Statek Corporation v McNeill Alford & Anor

The Claimant (“Statek”) is a company incorporated in California which carries on business as a manufacturer of ultra-miniature quartz crystals, oscillators and sensors. In February 1984 Statek was purchased by a Delaware company called Technicorp International II Inc. (“TCI II”) from a Swiss company. The purchase took place pursuant to an agreement between Hans Frederick Johnston (“Johnston”), an American citizen and Miklos Vendel (“Mr Vendel”), a Swiss citizen who each contributed to the capital of TCI II.

Johnston became chairman and president of TCI II. Sandra Spillane (“Spillane”), a close business associate of Johnston, became vice-president and secretary of TCI II. Both Johnston and Spillane became directors of Statek. Mr Vendel did not become a director of TCI II or Statek. He unwisely entrusted Johnston and Spillane with the day to day control of those companies.

TCI II was a holding company and did not trade; all its revenues came from the trading of Statek. Statek was a highly profitable company and Johnston and Spillane came to realise that they were in control of a cash cow. Between February 1984 and January 1996 it is accepted that Johnston and Spillane misappropriated more than $19.8 million from Statek and more than $10.5 million from TCI II. In 1990 Statek had about 150 employees and an annual turnover of approximately $10 million. Johnston and Spillane forged documents in order to change the balance of shareholding in TCI II so as to reduce Mr Vendel from majority to a minority shareholder.

The Defendant, David Frederick McNeill Alford (“Mr Alford”), is a British citizen and a businessman and long-time business associate of Johnston and Spillane. Johnston and Mr Alford first met at Harvard Business School in 1967 when they became friends. The claim relates to a series of payments made from the assets of Statek into Mr Alford’s personal bank accounts in the UK between April 1988 and December 1995. Statek alleges that, in dishonest breach of his duties to Statek, Mr Alford facilitated the misapplication of the monies so received by him for which Statek claims damages by way of compensation, alternatively he is bound to account for the monies received as constructive trustee.

The Second Defendant is Mr Alford’s wife. Shortly before the trial Statek decided not to proceed against Mrs Alford, and an order has since been made by consent dealing with this.

The background facts

In 1984 Vendel and Johnston agreed to purchase Statek.

The vehicle used by Vendel and Johnston to acquire Statek was TCI II. This acquisition took place in 1984.

In 1984 Johnston became the chairman, president and treasurer of TCI II. Spillane became a director of TCI II and its vice president and secretary.

After Statek was acquired it was operated exclusively by Johnson and Spillane who were both directors (Vendel had no participation or input).

From 1984 until January 1996 Johnston and Spillane systematically looted TCI II and Statek, treating the assets of these two companies as their private preserve.

From 1984 until January 1996 Johnston and Spillane travelled extensively and lavishly in the USA, the Bahamas and throughout western Europe. They did so at the illegitimate expense of TCI II and Statek.

From 1984 until January 1996 Johnston and Spillane fraudulently and in breach of their fiduciary duties as directors: (i) wrongly deprived TCI II of US$10,501,329; (ii) wrongly deprived Statek of US$19,812,942.

In perpetrating their fraud and breach of fiduciary duty, Johnston and Spillane used the following companies ('the Johnston Entities') all of which were owned or controlled by Johnston and/or Spillane, namely:

All the Johnston Entities were corporate shells.

TCI II was a holding company that had no operations, and had little or no reason to incur expense.

Spillane moved money in huge amounts to the Johnston Entities and back to Statek and back out of Statek with the elan and skill of a drug cartel consigliere.

Neither Johnston nor Spillane submitted a single expense report or receipt or otherwise documented their many trips which were purportedly carried out on behalf of Statek.

Between March and June 1993 Vendel filed a lawsuit in Connecticut against Johnston and Spillane ('the Connecticut Action'). This action sought an accounting, a constructive trust, and damages for alleged asset misappropriation. The Connecticut court dismissed the action with leave to amend, on the basis that the claims were derivative in nature and the complaint failed to plead fraud with any particularity. In a conference with the Connecticut Magistrate Judge during which Johnston refused to give Vendel access to any of TCI II's books and records, the Magistrate Judge suggested that Vendel initiate proceedings in Delaware to obtain access to those records.

On 25 October 1993 Mr Vendel and his corporate nominee, Arbitrium (Cayman Islands) Handels AG ('Arbitrium') made a demand to inspect TCI II's stock list and certain of its books and records.

The demand to inspect documents was not complied with and action was taken to compel inspection of the said documents. This action was settled in February 1994. As part of the settlement TCI II agreed to produce the documents requested.

On 28 April 1994 Mr Vendel signed a written consent ('the Consent') removing Johnston and Spillane as TCI II's directors, and appointing himself TCI II's sole director. The consent was hand delivered to TCI II's registered office on 2 May 1994.

Johnston and Spillane refused to acknowledge the validity of the Consent.

On 5 May 1994 Vendel and Arbitrium commenced the Chancery Proceedings against Johnston and Spillane and TCI II. Johnson and Spillane defended the Chancery Proceedings.

The trial of the Chancery Proceedings commenced on 31 October 1994. The trial judge was Jacobs Vice-Chancellor.

On 5 January 1996 Jacobs V-C issued an opinion upholding the validity of the Consent as at 2 May 1994. The Judge's order, giving effect to his opinion, was issued on 11 January 1996.

On 19 March 1996 Jacobs V -C issued a determination stating that:'Given [Johnston and Spillane's] history of factual misrepresentations and irregular bookkeeping practice, no good faith on their part in complying with this Court's January 11 1996 order will be presumed. Accordingly [Vendel and Arbitrium] shall be given the widest permissible latitude in inspecting documents for purposes of ascertaining those they are entitled to copy and retain as records of TCI II and its subsidiaries.'

On 26 June 1996 TCI II and Statek commenced the Fraud Action. One of the many issues in the Fraud Action was whether payments made to Mr Alford by Johnston and Spillane using Statek's monies totalling US$1,883,134 net were made for the legitimate business purposes of Statek.

In an opinion handed down on 27 May 1997 Jacobs V-C held that Johnston and Spillane had defended the Chancery Proceedings in bad faith and accordingly that they were liable to Vendel for the attorney and expert witness fees that he had incurred in those proceedings (these fees and expenses totalled about US$1.6million).

The Fraud Action was tried on its merits before Jacobs V-C for 8 trial days between 14 September 1998 and 16 November 1998.

Post-trial briefing and oral argument in the Fraud Action was concluded on 10 August 1999.

Jacobs V-C provided his opinion in the Fraud Action on 31 May 2000. In his opinion (at pages 97-98) he found that Johnston and Spillane had 'not met their burden of proving that net payments to Alford totalling $1,883,134 were made for legitimate business purposes of Statek'.”

Relevant events in chronological order

Contemporaneous documents show Mr Alford as a director of two other companies in which Johnston had an interest, BAI and Rare Stamps Ltd. BAI was a subsidiary of Technicorp Ventures Inc. of which Mr Alford is shown in public filings to be a director. It is a common feature of all Johnston’s companies, apart from Statek, that they are either holding companies or shell companies. In 1984, as already described, Mr Vendel and Johnston acquired the whole of the issued share capital of Statek using T II as a vehicle of which Mr Vendel was majority shareholder.

On 5^th April 1988 Statek commenced making payments to Mr Alford which are the first payments challenged in these proceedings. These payments were made quarterly until December 1995. They started at the rate of $2,000 and were accompanied by an “invoice” apparently directed to Statek by Mr Alford and which described each payment as “Director’s Fee”. Soon after these payments commenced a further quarterly payment was made by Statek to Mr Alford of $1,000 “expenses”. Towards the end of the period the expenses payment was increased to $2,000 so that Mr Alford was receiving a quarterly payment of $4,000. Notwithstanding these payments Mr Alford denies that he was a director of Statek owing it the duties of directorship. His evidence was that he was not responsible for the preparation of the “invoices”.

