Home Information Cases Auden Mckenzie v Amit Patel (2019)

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Auden Mckenzie v Amit Patel (2019)

Summary

The Court of Appeal discussed whether, in a claim for equitable compensation for a director's misappropriation of company funds, a defence was open to the director on the grounds that, if the misappropriation had not occurred, the funds would have been lawfully transferred to the same persons for no value, so that it could be said that the company had sustained no loss as a result of the misappropriation that could be recovered by way of equitable compensation.

Facts

A company director appealed against summary judgment on a claim for equitable compensation.

The appellant was the director and shareholder of a pharmaceutical company. Between 2009 and 2014, he caused the company to pay a total of £13,763,452 ("the payments") against sham invoices. The company received no value for the payments, which had been made in order to extract funds from the company to evade the payment of tax. The appellant later made disclosures to HMRC about the payments and a settlement was reached. In 2017, the company claimed damages against the appellant for breach of fiduciary duty in relation to the payments and sought summary judgment. The appellant's defences, namely (i) that actions that would otherwise amount to breaches of duty by directors could be authorised or ratified by the unanimous consent of the shareholders; and (ii) that if the payments had not been made unlawfully, the shareholders would have caused the company to make equivalent payments to them as dividends or in some other lawful manner, were both rejected. Summary judgment was awarded in the sum of £13,149,479.

The appellant challenged the judge's decision that he had no real prospect of successfully defending the claim on the basis of his second defence.

Held

Equitable compensation - Equitable compensation was the personal remedy available against trustees, or others in a fiduciary position, whose acts or omissions amounted to a breach of trust or fiduciary duty. The breach of duty in the instant case involved the unauthorised payment or disposal of or damage to the company's assets. On the face of it, the loss to the company was the amount of the payments, being the amount by which its cash assets were depleted. If an account in common form were ordered to be taken, the payments would be disallowed and the appellant would be ordered to make good the loss. The order would be to pay a sum equal to the payments plus interest, Target Holdings Ltd v Redferns [1996] A.C. 421, Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (In Administration) [2011] EWCA Civ 347 and Interactive Technology Corp Ltd v Ferster [2018] EWCA Civ 1594 considered (see paras 31-36 of judgment).

Reduction for hypothetical payments - The issue in the instant case was whether, in a case of equitable compensation, the loss to the company resulting from the payments stood to be reduced or eliminated by reference to the hypothetical payments of lawful dividends or other benefits to the shareholders (para.37). Target and AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58 established that equitable compensation in respect of unauthorised payments was not invariably for a sum equal to the payments. If the amount required to replace the misappropriated asset was less or more at the date of trial than it was at the date of misappropriation, either as a result of changes in value or the grant of security, it was that amount which would be awarded as compensation, Dawson (Deceased), Re [1966] 2 N.S.W.R. 211 considered. There was nothing in Lord Browne-Wilkinson's speech in Target to suggest that in ascertaining the loss suffered account was to be taken of hypothetical events, as opposed to actual events which established the quantum of the loss, Target and AIB considered (paras 44, 49, 52). Where a director caused a company to make unauthorised payments for which the company received no value, the director was liable to the company to pay compensation equal in amount to the payments,Bairstow v Queens Moat Houses Plc [2001] EWCA Civ 712 andRevenue and Customs Commissioners v Holland [2009] EWCA Civ 625 applied. There was no reason why there should be a difference in remedy where the unauthorised payment was not a dividend, but a misappropriation of funds paid against bogus invoices. The appellant was not entitled to rely on the assumed fact that dividends equal to the payments made would have been paid in response to the claim for equitable compensation. However, the order below was for summary judgment, not judgment on a preliminary issue, and the court had to be satisfied that the appellant's defence was unsustainable in law (paras 58-59).

Sustainability of defence - The appellant was right to say that in his hypothetical scenario the position of all parties would by now have been precisely the same as it was immediately after the payments were made. The company would not have the money and the appellant would have received the money. While the decisions in Target and AIB did not directly assist the appellant, they did demonstrate a willingness of the courts to develop the equitable remedies for breach of trust and breach of fiduciary duty and, where required to do what was practically just, to entertain some departure from the strict obligation of trustees and fiduciaries to restore the fund under their control, Target, AIB and Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (In Administration) [2011] EWCA Civ 347 considered. The court was far from saying that the appellant had a defence that would succeed if he established the facts on which he relied, but it was not prepared to say that it was unsustainable in law. As with many questions in a developing area of the law, it was an issue which required much fuller submissions than was normally appropriate on a summary judgment application. It was also an issue best decided on the facts as found at trial (paras 60, 64).

Outcome - The appeal would be allowed and summary judgment against the appellant would be set aside (para.65).

Appeal allowed

Court of Appeal
Lewison LJ, David Richards LJ, Newey LJ
Judgment date
20 December 2019
References
[2019] 12 WLUK 399