Watson v KEA Investments Ltd

When equitable interest is awarded against a defaulting trustee or a knowing recipient liable to account as a constructive trustee, the court has a wide discretion to select a proxy suited to the fund and contemporary economic conditions. Where the missing capital would have been held for trustee investment, the rate may reflect the investment return reasonably achievable by trusts with the fund’s general characteristics. In an appropriate modern case, that return may include capital growth as well as income.

The assessment is broad and does not reconstruct the particular claimant’s hypothetical investments. Neither a borrowing rate nor a deposit rate necessarily provides the correct proxy. The court may use reliable investment-performance indices and may award compound interest where equitable principles justify it.

Kea Investments Ltd invested £129 million of trust money in a joint venture vehicle, Spartan Capital Ltd. The investment agreements were later set aside following deceit and breaches of fiduciary duty. Spartan was liable to account for the money as a constructive trustee, while Mr Watson was liable in equitable compensation for any deficiency in Spartan’s repayment, including equitable interest.

Nugee J held in the Interest Judgment, [2018] EWHC 2483 (Ch), that Spartan’s interest liability should be assessed by analogy with that of a defaulting trustee. Using independent investment-performance indices, he selected a broad-brush rate of 6.5% per annum, compounded annually, as a proxy for the return achievable on suitable trustee investments.

Mr Watson appealed, principally contending that the defaulting-trustee analogy was inappropriate and that the award should reflect income yield, borrowing costs or a materially lower rate. The central issue was whether the judge’s basis and rate fell within the equitable principles governing interest and his discretionary judgment.

1. Appeal dismissed unanimously. Nugee J’s award of compound interest at 6.5% fell within his wide equitable discretion and accorded with the principles developed in the trust cases. The absence of a precedent fixing that precise rate did not undermine an award grounded in established equitable principle.

2. Spartan had knowingly received money obtained by deceit and breach of fiduciary duty and was liable to account as a constructive trustee. Although a knowing recipient is not formally a trustee, equitable remedies require it to account for its wrongful receipt as if it were an express trustee in default. Thakerar v Paragon Finance [1999] 1 All ER 400, Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555 and Central Bank of Nigeria v Williams [2014] UKSC 10 did not support a narrower liability.

3. Equity has adapted its awards of interest to the nature of the fund and prevailing economic conditions. A suitable rate may compensate a trust fund for the return lost through deprivation of its capital, or serve as a proxy for profit made or presumed to have been made by the wrongdoer. Historical fixed rates were responses to the investment conditions of their time, rather than immutable rules.

4. Where trust capital would have been invested, neither the cost of borrowing nor a minimal deposit rate is necessarily realistic. The court should select a proxy reflecting the returns reasonably available to funds having the claimant fund’s general characteristics. It should take a broad-brush approach rather than determine what the particular claimant would in fact have done. Reliable ARC and STEP performance data entitled the judge to select a medium-risk total-return figure and cautiously reduce it to 6.5%.

5. McCombe LJ held that modern trustee investment may properly seek both income and capital accretion. Hamblen LJ agreed and emphasised that, because interest against a defaulting trustee operates as a proxy for the return which ought to have been obtained, it may in an appropriate case reflect total return. Carrasco v Johnson [2018] EWCA Civ 87 concerned statutory interest between private parties, not equitable compensation or defaulting trustees, and did not prescribe the applicable approach.

6. The trial judge’s finding that Kea was a vehicle for trust investment and that the money would otherwise have been placed in suitable trustee investments was a primary factual finding. It could be displaced on appeal only if plainly wrong, and no basis for doing so had been demonstrated.

1. Court of Appeal (Civil Division): By [2019] EWCA Civ 1759, unanimously dismissed Mr Watson’s appeal and upheld the 6.5% annual compound interest rate.
2. High Court of Justice (Chancery Division): Following the trial judgment, [2018] EWHC 2016 (Ch), Nugee J determined the equitable-interest issue in [2018] EWHC 2483 (Ch). He treated Spartan as liable to account by analogy with a defaulting trustee and fixed interest at 6.5% per annum, compounded annually.