As will emerge later in my description of the background facts, Johnston was made bankrupt in the UK and his Trustee in Bankruptcy conducted two recorded interviews with Mr Alford on 27^th January 2003 (“the First Interview”) and on 22^nd October 2003 (“the Second Interview”). In the course of the First Interview Mr Alford said:

In a letter from Mr Alford’s solicitors of 24^th October 2005 the following passage appears:

It is accepted by Mr Alford that on four occasions during the period April 1988 to January 1996 he can be demonstrated as acting as a director of Statek. The first such occasion was 28^th August 1990 when he signed a bank mandate to Barclays Bank in respect of Statek accounts. The mandate was in evidence and shows the entry in respect of Mr Alford and his signature appearing between that of Johnston and Spillane. Mr Alford’s signature has been crossed out with a date, when this was apparently done, of January 1996 which date was written in. On 29^th September 1991 he signed a letter to the managing director of Regalian Developments Limited, Statek’s landlords in respect of a flat at 127 Crown Lodge, Elystan Street in London (“the Flat”) describing himself as a director of Statek. Mr Alford later entered into a guarantee in favour of Regalian guaranteeing payment by Statek of all amounts becoming due under the lease. On 19^th October 1991 he signed an agreement extending the lease on behalf of Statek. On 1^st October 1990 Mr Alford signed a return to the Registrar of Companies in respect of Statek Europe Limited, a Johnston company incorporated in the UK of which Mr Alford was appointed director in 1990. In the “memorandum of directorships held” by Mr Alford in that return he is shown as a director of Statek. He accepted that this return would have been completed for his signature by Spillane. Indeed Mr Alford allowed himself to be shown as a director of Statek in similar memoranda in returns made by other companies of which he was a director, including Rare Stamps Inc. and other companies with which Johnston was connected, but also companies apparently unconnected with Johnston.

It was Mr Alford’s evidence under cross-examination that, at some time before the first of these four events, Johnston and Spillane informed him that they intended to appoint him as a director of Statek and that at all times subsequently until January 1996 he believed himself to have been so appointed.

On 15^th June 1989 Mr Alford was allotted 995 of the 1,000 issued shares in another Johnston company, Beverley Lane Limited incorporated in the Bahamas. This company owned a substantial house which became Johnston’s home. Mr Alford was also a director of that company. Under cross-examination he was unable to give any further explanation for why he undertook these duties other than that it was because Mr Johnston asked him to do so. On 16^th September 1991 Mr Alford wrote to a Mr Samuel Greenspoon (“Mr Greenspoon”), Johnston’s American attorney:-

In the course of “the First Interview” Mr Alford, when asked about the existence of a property in Nassau, replied:

At all material times Mr Alford and his wife maintained a sterling bank account at Barclays Bank Bristol number 20107778. Schedule A to the amended Particulars of Claim sets out a number of payments in American dollars into accounts of Mr Alford and his wife. It is not in issue that the origin of these payments was Statek and that they were, initially, received into this account. The vast majority of these payments are for relatively small amounts. Interspersed, however, are a number of very substantial payments. I will deal with the substantial payments separately. The small payments total $172,913.90, of which $62,790 it is accepted was received and disbursed to meet the costs incurred by Mr Alford in keeping the Flat and, $101,266 for fees and expenses of Mr Alford, allegedly, for services to Statek and which include the “Director’s Fees” which I have already described.

In the course of the First Interview, Mr Alford was asked about the large payments and he described how large sums would be paid into his accounts on the instructions of Johnston or Spillane where they would remain for a time before being transferred back to Statek. He said that Johnston’s reasons for doing this were twofold: so that the money could be managed by Messrs. Cazenove in the UK (a relationship which only lasted months) and so as to be available to purchase businesses in Europe. When he was asked why the money was sent to his accounts as opposed to accounts of Statek or Johnston, which had been opened in this country, he had no explanation and accepted that he thought it “illogical” to do so. Mr Alford accepted that the large sums received into his accounts were held by him for Statek. There is no evidence of any activity by or on behalf of Statek (or Johnston) to look for acquisitions in Europe let alone make payments for that purpose.

Under cross-examination Mr Alford described how Johnston gave him another reason that large payments of Statek’s money were made into Mr Alford’s accounts. This was because “he wanted to have money outside the normal banking system”. By this it emerged that Mr Alford understood Johnston to mean outside Statek’s bank accounts so that no-one would know it was Statek’s money. He said he never asked himself why this should be necessary at the time and could now give no reason for it.

It is admitted by Mr Alford that in the course of 1990 four large dollar payments were made by Statek into the Mr Alford’s joint account number 20107778. These were for $275,013 on 10^th January 1990, $100,000 on 30^th May 1990, $50,000 on 1^st June 1990 and $100,000 on 6^th June 1990.

The sum of $275,000 was paid out of the Alford’s joint account on 18^th January 1990 and received into the UTO Bank Zurich where it was credited to an account in the name of Vivum Stiftung, of Vaduz. It was Mr Alford’s evidence that the payment out was made on the instructions of Johnston to be made to the “senior partner” of the UTO Bank, a Mr Kimsche, into a bank account the number of which ended with the figures 08. It was, he said, Mr Kimsche who procured the payment to be credited to an account in the name of Vivum Stiftung of which Mr Alford said he knew nothing. That this sum was initially paid to UTO for the attention of Mr Kimsche appears to be borne out by a document headed “Customer’s instructions” originating at Barclays Bank. There was no direct evidence of the identity and nature of Vivum Stiftung. It is Statek’s case that this is an entity connected with Johnston. What is clear is there is no evidence that the money has been repaid to Statek and it is now untraceable. I will shortly return to the three further payments totalling $250,000 in May and June of 1990.

In July 1990 Statek opened bank accounts in this country at Barclays Bank Knightsbridge. I have already described how Mr Alford signed the mandate for those accounts. He did so at the same time as they were signed by Johnston and Spillane. At about the same time, accounts were opened for Johnston at the same bank.

In October 1990 a company, Statek Europe Limited, incorporated in the UK was set up having been acquired off the shelf and on 1^st October 1990 Mr Alford signed a form 288 for the Company’s Registry showing his consent to act as a director of it. It was on this form that Mr Alford disclosed under “other directorships” that he was a director of Statek. There is no evidence that Statek Europe Limited ever traded or indeed acted.

Also in October 1990 a firm of solicitors, Beharrel Thompson & Co, together with a firm of Jersey solicitors, Whitehead & Co, set up a trust in Jersey known as the 1990 No. 1 Trust (“the No. 1 Trust”). In a letter from Mr Beharrel to Mr Morgan of Whiteheads dated 30^th October 1990 Mr Beharrel said:-

This letter reflected instructions contained in a letter dated 25^th November 1990 written by Mr Johnston on paper headed with Mr Alford’s home address, to Mr Beharrel which reads:-

The matter will be regarded as absolutely private & confidential.

No correspondence in this connection will go to anyone at this point other than David – (and none will in any way come to me!)

You will limit access to this matter within your office.

As a letter of 8^th November 1990 from Mr Morgan to Mr Beharrel shows, sterling and US dollar bank accounts were opened for the No 1 Trust at Barclays Bank St Helier Jersey. Mr Alford was the only sole signatory on these accounts. Combinations of two of the solicitors involved were joint signatories. On 16^th January 1991 Mr Alford wrote to Mr Morgan asking him to arrange for appropriate bank mandates to be set up and that statements of the accounts should be sent to him by the bank “periodically”. On 27^th February 1991 Mr Morgan wrote to Mr Alford as follows:-

Later in this account of the background facts I will describe how Mr Alford received into his dollar account opened in October 1992 substantial sums of money from the No. 1 Trust bank accounts. In his original defence, Mr Alford admitted that the source of the money from which these payments were made was Statek. He subsequently amended his defence to a non-admission that such was the source, describing the previous pleading as “a mistake”. It was not a mistake and in cross-examination Mr Alford accepted that the ultimate source of that money was, almost certainly, Statek. There is no evidence that the No. 1 Trust existed for any other purpose than to receive money into its bank accounts and then to disburse that money. It is clear that the Trust was established so that it could receive and disburse Statek’s money secretly.

