark upon the debate whether the knowledge of Frank or John should be imputed to PFA. PFA knew at the time of the breaches of duty now relied on; or at the very least could with reasonable diligence have discovered them. I would therefore uphold the judge’s conclusion that, subject to one exception, the claims made by PFA are statute barred.

In addition many of the heads of loss claimed relate to allegations that PFA is potentially liable for contingent claims by dissatisfied customers. The judge held that the prospect of such claims were remote; and that even if such claims were brought, it would be open to PFA to claim indemnity from Frank and or John under section 10 of the Limitation Act 1980 and the Civil Liability (Contribution) Act 1978. I agree with the judge on this point. There is no point in the court having to try hypothetical disputes which may never materialise. Moreover since PFA is in insolvent liquidation it is highly unlikely that anyone will sue it.

I have said that there is one exception: namely the allegation that Frank or John misappropriated the price paid by Mr Mavromatis for the third Gueridon table. It is conceded that this claim is not statute barred. The judge decided that it had no real prospect of succeeding on the facts. Was he right?

The allegation that the price must have been misappropriated has a number of strands. The item had been given a stock number in PFA’s records. The number given to it signified that it had been consigned by a third party; in other words that it did not belong to PFA. But PFA often sold consigned items. When a sale of such an item took place, the stock number should have been changed. But there is no record of any change of number. There is no invoice issued by PFA. Nor is there any record of the sale price going through PFA’s books. All this might suggest that there was no sale at all. Yet it is common ground that the table was sold to Mr Mavromatis. How can this be? In his evidence Frank suggests that the sale must have been effected by PFA’s Swiss subsidiary. But as yet there is no evidence of that. No bank records have been produced which show the payment having reached the Swiss subsidiary; and there is no accounting evidence that shows any inter-company accounting. Perhaps more to the point Frank says that when Mr Mavromatis complained about the authenticity of the table he (Frank) settled Mr Mavromatis’ claim by buying it back. If that is true one would have expected Mr Mavromatis to have produced the invoice from the Swiss subsidiary (if there was one). But rather surprisingly Frank says that there is not a single piece of paper relating to the alleged compromise. I also find it odd that Frank (who had left PFA in 2004) would have bought back the table in 2010 in order to settle a claim that might be made against PFA. Even odder is that fact that despite repeated requests Frank has not allowed the table to be inspected, on the ground that it is in Moscow and might be sold. In my judgment there is a sufficient mystery surrounding this transaction and the whereabouts of the sale price to warrant further investigation at trial.

The upshot is that I would strike out paragraph 58C (1) of the Particulars of Claim. I would also strike out paragraph 58C (2) of the Particulars of Claim with the exception of the allegation that Frank misappropriated the entire sale proceeds of the third Gueridon table.

Finally I should record that Mr Tager asked for permission to amend the Particulars of Claim to claim certain indemnities. But there was no formulated draft. I think that these potential amendments are already covered by what I have said; but in any event permission to amend should not be given (especially on appeal) without a formulated draft.

For the reasons I have given I would allow both the appeal and cross-appeal in part; to the extent that I have indicated. If my Lords agree with my conclusions, Counsel should try to agree the precise form of a pleading that reflects the reasoning in this judgment. That will enable the trial judge to know exactly what issues remain to be tried. My provisional view is that, in addition to the paragraphs of the Particulars of Claim that I have already said should be struck out, the following paragraphs should also be excised: 7D, 8C(ii) to (iv) and (vi); 8D, 8E, 24A (which has been abandoned), 27 (4B) (which the judge found was unsustainable on the facts), 27 (7) (which seems to be consequential on paragraph 27 (4B)), 28A, 28B, 28C, 31A, 31B, 31C, 35A, 35B, 35C, 35D, 38A, 38B, 38C, 38D, 41A, 41B, 41D, 41E, 44A, 44B, 48A, 48B, 48C, 51A, 51B and 54A.

I agree.

I also agree.