Independent Trustee Services Ltd v GP Noble Trustees Ltd. & Ors

This is an application to vary a freezing order made on a without notice application by Blackburne J. The applicant is a company called Multiple and Unilateral Financial Futures Limited ("MUFF"). MUFF is a subsidiary of Morris Family Holdings Limited, which is in turn owned by trustees of the Augusta Settlement, a settlement set up by Mr Tony Morris.

The underlying allegations are made by the claimant, ITS, as trustee of a number of occupational pension schemes. In short the allegation is that the former trustees of those schemes (abbreviated to GPNT and BDC) paid away money held on the trusts of those schemes in purported investments not within the trustees' investment powers. It is also alleged that two of the directors of those trustees, Mr Pitcher and Mr Cordell, were dishonest and that Mr Morris was a dishonest accomplice. Some £52 million is involved. Of that £52 million some £45 million was paid to MUFF and some £28 million remains in accounts held at Credit Suisse in Geneva.

ITS alleges that it is entitled to trace the money into the Swiss bank account and that MUFF was not a bona fide purchaser for value without notice of the breach of trust such as to prevent ITS from asserting a proprietary claim to the money. It also alleges that MUFF dishonestly assisted in the breach of trust and hence holds the funds in the Swiss account as constructive trustee for ITS. Finally, it asserts that MUFF received trust property with knowledge of the breach of trust and hence holds the monies on constructive trust for ITS.

In addition to the freezing order made by Blackburne J there is also in force a series of restraint orders made by the Central Criminal Court under the Proceeds of Crime Act 2002. These orders, which are made against individuals, notably Mr Morris and Mr Starkey, who is the sole director of MUFF, apply in terms to the funds in the Swiss bank account and to other assets.

The three variations sought are, first, the release of funds to enable MUFF to incur expenses in defending these proceedings, second, the release of some £8 million to enable MUFF to honour contractual commitments that it has entered into, particularly in relation to the purchase and development of land in Thailand, and, third, the making of the freezing order conditional on provision by ITS of a more extensive cross undertaking in damages.

It is common ground that the approach I should adopt to the first two variations sought is set out in the Ostrich Farming Corporation Limited v Ketchell (unreported) 10 December 1997. That involves asking four questions. First, does ITS have an arguable proprietary claim to the money? Second, if yes, does MUFF have arguable grounds for denying that claim? Third, if yes, has MUFF demonstrated that without the release of the funds in issue it cannot effectively defend these proceedings? Fourth, if yes, where does the balance of justice lie as between, on the one hand, permitting MUFF to expend funds which might belong to ITS and, on the other hand, refusing to allow MUFF to expend funds which might belong to it? It is also common ground that nothing I decide will affect the restraint order. The jurisdiction to vary the restraint order belongs exclusively to the Crown Court.

Mr Smith QC, appearing on behalf of MUFF, says that this approach should also apply to the application to allow MUFF to pay business debts incurred before the freezing order was made. However, as he rightly said, article 6 of the European Convention on Human Rights and Fundamental Freedoms applies in relation to legal fees in a case where an effective defence cannot be mounted without the aid of lawyers. These considerations do not apply to the payment of business debts. Thus, although the same questions are to be asked, the balance of justice may differ according to what kind of payment is in issue.

The first two questions are, in my judgment, inextricably linked. The groundwork preceding the making of the impugned payments was undertaken by Mr Pitcher, acting on behalf of the then trustees, GPNT and BDC, and Mr Morris before the incorporation of MUFF. Mr Pitcher, it seems, concealed his intentions and the making of the payments from his fellow directors of GPNT and BDC. Some payments were made by Hassans, a respectable law firm based in Gibraltar, and used for or towards the purchase of land in Thailand, also before MUFF was incorporated.

Hassans incorporated MUFF on 13 February 2008. The purpose of the incorporation was to create a special purpose vehicle to receive funds from the pension funds and to use those funds for onward investment. MUFF was incorporated on the instructions of Mr Morris and the ownership of its shares, as I have said, is vested in Morris Family Holdings, which is in turn owned by the settlement created by Mr Morris. Between 18 and 21 April 2008 some £22 million was transferred from BDC and GPNT to MUFF's Credit Suisse account. On 23 April 2008 Mr Starkey became a director of MUFF and a further £10 million was transferred to MUFF's Credit Suisse account. In response to questions asked by ITS, Mr Starkey has said that he acts on the advice of, amongst others, Mr Morris. Whether advice is the right description of Mr Morris' input is questionable.