It is admitted by Mr Alford that on 15^th January 1991 and 7^th January 1992 respectively, US $500,015.75 and $260,000 were paid by Statek into the Alfords’ joint account number 201 07778. It is submitted by Mr Alford that this sum together with the three substantial receipts into that account in May and June 1990, which I have described at paragraph 17 above, were paid out of this account between May 1990 and January 1992, the total amount being so paid out amounting to $1,010,015.75. See paragraph 30 of the Amended Defence. It is Mr Alford’s case, pleaded at paragraph 30, that those sums were paid into the US dollar account of the No. 1 Trust in Jersey. That this took place is unsupported by any documentary or other evidence save the assertion of Mr Alford. The relevant bank account statements, which would have been sent to Mr Alford, are missing or have not been produced by him.

In October 1992 Mr Alford opened a US dollar account at Barclays Bank Bristol number 42468000. He accepted that this account was opened to receive payments from Statek. On 11^th November 1992 the sum of $1,030,040.00 was received into that account. On 12^th November 1992 that sum was paid out in two payments of $370,038.20 and $660,066.54 to two Statek bank accounts.

It is Mr Alford’s case that the receipt into the Mr Alford’s dollar account at Barclays Bristol of $1,030,040.00 came from the No 1 Trust dollar account and included the receipts into that account from the Barclays Bristol accounts of the Alfords of $1,010,015.75 allegedly paid over between May 1990 and January 1992. There is no evidence of any connection between these two payments other than the assertion of Mr Alford.

Mr Alford accepts that on 15^th January 1993 $300,000 was paid by Statek into Mr Alford’s dollar account number 42468000. I will return to the disposition of this amount shortly.

On 22^nd January 1993 Mr Alford became the Nominee Holder of Johnston’s shares in TCI II. In the course of his cross-examination, Mr Alford was compelled to accept that a statement in a letter to the Trustee of 25^th March 2003 from Mr Alford’s solicitor that he did not know that he held these shares as nominee until receipt of a letter from Mr Vendel’s lawyer of 12^th January 1995, was false and misleading. On the same day he was allotted shares as nominee in Technicorp Ventures Inc., Technicorp International Inc. and TCI III, all Johnston companies. Mr Alford could give no reason for his doing this other than that he was asked to do it by Johnston, his friend.

In the beginning of March 1993 the address shown on the statements of Statek’s Barclays Knightsbridge account no. 40859737 was changed to Mr Alford’s home address.

Mr Alford was unable to give any satisfactory explanation for why he agreed to become a nominee shareholder for Johnston in respect of the companies mentioned in paragraphs 14 and 31 above. There is no suggestion that he obtained any reward for doing so. It seems to me that the explanation that he gave when asked – that he undertook this role to help a friend at his request - leads to the conclusion that Johnston wished to conceal his interest in the companies, for whatever reason, and was using his friend as a nominee to assist him in doing so.

Mr Alford accepts that on 20^th April and 11^th May 1993 respectively, $200,030.90 and $200,031.01 were paid into Mr Alford’s dollar account number 42468000. These two payments were made from Statek’s account at Barclays Bank Knightsbridge no. 83225811. A statement of that bank account records those payments as being made into an Alford account. That statement also shows that on 30^th April 1993 a further payment of $300,031.63 was made to an unidentifiable payee. Statement no. 6 of Mr Alford’s account number 42468000 shows a balance at the end of the account of $2,305.63. Statement no. 7 is missing but statement no. 8 shows a commencing credit balance of $502,305.63. It seems highly likely, therefore, that statement no. 7 would have contained a credit of $500,000, alternatively, credits amounting to that sum. It is Statek’s case that since the payment of $200,000 (with a small expenses figure added) was paid into Mr Alford’s account during the period of the missing statement, it is clear that the balance of the credit in the period of that statement must have come from the debit of $300,000 plus expenses to Statek’s Barclays Knightsbridge account no. 83225811, the destination of which is not shown on the statement of that account. In the course of his cross-examination Mr Alford was driven, in reality, to accept this.

The payments into Mr Alford’s account number 42468000 of $300,000, $200,000, $200,000 and $300,000 (together with small sums on account of expenses), on 15^th January, 20^th April, 11^th May and 30^th April 1993 respectively, were paid out of that account by payments of $300,000 on 19^th January 1993, $500,000 on 11^th May 1993 and $200,000 on 18^th May 1993 (together with small amounts for expenses) to unknown payees or payees of which Mr Alford was unable to give any particulars, notwithstanding that he must have authorised those payments out to be made.

Between March and June 1993 Mr Vendel commenced proceedings in the courts of Connecticut on behalf of Statek against Johnston and Spillane seeking an accounting on the basis of constructive trust and damages for alleged asset misappropriation. That action was dismissed on technical grounds but with a recommendation that proceedings should be commenced in the courts of Delaware. On 25^th October 1993 Mr Vendel and his Nominee, as shareholders of TCI II, made a demand to inspect TCI II’s books and records which request was resisted by Johnston and Spillane.

On 13^th December 1993 $300,000 were paid from a bank account at Barclays Bank Jersey of the No 1 Trust into Mr Alford’s account at Barclays Bristol number 42468000. On 15^th December that sum was paid out to Johnston’s account at Barclays Knightsbridge no. 83225722. On 22^nd December $203,000 was paid out from this account to the account of Statek at the same Barclays branch. It is accepted that the balance of the $300,000 paid in to Johnston’s account, namely $97,000, has been paid away and is untraceable.

On 28^th April 1994 Mr Vendel signed a “Stockholder consent” directed to removing Johnston and Spillane as directors of TCI II which was then delivered to that company. That attempt at removal being resisted, on 5^th May 1994 Mr Vendel commenced proceedings in the Delaware Chancery Court against Johnston and Spillane, asking for a declaration that he controlled Statek and an injunction to remove them as directors of that company. Those proceedings have been called “the Section 225 Action” and I will continue that description. On 5^th May 1994 Mr Vendel obtained an order of the court expediting those proceedings. On 3^rd June 1994 Statek, TCI II, Johnston and Spillane agreed “that pending a decision by the Chancery Court in the Section 225 Action, TCI II will not make any loans or other extraordinary cash disbursements to Johnston, Spillane or entities affiliated with, or owned or controlled by Johnston or Spillane nor will TCI II or Statek engage in any extraordinary transactions without first giving the plaintiffs seven days notice.” On 31^st August lawyers instructed by Johnston and Spillane purported to revoke this “standstill agreement” but on 23^rd September Vice Chancellor Jacobs, the judge in the Section 225 Action, affirmed the agreement.

It seems clear from Mr Vendel’s lawyers’ letter to Mr Alford of 12^th January 1995 that Mr Alford was aware of the Section 225 Action at least from this date. He was probably aware of them from December 1994 as indicated by personal correspondence from Johnston’s wife to the Alfords and probably earlier still.

An extract from the 12^th January 1995 letter from lawyers instructed by Mr Vendel to Mr Alford reads as follows:-

The letter goes on to request that Mr Alford “refrain from any disposal of TCI II shares or from any other act prejudicial to Mr Vendel’s shareholding in TCI II….” It is clear from a letter of 25^th March 2003 to Mr Johnston’s trustee in bankruptcy from solicitors instructed by Mr Alford that Mr Alford received this letter. An invoice from Johnston and Spillane’s lawyers in the Section 225 Action, for legal services to TCI II includes a reference to a telephone call with Mr Alford and a “review of correspondence to D. Alford”.

Meanwhile on 18^th November 1994 $951,000 was paid from the No. 1 Trust account in Jersey into Mr Alford’s account number 42468000 at Barclays Bank Bristol. On 21^st November $950,000 was paid out from this account to Johnston’s account at Barclays Knightsbridge no. 83225811. On 23^rd November $940,000 was paid out from Johnston’s account to Statek’s account at the same Barclays branch no. 83225911, leaving a balance of $11,000 which it is accepted cannot be traced.

On 20^th April 1995 $24,404.99 were paid from the No. 1 Trust account in Jersey into the Alfords’ account number 42468000. It is Mr Alford’s pleaded case that $25,000 was paid out to an account at “Fleet Bank Stamford CC. 1685558”, an account of Metrodyne Corporation, a Johnston company. There are no contemporaneous documents in evidence which support this latter transfer. In any event the sum is now untraceable.

