Mullarkey v Broad

The Court of Appeal dismissed the appellants' challenge to the judge's dismissal of a section 212 Insolvency Act 1986 claim. The appeal centred on whether the claimants could avoid the Limitation Act 1980 bar by showing fraudulent breach of trust (section 21(1)(a)) or alternatively by treating sums received by the director as trust property or proceeds converted to his use so as to engage section 21(1)(b). The appellants sought further to rely on the Companies Act 1985 prohibitions on loans to directors (section 330) and the consequent remedies (section 341) to avoid limitation.

The court held that at trial the claim had been presented exclusively on a fraud basis and that the appellants could not permissibly change tack on appeal to a new statutory avoidance argument without showing that no additional evidence or findings would have been necessary. The judge had correctly found that the pleaded case of fraudulent breach failed in relation to the sale of 18/20 Mill Road and the loans to Gentlesound. Because the alternative case would have required further factual inquiry and findings (including whether Southill was a "relevant company" under section 331(6)), the Court of Appeal would not allow the change of case and dismissed the appeal.

Background and parties

The appellants, two former participants in the Southill group, brought proceedings under section 212 of the Insolvency Act 1986 as assignees of a creditor, alleging misfeasance and breach of fiduciary duty by Mr John Broad in relation to Southill Finance Limited (in liquidation). The principal factual allegations relevant on appeal concerned the transfer and sale of the freehold at 18/20 Mill Road Burgess Hill and loans made to Gentlesound Limited.

Procedural posture

• The matter was tried before Lewison J in the Chancery Division, who gave a reserved judgment dismissing the application. The judge held that the claimants were entitled to bring the proceedings as creditors by assignment, but found that the case of fraudulent breach of trust had not been established in respect of the Mill Road transaction or the Gentlesound loans. The judge accepted limitation as a complete bar unless fraud could be shown (relying on Limitation Act 1980 section 21(1)(a)), and made factual findings about an outstanding debt of approximately £85,000 arising from the Mill Road transaction and about payments and arrangements concerning Gentlesound.
• Permission to appeal to the Court of Appeal was granted. On appeal the appellants sought to rely, in addition to the pleaded fraud case, on Limitation Act 1980 section 21(1)(b) (to recover trust property or proceeds in the possession of the trustee) and on breaches of the Companies Act 1985 (notably section 330 and remedies in section 341) to avoid limitation.

Issues framed by the Court of Appeal

1. Whether the appellants could, on appeal, pursue a different legal basis (relying on section 21(1)(b) and the Companies Act) when the trial had been conducted and argued on an exclusive fraud basis.
2. Whether the judge was wrong as a matter of fact or law in rejecting the case of fraudulent breach of trust in relation to 18/20 Mill Road and Gentlesound.

Court's reasoning and conclusions

The Court of Appeal (Lloyd, Moses and Pill LJJ) concluded that the appellants had presented their case at trial exclusively on the ground of fraud. Authorities on withdrawal of concessions and raising new points on appeal (including Pittalis v Grant and Jones v MBNA International) require caution and typically denial of permission where the new point could have required further evidence or findings at trial. The proposed reliance on section 21(1)(b) and on section 330/341 would have required further factual findings (for example whether Southill was a "relevant company" under section 331(6) for loans to persons connected with a director) and additional cross-examination and evidence. The court could not be satisfied that no relevant evidential material would have been different if the claim had been run on that basis at trial. Consequently the change of case was refused and the appeal dismissed. The court also endorsed the primary judge's factual findings that the pleaded fraudulent breach of trust was not made out in relation to the key transactions.

The Court commented on the rarity and procedural difficulty of permitting a party to alter the basis of its case on appeal where doing so would affect evidence and findings at trial.

Appeal dismissed. The Court of Appeal held that the claim had been presented at trial solely on a fraud basis and the appellants could not on appeal adopt a different legal basis (relying on Limitation Act 1980 section 21(1)(b) and Companies Act 1985 prohibitions/remedies) without showing that no additional evidence or factual findings would have been needed. The primary judge had been entitled to reject the pleaded fraudulent breach of trust in relation to 18/20 Mill Road and the Gentlesound loans; the proposed alternative case raised factual questions not addressed at trial and therefore could not be permitted on appeal.

Appeal from the High Court of Justice, Chancery Division (Lewison J). Permission to appeal was given by Lord Justice Waller. The Court of Appeal (EWCA Civ) heard the appeal and handed down judgment on 21 January 2009 (neutral citation [2009] EWCA Civ 2).