Although the trust deeds governing the pension funds contained wide powers of investment, these powers are constrained by legislation. Having regard to the legislation governing investments by pension funds, there can, in my judgment, be little doubt but that these transfers exceeded the trustees' powers. Moreover, it is, to put it no higher, strongly arguable that the intended investments that MUFF was created to make were also in breach of those constraints. Thus far it is well arguable that MUFF held the transferred monies on constructive trust for the pension funds.

In June 2008 Mr Starkey signed two bond instruments creating interest bearing bonds in relation to which the pension funds were to be the bond holders. The creation of these bonds is relied on as amounting to a bona fide purchase for value without notice. In effect MUFF says that by issuing the bonds it bought the monies in good faith. This is the central issue in the case. Thus if the issue of the bonds were a bona fide purchase for value without notice it will (a) defeat ITS' right to trace the monies into MUFF's Credit Suisse account, (b) defeat any allegation that MUFF received trust monies as a volunteer, (c) defeat any allegation that MUFF knew that the transfer of the monies was a breach of trust, and (d) defeat any allegation of dishonesty necessary to support the claim of dishonest assistance.

A bona fide purchase is one which is made honestly by the purchaser and without knowledge of any defect in the seller's ability to sell. But as well as being bona fide the purchase must also be made without notice. Notice is not the same as knowledge. Notice includes the knowledge that would have been acquired if the purchaser had made such inquiries as a prudent purchaser would have made.

MUFF took advice from Hassans and in particular Mr Fabian Picardo. No attack is made on Mr Picardo's personal integrity. His evidence is that after first meeting Mr Pitcher in January 2008 he carried out some Internet checks on Mr Pitcher which confirmed that Mr Pitcher was a professional pensions trustee and apparently well-respected in that industry and that he had received praise for his work in dealing with distressed pension funds. Mr Picardo also carried out standard identity checks on Mr Pitcher. Mr Picardo was also provided with the investment powers of a representative deed of trust which appeared to contain very wide powers of investment. As a result Mr Picardo says that he believed that GPNT had the ability to invest in a wide range of financial instruments, including investment bonds or similar such products. However, as he made clear both at the time and in his evidence, his belief was based on a reading of the trust deed alone and did not take into account any UK legislative constraints on which very fairly he said he was not competent to advise. Mr Starkey's evidence is that he had the same belief. Mr Morris, who set up the deal in the first place has not given any evidence.

If the evidence of Mr Picardo and Mr Starkey is accepted, it is likely that they will be personally acquitted of dishonesty. But ITS maintains that Mr Morris orchestrated the transactions and that he was dishonest. Mr Picardo has had a long-standing relationship with Mr Morris and the structure under which MUFF was incorporated was established on Mr Morris' instructions. Morris entities, namely Morris Family Holdings and the Morris Settlement are the ultimate owners of MUFF. The action is at an early stage and Mr Spearman QC, appearing for ITS, has pointed to indications that Mr Morris was more closely involved than MUFF was prepared to accept and that Mr Picardo had rather more misgivings about the arrangements than his current evidence suggests. There is also, as I have said, evidence to suggest that Mr Starkey as director of MUFF was taking instructions from Mr Morris and strong evidence that large payments of money paid away by the trustees made its way into Mr Morris' pocket. This includes money channelled via MUFF to a company called Cerberus, part of which was in turn paid to Mr Morris.

On 16 December 2008 Mr Mark Thompson, an investigator with the SFO, made a witness statement in these proceedings. The view I take on the basis of the evidence before me, and in particular Mr Thompson's witness statement, is that it is at least arguable that MUFF is a vehicle for fraud and that Mr Morris is the man behind it pulling the strings. I am therefore satisfied that there is a prima facie case of dishonesty against Mr Morris and that MUFF may have been part of a dishonest plan, even if Mr Starkey and Mr Picardo were not themselves personally dishonest.

It is also clear from BCCI v Akindele [2001] Ch 437 that a lower threshold than dishonesty will suffice to impose liability for knowing receipt. As I have said, Mr Picardo did not make inquiries about legislative constraints on the investment powers of pension trustees. He appears to have relied on Mr Pitcher's assertions that the investments were within his powers. Mr Starkey actually called for UK pensions legislation so it is clear that he was aware that potentially there were legislative criteria that had to be satisfied. He too was fobbed off by assertions by Mr Pitcher and pursued the inquiries no further. He did not, for example, seek advice from an English lawyer, even though the amount to be invested was many tens of millions of pounds. It is strongly arguable that his omission to make inquiries suffices to fix MUFF with knowledge of what would have been found out if those inquiries had been made. That, in my judgment, may well amount to notice.