On 21^st April 1995 Johnston wrote to Mr Alford as follows:-

On 26^th September 1995 Mr Alford wrote a letter to Mr Morgan of Whitehead and Co. asking him to take the appropriate steps to liquidate the No. 1 Trust and on 3^rd October 1995 Grant Thornton wrote to Mr Alford noting “that it is your intention that the company [Statek Europe Limited] will be put into members’ voluntary liquidation.”

On 5^th December 1995, as already noted, the last payment of $4,000 “Director’s fees” by Statek to Mr Alford was made. On 7^th December 1995 Statek’s lawyers in the Section 225 Action, wrote to Mr Alford informing him that the hearings in that action were complete and the court had reserved its judgment.

On a date in December 1995 Mr Alford and his wife went to Gibraltar, according to him, for a brief break, where they met Johnston and Spillane. It was Mr Alford’s evidence under cross-examination that this meeting was not by arrangement and in the course of it no matters of important business were discussed, in particular the likely result of the Section 225 Action. However, Spillane’s written justification in the Section 225 Action for charging the expenses of this trip to Statek reads:-

On 5^th January 1996 Vice Chancellor Jacobs in the Section 225 Action, holding that Mr Vendel was the majority shareholder of TCI II, upheld the validity of the removal of Johnston and Spillane as directors of that company. An order to that effect followed. Mr Alford, after initially saying he could not recall when he did so, answering a question put by me, accepted that he got to know of the judgment in the Section 225 Action soon after it was given.

A number of events then took place, which appear to have been triggered by the judgment. On 20^th January 1996, Johnston, Spillane and Mr Alford resigned as directors of Statek Europe Limited. In the same month, as already noted, Mr Alford’s name appears to have been removed from the mandate of Statek’s accounts at Barclays Bank Knightsbridge and his address was removed from the statements of those accounts. On 16^th March the lease of the Flat was terminated in circumstances which remain obscure. On 22^nd March Mr Alford closed his US dollar account at Barclays Bristol no. 42468000 transferring the balance in that account of $77,876.99 to Metrodyne Corporation.

On 6^th March 1996 two accounts were opened at Lloyds Bank Birmingham, close to Mr Alford’s home, in the name of Johnston. Mr Alford was given authority to operate these accounts. In an internal letter to auditors from the bank of 19^th April 1997 the opening and subsequent use of these accounts is described as follows:-

The contents of this letter are confirmed by the bank statements in respect of these accounts which show large amounts of cash were paid into them. Some of the payments were made into the account at Lloyds Bank Shipston- upon-Stour branch, where Mr Alford lived, or at Stratford-upon-Avon branch which was nearby. When asked about this in cross-examination, Mr Alford could not remember making these payments, and later denied making them. It seems probable that Mr Alford was responsible for facilitating these payments although they are not directly a subject of the claim.

Also at about this time stamps and other goods were consigned for sale either in the name of Mr Alford or under an alias from his address: see the consignment of stamps to Robert Siegel & Co. in February 1996 under the name Phoenix and the consignment of items under the name of “A. Gordon” to Christies in May and July 1996.

On 19^th March 1996 Vice Chancellor Jacobs, consequent on his judgment in the Section 225 Action, made an order that “given the Defendants’ history of factual misrepresentations and irregular book-keeping practice, no good faith on their part in complying with this court’s January 11^th 1996 order will be presumed. Accordingly, the plaintiffs shall be given the widest permissible latitude in inspecting documents for purposes of ascertaining those they are entitled to copy and retain as records of TCI II and its subsidiaries.”

On 26^th June 1996 an action against Johnston and Spillane was commenced by Mr Vendel (through TCI II and Statek) alleging misappropriation of corporate assets (“the Fraud Action”) in the Delaware courts. The claim included allegations that payments of $1.8 million, made by Statek to Mr Alford, were not made for Statek’s legitimate business purposes. In cross-examination Mr Alford accepted that he knew of these proceedings.

On 21^st April 1998 Johnston was arrested by the Metropolitan Police for soliciting to murder Mr Vendel and his associates and lawyers. On 23^rd September 1999 he was found guilty of that offence and also of using a false passport and false driving licence. He was sentenced to 6 years imprisonment. There is evidence, in the form of notes of a conference with counsel defending Johnston, that Mr Alford attended at least one such conference and contributed to it. These notes appear to record Mr Alford as describing himself, or being described by others at the meeting, as being “in business with Fred”, “concerned with Statek” and “aware of his business affairs”.

In the course of his cross-examination, Mr Alford accepted that in July 1998, not long after Johnston’s arrest, he received £25,000 of Johnston’s money in cash, in a plastic bag, which was left for him to collect from a restaurant in Chelsea by a Mr Solomons. He used this money, he said, to meet Johnston’s expenses. I will return to the role of Mr Solomons in this account shortly. Suffice it to say at this point that, in cross-examination, Mr Alford refused to accept that the receipt of money, in this way and in these circumstances, was suspicious.

On 31^st May 2000 Vice Chancellor Jacobs gave judgment in the Fraud Action against Johnston and Spillane for $30.3 m. That judgment included a finding that the various payments made by Statek to the Alfords were not made for Statek’s legitimate business purposes. It is clear from a letter dated 27^th June 2000 from Johnston to Mr Alford that Mr Alford was aware of this judgment soon after it was given.

On 12^th February 2001 Mr Alford opened two safety deposit boxes at Barclays Stratford-upon-Avon. One of those boxes was closed on 29^th August 2001 without being used but which, as described in a letter from Mr Alford to Mr Johnston’s Trustee in bankruptcy on 20^th March 2004, was opened for the purpose of storing stamps collected from a Mr Barandun. The second box was closed on 28^th August 2002 and was used, as described in the same letter, for the purpose of storing two items of American folk art in anticipation of a shipment of such art to Sotheby’s on 30^th August 2002. It is apparent from the letter that the safety deposit boxes were opened for Johnston’s use.

It appears that in 1995 Johnston befriended a Mr Jonathan Solomons and his wife who were art and antique dealers. On 30^th April 2003 Mr Solomons wrote to Messrs. Taylor Wessing, solicitors to the Trustee, describing his relationship with Johnston. From this letter it emerges that Johnston entrusted Mr Solomons with his substantial collection of art and antiques for storage and/or sale, and asked him to hold in his name the proceeds of the sale of antiques at Christies by Johnston. It seems that Mr Solomons performed this function and carried out Johnston’s instructions as to the disposal of the proceeds.

Mr Solomons’ letter records his receipt of a letter from Johnston in October 1999 instructing him to transfer to Mr Alford £25,000 “as he had been paying bills on his behalf and needed to be reimbursed.” He records that he did this by arranging to send to Mr Alford five drafts of £5,000 each between November 1999 and March 2000. The letter then records a further instruction from Johnston to transfer £10,000 to Mr Alford in May 2001 and in September 2001 an instruction to send the remaining items held by him for Johnston, and any remaining funds of his to Mr Alford. Mr Alford received this money through an account at UBS Zurich (“the UBS account”) opened under the rubric “Fred”. He accepted that it contained Johnston’s money. With the money received in this way Mr Alford made payments on behalf of Johnston. It appears that Mr Alford kept a running account of receipts and expenditure which he set out in a document headed “Fred’s costs” of which a copy was sent to the Trustee. This account shows a steady flow of money through the account and a balance as at 17^th February 2003 of £44,288.86.

On 10^th July 2001 Johnston was released from prison and went to live in Switzerland.

On 2^nd July 2001 Mr Alford wrote a letter addressed to “to whom it may concern” saying that he had been funding Johnston for several years by giving him loans and providing him with credit cards in respect of which he had agreed to pay the amounts becoming due for their use. In the course of cross-examination Mr Alford was compelled to accept that the contents of this letter were entirely untrue. Notwithstanding Mr Alford’s suggestion that he could not recall delivering the letter to Johnston, it seems likely that it was delivered to him under cover of a letter of 11^th July 2001, the day after he was released from prison.

