Smalley v Bracken Partners Ltd. & Anor

A party need not be the ultimate beneficial owner of misappropriated funds to have standing to seek declaratory relief concerning property acquired with them. A recipient that is personally liable in equity for dishonest participation in a fiduciary breach has a real and legitimate interest in establishing that a later recipient holds the property on trust and in enabling the beneficial interest to be restored to its owner. Where the parties agree that the original owner is ultimately entitled, questions of relative title, tracing, priority and proprietary remedies may be unnecessary to decide standing. The declaration should be framed to reflect the agreed beneficial ownership.

Bracken Partners Ltd brought a derivative action concerning a house acquired in Sariah Smalley’s name with money misappropriated from Non-League Media plc (NLM) and transferred through Eye Group Ltd (EGL) and GMG Management Ltd. NLM was not a party but asserted that it was ultimately entitled to the relevant proceeds.

The deputy judge granted summary judgment, declared EGL beneficially entitled to 39/40 of the equity of redemption and Smalley entitled to 1/40, and ordered the property sold. On appeal, Smalley accepted that NLM was entitled to the 39/40 share but argued that only NLM could bring a proprietary claim and that EGL lacked standing after transferring the money onwards. The central issue was whether EGL had sufficient standing to obtain relief against Smalley.

1. Disposition. Mummery LJ, with whom Pill LJ agreed, held that the appeal should be dismissed. The declaration was nevertheless amended to reflect the agreed position that the 39/40 beneficial interest in the property and proceeds was held on trust for NLM, while Smalley retained the 1/40 interest.
2. Standing. EGL had sufficient standing to bring the proceedings. Its receipt of the £272,000 from NLM and its onward transfer to GMG made it personally liable to NLM in equity for dishonest participation in breaches of fiduciary duty arising from the misapplication of NLM’s funds. EGL was therefore accountable to NLM and had a real and legitimate interest in obtaining a declaration that Smalley held the property on trust and in restoring the beneficial interest to its rightful owner.
3. Scope of decision. The money could be traced through the relevant accounts into the property. Legal title was vested in Smalley, while the beneficial interest was elsewhere. EGL, GMG and Smalley were volunteers with knowledge of the misapplication and had no right to retain the money as against NLM; the vendor was a bona fide purchaser for value without notice. However, because NLM’s ultimate entitlement and Smalley’s trusteeship were agreed, issues concerning relative title, tracing, priority and the availability of proprietary or personal claims were unnecessary complications and did not require decision.
4. Mantell LJ’s separate reasons. Mantell LJ broadly agreed with the result but reasoned that the equitable proprietary interest remained vested in NLM throughout, while only legal title passed through the intermediaries. Adopting the discussion in Foskett v McKeown [2001] 1 AC 102, he treated tracing as a process rather than a claim or remedy. EGL could not claim the beneficial interest for itself, but could obtain the agreed declaration and order in its capacity as trustee and accounting party. He considered that substituting the declaration amounted in substance to allowing the appeal.

• Court of Appeal (Civil Division). The appeal was dismissed, with the declaration amended to record that the 39/40 beneficial interest was held on trust for NLM: [2003] EWCA Civ 1875.
• Chancery Division, High Court. On 31 March 2003, Peter Leaver QC sitting as a deputy judge granted summary judgment, declared EGL beneficially entitled to 39/40 of the equity of redemption and Smalley entitled to 1/40, and ordered the property sold.