It is also right to draw attention to a number of oddities about the bond terms themselves. In the first place, it is unclear what interest, if any, is payable and interest is only payable in rolled up form on redemption. The provisions purporting to protect capital are at best obscure and at worst meaningless. These and other features of the bond conditions ought to have rung warning bells about whether they were suitable investments for pension trustees. It is fair to say that warning bells did sound for Mr Picardo, but again he was fobbed off with assertions by Mr Pitcher. According to the bond conditions the bond holders are those entered in a register, yet no register exists. The bond holders are to be entitled to certificates of entitlement, but no certificates have ever been issued. There are also commercial considerations to bear in mind. Whatever the investment powers are conferred by a trust deed, a trustee has a duty to exercise them as a prudent man of business and to avoid investments that are hazardous. Where a pension fund invests tens of millions of pounds in a newly incorporated company with no security and only an obscure promise to repay, it would not have taken much thought to have seen that this was an unsuitable investment for the pension fund trustees. Those bare facts alone may themselves amount to notice of a breach of trust.

On the current state of the evidence both ITS' proprietary claim to the monies and MUFF's defence to that claim are well arguable. I answer yes to the first two questions posed by the Ketchell case.

I turn then to the third question. Has MUFF shown that without access to the frozen funds it cannot finance its defence? I accept that on the evidence (a) MUFF has no funds other than those which have been frozen, (b) Mr Starkey has no personal funds, and (c) third party creditors will not advance funds to finance the defence. What then is the other possible source of funds? The position here is complicated by the restraint orders. Mr Morris might be thought to be an obvious candidate for funds, but the restraint order is in place. There are funds held by Hassans in Gibraltar, but they came from the Augusta Settlement, which is also potentially caught by the restraint order made against Mr Morris. It is accepted by Mr Spearman that for practical purposes MUFF has no access to funds other than the frozen funds. Although the possibility of creditors advancing money has been canvassed, that is not, in my judgment, a realistic possibility. The possibility of a conditional fee agreement has also been canvassed, but in a case of this complexity I do not regard a conditional fee agreement as being realistic. I therefore approach the case on the basis that MUFF will be unrepresented by lawyers without access to the frozen funds.

The fourth question: where does the balance of justice lie? One important factor that is relevant in answering this question is the relative strengths of the claim and the defence. If the sole claim had been that MUFF was dishonestly assisting in a breach of trust I would have said that the claim was undoubtedly arguable but that the defence, so far as it is confined to the personal honesty of Mr Starkey and Mr Picardo, was on the face of it cogent. Mr Spearman, however, says that it is wrong to confine one's gaze to the position of MUFF alone and that in deciding whether there is a cogent case of dishonesty it is necessary to look at the bigger picture. I agree. The case is stronger when the wider picture is examined. Moreover, that is not the only claim. As a claim to trace the monies into the monies in the Credit Suisse account and to assert a beneficial interest in them there is, in my judgment, a very strong prima facie claim.

The question then is: how cogent is the defence based on bona fide purchaser without notice? Remembering that knowledge is not the same as notice, my provisional conclusion on the evidence so far is that the defence has many high hurdles to overcome. So I approach the balancing exercise that in asserting rival claims to ownership of the fund ITS has much the better of the argument.

So far as legal fees are concerned, as Mr Smith says, article 6 of the European Convention on Human Rights and Fundamental Freedoms is engaged. The test, however, is a high one. It was described by Chadwick LJ in Perotti v Collyer-Bristow, 6 October 2003, as follows:

In the present case Mr Starkey has already provided his account of the facts with the aid of solicitors and counsel. Written legal submissions have been made on his behalf by counsel and will be available to the court at any future hearing. There are other defendants in the case who will be defending and are likely to be represented. The court also has case management powers which it can exercise to mitigate the hardship to MUFF. Thus filed witness statements can be ordered to stand as the Defence.

There may be problem over disclosure of documents. At that stage it may be that the court would have to intervene, as suggested by the Court of Appeal in Regina v P. But the suggested intervention by the court in that case was not to release frozen funds but to stay the proceedings. Equally, it may be that ITS does not require further disclosure from MUFF or that it applies for third party disclosure from others or that the court makes an order which does not require MUFF to make standard disclosure. The position must be kept under review as the case proceeds.