On 17^th August 2001 Mr Alford wrote a similar letter to Johnston representing that he had paid for the furnishing and equipping of Johnston’s apartment in Switzerland, that the amount was to be treated as a loan and that meanwhile, until payment, the furnishings and equipment were to remain his, Mr Alford’s, property. This letter is countersigned by Johnston agreeing to its terms. These letters were clearly intended to represent that, contrary to the truth, Mr Alford was a substantial creditor of Johnston as a result of having, from his own resources, paid Johnston’s debts and expenses while he was in prison. They were evidently intended to justify the retention of Johnston’s money by Mr Alford which could then be applied by Mr Alford for the benefit of Johnston.

On 15^th August 2001 Johnston wrote to Mr Alford as follows:-

Notwithstanding the contents of this letter, it is apparent from correspondence passing between Johnston and Mr Alford, before and after it, that both are writing on the basis that the American folk art included amongst the various other items of Johnston’s property stored with the Solomons, remained the property of Johnston. In particular on 16^th February 2002 Mr Alford wrote to Johnston enclosing a list of various collectibles, which appears to include at least some of the items mentioned in Johnston’s letter of 15^th August 2001, of which he says:-

It is clear from a letter of Mr Alford to the Solomons of 14^th December 2000 that Johnston intended to sell the American folk art in London. The sale was then countermanded by Johnston in January 2001; see Mr Alford’s letter to the Solomons of 7^th January. By this stage Johnston had been convicted of conspiracy to murder and was serving a prison sentence and he was also subject to a judgment in America against him for $30.3 m. It was likely, therefore, that Sotheby’s would find difficulty in allowing the sale to proceed: hence the countermanding of the Solomons’ instructions. The items were then delivered to Mr Alford who consigned them to Sotheby’s for sale in his name.

The clear inference from this correspondence and the events which it records is that the letter of 15^th August 2001 was written so as to give Mr Alford a colourable right to sell the American folk art which, as is later described, he did, but with the intention thereafter to account for the proceeds of sale to Johnston.

On 24^th November 2001 Mr Alford wrote to a firm of shippers to arrange for the transmission of four boxes of paintings and other personal items to Johnston at an address in Switzerland.

On 11^th May 2002 Mr Alford was served with a statutory demand directed to Johnston as a preliminary to bankruptcy proceedings against him. Two days later he travelled to Vienna to see Johnston at Johnston’s expense. It appears that he returned with a collection of stamps given to him by Johnston which he deposited in the safety deposit box at Barclays Stratford-on-Avon. On 16^th July 2002 an e-mail message from Mr Alford to a Miss Druckman, an expert in American folk art at Sotheby’s, indicated Mr Alford’s wish to sell at auction some of the items of American folk art mentioned in Johnston’s letter to him of August 2001. On 11^th July 2002 a bankruptcy petition against Johnston was presented in the High Court by TCI II and Statek. That petition was served on Johnston via Mr Alford on 31^st August 2002 pursuant to an order for substituted service of Mr Registrar Jacques on 28^th August 2002. He was adjudicated bankrupt on 27^th September and on 2^nd October Mr Nicholas Wood (“the Trustee”) of Messrs. Grant Thornton was appointed his trustee in bankruptcy.

Meanwhile, on 16^th July 2002 Mr Alford consigned 11 items of American folk art mentioned in Johnston’s letter to him of 15^th August 2001 to Sotheby’s for sale and on 25^th July 2002 Mr Alford received $8,075 from Robert A. Siegel Auction Galleries Inc., an auction house specialising in sales of rare stamps from a sale of stamps consigned under Mr Alford’s name in 1996. As already noted the safety deposit box at Stratford-on-Avon was closed on 28^th August.

On 26^th November 2002 the Trustee wrote to Mr Alford as follows:-

Mr Alford’s response was by letter of 27^th November 2002 in which he says:-

A meeting was duly arranged for 27^th January (“the First Interview”) a transcript of which was before the court. In the course of the First Interview Mr Alford made a number of demonstrably untrue statements of which I have already described two; see paragraphs 10 and 15 above. When asked whether he was currently assisting Johnston, he denied that he was doing so. It later emerged that he was at the time holding £44,000 of Johnston’s money and paying his bills. He was in correspondence with Johnston shortly after the interview, giving him advice as to UK insolvency law. He was, as already described, keeping open safety deposit boxes for Johnston’s use. Using those boxes, he was in possession of rare stamps belonging to Johnston some of which were later found by the police and seized when his house was searched.

Mr Alford was asked whether or not he was “aware of any personal accounts Mr Johnston has held in the past three years.” His reply was “no. I am absolutely categoric. …I am not aware of any account he may have anywhere in the world” with the exception of possible accounts in Switzerland or Germany where Johnston was living. Having regard to the nature of the inquiries the Trustee was making, which he must have understood, it was plainly deceptive for him not, at this point, to have revealed the money that he was holding for Johnston. His explanation for not doing so, under cross-examination, was that the money was not held in an account in the name of Johnston. In any event he knew about the bank account at UBS through which he was receiving money from the Solomons. His explanation for not revealing this account was that he wasn’t sure that this was a Johnston account. Under cross-examination he was driven to accept that it held Johnston’s money but sought to explain its non-disclosure on the ground that, when answering the question, he was thinking about bank accounts in this country only. In any event Mr Alford knew about accounts at Lloyds TSB of Johnston which Johnston had closed in October 2001 directing that the balances held in those accounts be transferred to Mr Alford. Finally Mr Alford would have been aware of an account in America which he had assisted Johnston to open and about which we find him writing to an American attorney on 1^st February 1999.

Mr Alford was asked whether he knew of any assets which Johnston held in the UK. His answer was that he only knew of some books and the contents of a briefcase which included some stamps and money and some personal possessions which were in the Flat and of which he had taken delivery. Again, looking back over Mr Alford’s relationship with Johnston described in this judgment, that was a wholly inadequate and misleading statement. As already pointed out, Mr Alford was holding a substantial sum of Johnston’s money and could offer no explanation of any kind as to why he did not at this point inform the Trustee of that although some two months later he did so.

Mr Alford was asked whether he had stored for Johnston valuable items such as stamps and coins. He replied that he had not but mentioned that he had, at Johnston’s request, taken delivery from a warehouse of some personal possessions of Johnston’s and stored other items of his at his house which he then arranged to be shipped out to Johnston in Europe. Again this was a wholly misleading answer. It disregarded that Mr Alford had become a signatory on a Lloyds Bank account for the purpose of facilitating Johnston to trade in stamps and antiques which would from time to time require to be stored. His answer overlooked that in March 2000, as previously described, Mr Alford had collected for Johnston 2 kilos of rare stamps from Zurich and thereafter stored them in a safety deposit box in his own name at Barclays Bank Stratford. I have already described how Mr Alford received monies from the sale of rare stamps which were Johnston’s property. A document recovered in the course of the police raid on Alford’s house dated 31^st May 2002 records “stamps given back to me by Fred on our visit to Vienna May 2002”. There then follows a list of 15 stamps described as “a total of 15 covers. Now deposited with Barclays Bank Stratford-upon-Avon.” The police raid on Mr Alford’s house revealed more rare stamps which were removed.

Meanwhile on 21^st January 2003 Mr Alford had received a report from the New York branch of Sotheby’s on the sale of the folk art, covered by Johnston’s letter to Mr Alford of 15^th August 2001 and which had been consigned to them for sale, which had fetched a total of $277,215.

Following the First Interview, in the course of which Mr Alford had stated that he was unaware of any bank accounts of Johnston in the previous three years, he wrote to the Trustee on 29^th January 2003 enclosing twenty-nine Barclays Bank account statements adding:-

The bank account statements forwarded were of Mr Alford’s US dollar account no. 42468000. Mr Alford was a signatory on Statek’s Barclays Knightsbridge accounts.

On 30^th January 2003 Mr Alford wrote to the Trustee enclosing a schedule of the expenses which he had incurred in the maintenance of the Flat but which also included payments made in respect of the expense of maintaining safe deposits.

Also on 30^th January 2003 the Trustee wrote to Mr Alford asking for his explanation in respect of the various substantial payments into the Alfords’ accounts and the disbursement of the proceeds of those payments. He wrote again on 10^th February asking for an explanation of the various payments received which are recorded in Schedule A. On 11^th February Mr Alford responded by letter:-

On 25^th February 2003 the Trustee wrote to Mr Alford:-

On 6^th March 2003 solicitors instructed by Mr Alford wrote to the Trustee in response to his letter of 25^th February as follows:-

You have the Barclays Bank statements going back to November 1992 on an account Mr Alford set up specifically for receiving sums from Statek. He has also given authority for you to obtain details of all transfer orders on that account.

