Watson v KEA Investments Ltd

The Court of Appeal dismissed the appellant's challenge to the judge's exercise of discretion in fixing the rate of equitable interest payable on sums recoverable from a constructive trustee. The court confirmed that where trust money has been misapplied the appropriate inquiry is how equity should assess a rate of interest against a defaulting trustee and that the rate can properly be a proxy for the investment return that trust funds with the general characteristics of the fund could expect to earn. The judge's approach — treating Spartan as a constructive trustee, rejecting a borrowing-rate approach, and using independent indices (ARC and STEP) of trustee investment returns to select a medium-risk proxy rounded to 6.5% per annum compounded — was within his wide equitable discretion and consistent with the authorities.

Background and parties. Kea Investments Limited (Kea), a vehicle for the Corona Trust, invested sums in a joint venture vehicle Spartan Capital Limited (Spartan). Kea and Sir Owen Glenn sued several defendants, including Mr Eric Watson, alleging deceit and breaches of fiduciary duty and seeking restitution, accounts and equitable compensation. After trial the High Court (Nugee J) found Mr Watson liable and determined Kea's entitlement to sums due from Spartan, treating Spartan as a constructive trustee.

Nature of the application/relief sought. The claim included a request for equitable interest (and interest under s.35A Senior Courts Act 1981) on the sums recoverable. The core issue on appeal was the proper basis and rate of that interest: whether interest should reflect the total return available to trustee investments (including capital appreciation) or be limited to a borrowing or income-only proxy, and what the numeric rate should be.

Procedural posture. This was an appeal from Nugee J's trial judgment [2018] EWHC 2016 (Ch) and his subsequent Interest Judgment [2018] EWHC 2483 (Ch). Permission to appeal had been given on the ground that guidance on the exercise of discretion fixing interest rates in such cases was desirable.

Issues framed by the court. (i) Whether the interest payable by Spartan should be fixed to reflect the return a trustee fund with Kea's general characteristics would have obtained (including total return) or whether a borrowing-rate or income-only proxy was appropriate; (ii) whether Spartan could be treated as a constructive/defaulting trustee for the purposes of fixing interest; (iii) whether the judge erred in principle in using ARC and STEP investment indices and in fixing 6.5% compound interest.

Reasoning and decision. The Court of Appeal agreed with Nugee J that Spartan, having knowingly received trust money obtained by deceit, was properly treated as a constructive trustee liable to account as if a defaulting trustee. Equity's established approach is to award interest as compensation for the loss of income and return to the fund; historically fixed proxies (4%/5%) have been adapted to changing economic conditions. A borrowing-rate proxy is appropriate for commercial claimants whose loss is replacement of working capital, but is unrealistic for conventional trust funds which would not borrow to invest. The judge therefore correctly treated the appropriate rate as a proxy for trustee investment returns. Having regard to reputable independent indices (ARC and STEP) of discretionary trustee investment returns and adopting a medium-risk proxy, the judge was entitled to round down and fix 6.5% per annum compounded. The appeal was dismissed.

Appeal dismissed. The Court of Appeal held that the judge did not err in principle or in the exercise of his discretion in fixing equitable interest at 6.5% per annum compounded as a proxy for the total return that proper trustee investments of a fund with Kea's general characteristics would have produced. The judge was entitled to treat Spartan as a constructive/defaulting trustee and to rely on independent ARC and STEP indices to identify a medium-risk trustee-investment proxy rate; a borrowing-rate or income-only approach was not appropriate in the circumstances.

Appeal from the High Court of Justice (Chancery Division) (Nugee J): Trial Judgment [2018] EWHC 2016 (Ch); Interest Judgment [2018] EWHC 2483 (Ch). Permission to appeal granted on the question of the appropriate assessment of interest and the exercise of discretion in such cases. Appeal heard in the Court of Appeal (Civ Div) and dismissed [2019] EWCA Civ 1759.