Mr Stancombe for the SFO also relied on section 41 of the Proceeds of Crime Act. Section 41(3) provides that a restraint order may be made subject to exceptions and that an exception may in particular make provision for reasonable legal expenses. However, section 41(4) provides that an exception to a restraint order must not make provision for any legal expenses which relate to an offence which falls within subsection 5 and are incurred by the defendant or by the recipient of a tainted gift. The offences falling within subsection 5 include the offences which are under investigation and which triggered the application for the restraint order.

I am not persuaded that section 41 applies to these proceedings for the simple reason that it applies to a restraint order rather than to a freezing order and that it is common ground that, whatever I decide, the restraint order itself is not affected. There is, however, what has been called a legislative steer in section 69 of the 2002 Act. I should first point out that these proceedings fall within section 58(5) of the Act. That subsection provides:

The property in question is the money in the Swiss bank account. It is undoubtedly the case that the restraint orders made by the Central Criminal Court apply to that property. Accordingly, section 58(5) applies to this application for a variation. The power which I have under section 58(5) is either to allow the current proceedings to continue or to impose terms on those proceedings. Section 69(1) of the Act applies to the powers conferred on the court by sections 41 to 60 and therefore applies to the powers conferred on the court by section 58(5). Section 69(2)(b) provides that the powers:

Mr Smith, however, argues that MUFF was not a defendant and that consequently section 69(3)(a) applies. Section 69(3) says that subsection (2) has effect subject to a number of rules, of which paragraph (a) is:

It is true that MUFF itself is not under investigation and that no restraint order has been made against it. It is, however, clear where a company is used as a vehicle for fraud the court is justified in piercing the corporate veil. That is what the Crown Court has done in the present case, although the SFO have not placed before this court all the evidence that has been placed before the Crown Court. This court can only act on the evidence before it and, as I have said, even on the basis of the evidence before me, I am satisfied that there is a prima facie case that MUFF was used as a vehicle for fraud and that it is appropriate to pierce the corporate veil. Thus I apply the legislative steer, as it has been called, in section 69(2)(b).

If money is spent on legal fees defending these proceedings it will undoubtedly result in a diminution in value of realisable property. As I have said, the court can by the exercise of case management powers mitigate the difficulty to MUFF in defending the action, but I should also make clear that that position will have to be kept under review as the action progresses.

So far as the payments of debts are concerned, it is I think relatively clear that without access to frozen funds MUFF's business is likely to collapse. But there is no proper evaluation of the commercial prospects of a successful outcome and in addition the funds requested will be paid not to MUFF but to one of its subsidiaries, another BVI company called MUFF Thailand. It is, in my judgment, plain the release of the funds requested to pay these debts is only the thin end of the wedge, although there was disagreement over how thick the wedge would eventually become. But at best it would become some £13 million, which is nearly half the liquid cash left. Mr Spearman submitted that this would be throwing good money after bad and on the state of the evidence I agree.

It is true that on the evidence MUFF Thailand will or may forfeit interests in land for which it has partly paid, but unless the development is carried through to the conclusion it is also likely on the evidence that any assets that MUFF has in Thailand will be claimed by its other creditors. Bearing in mind the view I take of the strength of ITS' claim, it would, in my view, not be just to compel ITS in effect to fund the continuation of a speculative development. I have therefore been persuaded that the balance of justice lies in refusing the variations sought.

I turn lastly to the cross undertaking. Where the claimant is not claiming a personal benefit it may be appropriate to limit the cross undertaking. This can be done in a number of ways. In DPR Futures Limited [1989] 1 WLR 778 liquidators gave a personal undertaking limited to a quantified amount equal to the net assets of the company at the relevant time. In RBG Resources Limited v Rastogi, 31 May 2002, the undertaking was limited to the net realisable assets of the company but without quantifying the amount. In the present case ITS has confirmed that its undertaking extends to all the assets from time to time of the underlying pension funds. ITS is a trustee and should not be required to expose itself personally. In addition, as Mr Spearman points out, if MUFF succeeds it will be on the basis that the bonds were valid instruments. In that event MUFF will be entitled to set off against its liability to repay the amount secured by the bonds any sum that it recovers on the cross undertaking. In practical terms therefore, MUFF has a cross undertaking worth at least £28 million.

In my judgment, there is no warrant for amending the cross undertaking. In the result, therefore, I dismiss the application.