Mr Alford has told you that before that account was set up the payments went to the account of Technicorp Limited at the Bank of Scotland, and has authorised them to give you details. This should be all the information you need to trace the payments from Statek.

Mr Alford has told you he understands Messrs. Skadden Arps representing Mr Vendel, the owner of Statek, have already satisfied themselves along with Mrs Spillane that all the funds that went out of Statek to accounts in Mr Alford’s control were accounted for.

Statek’s own bank and auditors must have the information.

The letter then continues to disclose four payments between May 2002 and January 2003 totalling £41,352 received from “stamp auctioneers in Germany and elsewhere” and continues by alleging that Mr Alford first became aware of the bankruptcy on 26^th November 2002 as a result of a letter from the Trustee. The list of payments made on behalf of Johnston, headed “Fred’s Costs” was sent with this letter.

Meanwhile, on 21^st February 2003, the Gloucester police had conducted a search of Mr Alford’s home and removed a number of documents. I have already referred to a number of the documents which were removed. Amongst those documents was another version of the list of expenses incurred on behalf of Johnston entitled “Fred’s Costs”. This was clearly the original of the document entitled “Fred’s Costs” sent to the Trustee under cover of the letter of 6^th March 2003 from Mr Alford’s solicitors, which had been “edited” by Mr Alford to omit certain entries in the original. The original version contained entries showing that Mr Alford had paid the charges in respect of the safety deposit boxes opened at Barclays by Mr Alford and the transport charges for the movement of items of folk art allegedly given to Mr Alford. It also contained entries in respect of the receipt of money from Johnston not in the edited version. The inference to be drawn from these omissions is obvious. The police made copies of the documents which they removed before they returned the originals to Mr Alford which he says he then destroyed. He could give no logical reason for doing so. The inference to be drawn from the destruction of these documents by Mr Alford again is obvious.

A further recorded interview of Mr Alford took place at the offices of the Trustee’s solicitors on 22^nd October 2003 (“the Second Interview”). A transcript is in evidence. It seems that the interview took place at the wish of Mr Alford in order, as he said, to clear up outstanding matters and to bring the inquiry directed at him to a conclusion.

These proceedings were commenced on 28^th February 2006.

Statek’s claim requires Mr Alford to account for payments received into the Alford’s sterling joint account no. 2010778 and Mr Alford’s US dollar account no. 42468000 between April 1988 and December 1995. Those payments divide into 10 large payments made between January 1990 and May 1993 totalling US $2,285,060 and a series of smaller transfers from Statek into those accounts totalling US $172,976 and are set out in Schedule A to the Particulars of Claim. The disbursements of the smaller payments are to be divided between payments which Mr Alford submits were made in discharge of expenses incurred in the maintenance of the Flat and payments by way of fees and expenses to him in helping Statek and Johnston administer their affairs in the United Kingdom.

Statek’s second head of claim requires Mr Alford to account for sums received into his dollar account no. 42468000 from the No. 1 Trust account in Jersey and are set out in Schedule B to the Particulars of Claim. The first such sum is the $97,000 being the balance of the sum of $300,000 received into Mr Alford’s US dollar account on 13^th December 1993 as described in paragraph 35 above. The second such sum is $11,000 being the balance unaccounted for of the sum of $951,000 from the No. 1 Trust account credited to Mr Alford’s dollar account on 18^th November 1994 as described in paragraph 42 above. The third such sum is the $24,404.99 received into Mr Alford’s dollar account on 20^th April 1995 from the No. 1 Trust account as described in paragraph 43 above. These three payments amount to $132,404.99.

In his written closing submissions Mr Miles described Mr Alford as “a deeply unsatisfactory witness. He was indeed a seasoned and prodigious liar. Even when confronted with the lies he has told in the past, he evaded and equivocated, and many answers had to be dragged out of him. He remained unwilling to accept the obvious. The way he gave evidence about this shows that he has no regret about having been caught out in these lies; rather he did his best to defend them.” I fully accept that description of Mr Alford’s evidence. My description of the background facts illustrates the occasions upon which it can be demonstrated that Mr Alford has told untruths or sought to mislead in the past, either directly or through his solicitor. In particular I have highlighted extracts from his evidence at his First Interview by the Trustee which can be shown to be misleading. Before me his evidence was evasive. A good example of this was when the deception contained in his letter of 27^th November 2002 in response to the Trustee’s letter of 26^th November was put to him, in particular, his assertion that apart from minor matters he “had no financial involvement with Mr Johnston in the UK”. His response was:-

When later it was put to him that the description of his financial involvement with Mr Johnston was a lie, he denied that it was:-

When it was pointed out to him that at the time he wrote the letter he was holding £44,000 of Mr Johnston’s money, his response was that he wasn’t asked about money. He was finally driven to accept that, as a matter of English, the sentence from his letter of 27^th November 2002 which I have quoted was untrue but he still sought to explain his use of it. In the end he accepted that it was deceptive but continued to insist that he was not at the time attempting to deceive the Trustee in order to preserve his friend Johnston’s assets from being seized by him.

Throughout his evidence to me Mr Alford had lapses of memory when confronted with awkward events requiring explanation, but had surprisingly detailed recollection of events which appeared to assist his case. A good example of this was his stated inability to explain or give any reason for the removal of his name from Statek’s Barclays Bank mandate in January 1996 which elsewhere in his evidence he says was the point at which he realised that he had never been a duly appointed director of Statek.

I regard Mr Alford as a thoroughly unreliable witness whose evidence on any point of importance to the case I am reluctant to accept unless confirmed from another reliable source.

In the course of his cross-examination of Mr Alford, Mr Miles had two objectives; first, to establish that the relationship between Mr Alford and Johnston (and Spillane) at all material times, was that of close business associates in the course of which Mr Alford was at all times fully aware of Johnston’s milking of Statek’s money and its application for purposes other than the benefit of Statek. His second objective was to establish clearly the facts surrounding the various transfers of Statek’s money into the control of Mr Alford giving rise to the transactions in respect of which relief is sought in these proceedings. In my judgment he succeeded in both objectives. In the course of my description of the background facts I have made a number of findings of detailed fact. It seems to me that those findings, taken with the facts which have been specifically agreed or are otherwise not in issue, enable me to make the following further broad findings of fact:-

At least by the early 1980s Mr Alford was a trusted friend and business associate of Johnston and director and nominee shareholder for him of a growing number of companies in which Johnston was interested.

In April 1988 Johnston and Spillane, another close associate of Johnston, started to treat Mr Alford as a director of Statek and told him that he would be appointed as such. He came to regard himself and to act as such a director so as to be constituted a director of Statek de facto. The evidence which, in my judgment, supports this finding is set out in the following paragraphs of this judgment, the contents of which, for the sake of brevity, I will not have to repeat: paragraphs 9-13, 21, 26, 27, 28, 30, 31, 34, 37, 42, 46, 47, 49. It was submitted by Mr Alford that he never received any of the information such as one would expect him to have received as a director of Statek such as accounts and minutes of directors’ meetings. It is correct that there is no documentary evidence of this having happened. In the circumstances of this case and having regard to the view that I take of the value of Mr Alford’s evidence I do not consider that the absence of such evidence undermines this conclusion. Unbeknown to him he was never actually appointed director de jure. He “resigned” as such director in January 1996 when he heard of the removal of Johnston and Spillane as directors of Statek consequent on the judgment of Vice Chancellor Jacobs in the Section 225 Action. At the same time he formally resigned as a director of Statek Europe Limited, a dormant company.

At least by the beginning of 1990 and probably earlier Mr Alford must have come to suspect that Johnston and Spillane were misappropriating the assets of Statek. The pattern of secrecy which emerges from the actions of Johnston from that date, the setting up of the secret No. 1 Trust, the passing of substantial sums of Statek’s money to accounts controlled by Mr Alford to “take them out of the normal banking system” for reasons which don’t bear examination by any remotely intelligent businessman, and the opening of safe deposit boxes for the use of Johnston but in the name of Mr Alford, to name but the most obvious, must have led Mr Alford to suspect that Statek was being unlawfully milked of its assets for the private purposes of Johnston even if he had not been expressly told what was going on. I will return to this finding shortly.

Mr Alford was at all material times from their commencement quickly aware of the proceedings commenced in America by Mr Vendel in early 1993 to recover control of Statek from Johnston and Spillane, which became the Section 225 Action and the Fraud Action, of the various developments in those proceedings, and of the allegations against Johnston and Spillane contained in them.

Mr Alford’s close association with Johnston and their friendship led Mr Alford to be prepared to assist Johnston in the conduct of his and Statek’s business in this country in such ways as Johnston, or on his behalf, Spillane requested or instructed. This willingness to assist continued even after Mr Alford had become aware of the commencement of the Fraud Action in Delaware, judgment in that action, the prosecution and conviction of Johnston for conspiracy to murder and of his bankruptcy in the course of which he was prepared to take steps to conceal Johnston’s assets from his Trustee.

It is accepted that Johnston and, to a lesser extent, Spillane were the prime movers in a substantial fraud against Statek extending over a period from 1984 until January 1996 when Vice Chancellor Jacobs gave judgment in the Section 225 Action removing Johnston and Spillane from their control of Statek; see the statement of agreed facts paragraph 6. The extent of the fraud was to deprive TCI II, Statek’s parent, of US $10,501,329 and Statek of US $19,812,942; see paragraph 7 of that statement. The question before the court was whether Mr Alford knowingly assisted Johnston and Spillane in their fraud by receiving Statek money into the Mr Alford’s joint sterling account at Barclays Bristol no. 20107778 and Mr Alford’s dollar account at the same bank no. 42468000 and disbursing those monies from those accounts in accordance with the directions of Johnston and Spillane; see the statement of agreed facts paragraph 11.

It is not suggested that Mr Alford made any disbursement from the Alford accounts save at the instruction of Johnston and Spillane, usually Spillane, or with their authority.

In this area the law is now authoritatively found in two decisions of the Privy Council, Royal Brunei Airlines v. Tan [1995]2AC,3.78 and Barlow Clowes International v. Eurotrust International [2006]1WLR,1476. In the Barlow Clowes case the Privy Council were considering a claim by the liquidator of a Gibraltar company which operated an investment scheme which had attracted large amounts of money from investors. The scheme was fraudulent and ultimately collapsed and the prime movers of the scheme were convicted of fraud and imprisoned. Some of the investors’ funds had been paid through bank accounts maintained by companies administered from the Isle of Man by two individuals through an Isle of Man registered company. The judgment of the Deputy Deemster, at first instance, against the Second Respondent, a Mr Henwood, one of those individuals, finding him liable for dishonestly assisting in the misappropriation of funds subscribed by investors in the scheme, was reversed in the Isle of Man Court of Appeal. In the result the Privy Council, on appeal, allowed the liquidator’s appeal restoring the Deputy Deemster’s order. The opinion of the Privy Council was given by Lord Hoffman. Having described how Mr Henwood had, up to a certain point in time, played a peripheral part through the First Respondent, “ITC’s”, administration of the scheme, he continued in his description of the facts at paragraph 7 as follows:-

At paragraph 18 of the opinion Lord Hoffman expressed the view of the Privy Council that the applicable principles are to be found in the Royal Brunei Airlines case which had been correctly summarized by the Deputy Deemster, in turn summarized by Lord Hoffman at paragraph 10 in the passage from the opinion which I have quoted.

In the report of the Royal Brunei Airlines case at page 390 Lord Nicholls is discussing the position of an accessory to a dishonest transaction. Having stated that the liability of a trustee is strict, namely that he is liable if he departs from the terms of his trust, he continues:-

Where dishonesty is alleged the burden of proof is firmly on the party alleging that dishonesty but remains the ordinary civil burden. In re H and others [1996]Appeal Cases 563 at page 586 Lord Nicholls explained this in the following words:-

At paragraph 226 of his written closing submissions Mr Miles made the following submissions as to Mr Alford’s state of mind when receiving the payments from Statek sources into his joint sterling account and his dollar account and thereafter disbursing that money on the instructions of Johnston and Spillane.

Mr Alford knew that the monies were Statek’s property. These monies were therefore trust property.

He knew that Statek was a successful manufacturing company with its own employees and creditors.

He was asked to allow his own personal bank accounts to be used to receive and disburse Statek’s corporate funds.

He knew there was no good reason for his own accounts being used to receive and disburse monies. Statek had its own bank accounts in the UK.

He also knew, in respect of many of the receipts that the monies were actually received from a UK bank account of Statek.

He did receive an explanation for the payments to him, that it was for acquisitions in Europe, but the explanation was nonsensical and he believed it to be illogical at the time.

He knew that many of the payments were to Johnston or his entities.

He knew that the payments into and out of his bank accounts were of very large amounts of money, were generally for short periods, and were for no apparent commercial purpose. Certainly the monies were not being held for “acquisitions” and he knew this.

So not only had he received an “illogical” explanation – the pattern of payments was actually inconsistent with what had been explained.

He was also told that the reason for paying Statek’s money to his accounts was to remove it from the normal banking system. This can only have meant putting monies of Statek out of its name into that of Mr Alford, i.e. to conceal the monies. Mr Alford was pressed about this on Day 4. He agreed that the purpose must have been to move the money out of Statek’s name into his own name so that someone would not know that Statek had the money, but said that he did not think about it at the time. He said that he made no inquiries about it and that he treated it as an entirely normal transaction. He still asked no questions when the monies were paid to Johnston. When he was asked why Johnston could not get the money direct from Statek he said “I can’t answer that question”.

I accept Mr Miles’ submissions and find that Mr Alford’s state of mind was as he submits it to have been when each of the large transactions complained of were being handled by him. Like the Deputy Deemster in relation to the Second Respondent in the Barlow Clowes case, which has some factual similarity to the present case, I find that Mr Alford rendered his assistance to carrying out the transactions complained of dishonestly.

Mr Alford, for the bulk of the hearing before me, was unrepresented save that he instructed solicitors and counsel to appear to develop a defence of limitation.

So far as material to this judgment Section 21 of the Limitation Act 1980 provides as follows:-

In the judgment of Lord Justice Millett in Paragon Finance v Thakerar [1999]1AllER400, he divides defendants who are sued as trustees into two categories, the first of which I will call category 1 trustees, being trustees or fiduciaries established as such before the events complained of in the proceedings, and, category 2 trustees, usually called constructive trustees, whose status as such arose only because of the transaction the subject matter of the claim. It is accepted that directors of companies are fiduciaries for their companies of the assets of those companies which come under their control and so fall into category 1; see J J Harrison (Properties) Ltd v Harrison [2002]1BCLC,162.

For the reasons set out in this judgment I have found that between April 1988 and January 1996 Mr Alford was constituted a de facto director of Statek and, in consequence, owed Statek fiduciary duties in respect of the assets of Statek within his control during that time. In particular, I find that the monies of Statek which he accepts or which I have found were paid into the bank accounts at Barclays Bristol which he controlled were held by him as a director of Statek. Even if I am wrong in this finding, Mr Alford accepts that when he received those monies into his accounts he knew that they were the property of Statek and, in consequence, he received them as trustee for Statek. Accordingly in later disbursing those monies he owed Statek fiduciary duties to ensure that they were being applied for Statek’s purposes: see per Lord Esher in Soar v Ashwell [1893]2QB390 at 394. Mr Behrens accepted in the course of submissions that if it was found that Mr Alford was a director of Statek at any material time for the purposes of these proceedings, and that finding stood, his defence of limitation failed because sub-section (1) of Section 21 would apply.

That is sufficient to dispose of Mr Alford’s limitation defence but since the matter was fully argued and in case I am wrong in my conclusions as to the status of Mr Alford as a fiduciary or trustee, I will consider Mr Alford’s limitation defence on the basis that the claim against him was that he was only an accessory to the fraud of Johnston and Spillane who obtained possession of trust property (the money received into Mr Alford’s accounts) as the result of an unlawful transfer from Statek.

It is Statek’s submission that the words in Section 21 (1) “…action… in respect of any breach of trust” includes actions in respect of a breach of trust by a category 1 trustee, in this case, Johnston and Spillane, whose breach of trust it is accepted was fraudulent, and in respect of dishonest assistance in that breach by an accessory, in this case Mr Alford. This interpretation gives a similar meaning to the words “action by a beneficiary… in respect of any breach of trust” where those words are used in sub-sections (1) and (3) of Section 21 with the result that the period of limitation applicable to claims against the category 1 trustee and his category 2 accessory are the same, namely, where the category 1 trustee’s breach of trust was fraudulent, no limitation period, and where it was innocent, six years. It must always be borne in mind that an accessory to a breach of trust must be shown to have acted dishonestly to be made liable but if he so acted, he is liable notwithstanding that the breach that he assisted was itself innocent.

In the decision of Mr Justice Dankwerts in G L Baker Limited v Medway Building and Supplies Limited [1958]1WLR1216 at 1221-2, Mr Justice Dankwerts, whose order was discharged by the Court of Appeal on other technical grounds not affecting his decision on the limitation point, was considering a case under Section 19 of the Limitation Act 1939 having similar wording to the present Section 21 for the purposes of this judgment. The case before him concerned a claim by a company to recover money entrusted to its auditor who fraudulently had paid away some of it to a company of which he was director. At page 1221 of the report Mr Justice Dankwerts is recorded as saying:-

It is noticeable that Dankwerts J. does point out a weakness in this construction, namely that sub-section (1) (a) speaks of “an action by the beneficiary of a trust …to which the Trustee was a party …” which might lead to a conclusion that the sub-section is only concerned with actions against category 1 trustees.

The defendant in the Baker case was not an accessory to the fraud but the innocent recipient of the proceeds of it. In my view that consideration has no bearing on the effect of Mr Justice Dankwerts’ judgment for the purpose of the present case.

In the Paragon case the Court of Appeal was dealing with an application for permission to amend the claim to include a claim for fraud and other similar claims including fraudulent breach of trust and fiduciary duty where solicitors had acted for both the plaintiff mortgage lenders and the borrowers in what turned out to be a mortgage fraud. The leading judgment was delivered by Lord Justice Millett with which Lord Justice Pill and Lord Justice May agreed. At page 412 of the report Lord Justice Millett was dealing with the contention that the former distinction between category 1 and category 2 trustees in the application of limitation provisions had been abrogated by the 1939 Limitation Act. Lord Justice Millett rejected this contention for ten separate reasons. The last two of those reasons were these:-

Mr Miles cited these passages as being consistent with his construction of Section 21 (1)(a). He also cited a passage from Birkes and Pretto on “Breach of Trust” which is also cited in the Paragon judgment and which appears to support his construction.

Against Mr Miles’ construction is the decision of Mr Richard Sheldon QC sitting as a Deputy Judge of this court in Cattley v Pollard [2007]3WLR317. In that case Mr Sheldon was dealing with a claim by trustees of a deceased’s estate against a past trustee who had misappropriated assets of the trust to which claim it was sought to join a defendant against whom it was alleged that she had knowingly and dishonestly assisted in the fraudulent breaches of trust by the former trustee. Mr Sheldon was concerned with a series of preliminary issues one of which was whether, as an accessory to a fraudulent breach of trust, Section 21 (1)(a) applied so that no limitation period was applicable to this further defendant. In the result Mr Sheldon concluded that the sub-section did not apply.

In arriving at his conclusion he cited substantial extracts from the judgments of Lord Esher MR and Bowen LJ in Soar v Ashwell [1893]2QB,390. In particular a passage in the judgment of Lord Esher where he says “there is another recognised state of circumstances in which a person not nominated a trustee may be bound to liability as if he were a nominated trustee, namely, where he has knowingly assisted a nominated trustee in a fraudulent and dishonest disposition of the trust property. Such a person will be treated by a court of equity as if he were an express trustee of an express trust…” and that the Statute of Limitations then in force would not apply to him.

In that case the Court of Appeal were dealing with circumstances where will trustees had entrusted the trust fund to a solicitor for investment who had retained part of the fund for his own use. He was found to have been in the position of an express trustee because he had obtained possession of the trust fund lawfully from the will trustees prior to misapplying it. Thus this passage in Lord Esher’s judgment, the effect of which was repeated in the judgment of Lord Justice Bowen, was obiter.

Mr Sheldon also referred to the Paragon case citing it as support for his conclusion though conceding that paragraph (10) which I have set out above “does provide some support” for a contrary result as follows:-

With respect to Mr Sheldon it seems to me that such a rationale is provided by Lord Justice Millett in the passage from his judgment in the Paragon case which I have set out above.

In arriving at his conclusion Mr Sheldon placed principal reliance on the judgment of Lord Millett as he had then become in Dubai Aluminium Company Limited v Salaam [2003]2AC366. In this case the House of Lords was dealing with the aftermath of a substantial fraud whereby a group of individuals and companies including the defrauded company’s chief executive had, by a series of fraudulent contracts, defrauded the claimant of substantial sums of money. Two associated firms of solicitors had been involved in the case and were defendants. They were involved because a Mr Amhurst, who was a partner in both firms, had been involved in the fraud, in amongst other ways, by drafting the fraudulent contracts. The solicitors firms had compromised the claim against them by the payment of a substantial sum of money to the claimant. The case involved the ascertainment of the extent to which they could recover the amount paid by way of contribution against their co-defendants. The issue before the House of Lords was whether Mr Amhurst was a category 1 trustee for the claimant in which case his having been so constituted would not have been in the ordinary course of business of the firms whereas if he were a category 2 trustee it would have been. In the result the House of Lords concluded that Mr Amhurst was constituted a category 2 trustee having assisted in a fraud.

At paragraph 141 in the speech of Lord Millett he is recorded as saying this:-

This passage is cited by Mr Sheldon in the Cattley case.

Later in his judgment at paragraph 84 Mr Sheldon describes Lord Millett in this passage as “dealing with a claim for dishonest assistance in a fraudulent breach of trust”, as in the case with which he was dealing, and found that the Limitation Act could be pleaded as a defence to the claim.

With respect to Mr Sheldon, nowhere in his judgment does Lord Millett describe the assistance given by Mr Amhurst to the fraud as being assistance to a fraudulent breach of trust. He does not do so in the passage cited. All the defendants to the claim save Mr Livingstone were strangers to the claimant. Mr Livingstone was its chief executive. It is not clear if he was also a director. In any event the case does not seem to proceed on the basis that he or any of the other defendants were trustees or fiduciaries of the assets of the claimant whose fraud, in dealing with those assets, had been assisted by the actions of Mr Amhurst.

In my judgement, Section 21(1) of the Limitation Act 1980, following the decision of Mr Justice Dankwerts in the G.L. Baker Ltd case and the obiter dicta of Lord Esher and Bowen LJ in Soar v Ashwell, is to be construed as applying to accessories to the fraudulent breaches of trust of others with the result that no period of limitation is applicable to claims against them. I do not read the decision of the House of Lords in the Dubai Aluminium case as authority to the contrary.

For these reasons, if I had not already concluded that a defence of limitation was not available to Mr Alford because he was a category 1 fiduciary but was to be treated as an accessory to the fraudulent breaches of trust of Johnston and Spillane, with respect to him, I would not have followed Mr Sheldon’s decision in the Cattley case and would have concluded that no limitation period applied to Statek’s claim against him as an accessory to that fraudulent breach of trust.

In the result, therefore, I hold that Mr Alford has failed to account for the monies of Statek in his control set out in Schedule A to the Particulars of Claim and in respect of which he owed Statek fiduciary duties to ensure they were applied exclusively for the purposes of Statek less $101,266 being fees and expenses of Statek discharged from those monies and $62,790 being costs and expenses of maintaining the Flat similarly discharged, in respect both of which amounts no claim is made in the circumstances I have found. I also hold that Mr Alford has similarly failed to account for $132,404.99 of the amounts set out in Schedule B to the Particulars of Claim.

There will therefore be judgment for the Claimant Statek against the Defendant Mr Alford for US $2,426,385.40.