Kenneth Davies v Stephen Ford & Ors.

The Court of Appeal dismissed the appellant's appeal and the respondents' cross-appeal. The main legal issues concerned the scope of findings of breach of directors' duties made at a liability trial, the permissible scope of a claim in knowing receipt, the appropriate measure of equitable compensation and the availability and size of an equitable allowance to a fiduciary who had acted in breach. The court held that the findings of breach in paragraph 272 of the liability judgment were intended to be exhaustive for the purposes of quantification; that liability in knowing receipt requires receipt of identifiable trust property traceable to a breach of fiduciary duty; and that equitable compensation in this case should be assessed on a reparative basis (compensating loss) rather than by substitutive valuation except where specific misapplied trust property was involved. The judge's factual findings on valuation, causation and the arm's-length nature of a contemporaneous investment were upheld and his discretionary decisions (including refusal of an account of profits and the grant of a limited equitable allowance) were not disturbed.

Background and parties

The appeals arise from a split trial process. Liability was determined by the High Court (David Holland KC presiding over the quantum trial) after an earlier liability trial ([2020] EWHC 686 (Ch)) in which the judge found breaches of directors' duties by Mr Monks and liability in knowing receipt by GBRK. The claims were then remitted to a Quantum Trial before Mr Holland KC (the Quantum Judgment: [2021] EWHC 2550 (Ch)) to determine the nature and quantum of relief. The claimant/appellant is Mr Kenneth Davies (assignee of GBR's liquidators). The defendants/respondents are Mr Stephen Ford, Mr Richard Monks and Greenbox Recycling Kent Limited (GBRK).

Nature of the claim / relief sought

• Primary relief sought included a declaration that GBRK held the Ashford Site freehold on constructive trust for GBR (now Mr Davies) and an account of profits or equitable compensation in respect of the business conducted from the Ashford Site.
• Alternatively, equitable compensation and an award against the directors personally for misappropriated funds, and an equitable allowance to an errant director were in issue.

Issues before the Court of Appeal

• Whether the liability findings in paragraph 272 of the liability judgment were exhaustive or open to expansion at the quantum stage.
• Whether a claim in knowing receipt against GBRK could extend to all business, opportunities and profits of GBRK rather than identifiable trust property.
• Whether specific withdrawals and the acquisition and later sale/assignment of leases and the freehold gave rise to proprietary remedies.
• The appropriate basis for assessing equitable compensation and whether the judge erred in awarding compensation on a reparative basis and in the amount of the equitable allowance.
• Whether the valuation of GBRK used to quantify reparative compensation (derived from a contemporaneous third-party investment) was open to challenge.

Court’s reasoning and principal conclusions

• The Court held that the liability judge’s paragraph 272 listed the specific breaches of duty he was prepared to find; that list was to be read as exhaustive for the purpose of quantifying remedies at the quantum trial. The split-trial structure required finality on liability.
• On knowing receipt the Court applied recent authority to confirm that a defendant must have received identifiable trust property (or its traceable proceeds) and that the transaction by which the recipient obtained the property must itself have been a breach giving the claimant a proprietary remedy. Thus GBRK’s liability was confined to receipt of identifiable trust property traceable to the breaches found (not to the entire business or to unmanifested opportunities).
• The judge properly rejected proprietary claims in respect of the freehold and other post-October 2011 acquisitions because there was no causal link to breaches within the limitation period and because interests had been extinguished or surrendered in ways that defeated tracing and proprietary relief.
• Equitable compensation was to be awarded on a reparative basis: compensation for loss caused by breach, not as an automatic substitutive transfer of all gains made. The judge’s approach was supported by AIB and other authority.
• The judge’s valuation of GBRK as at October 2011, extrapolated from an arm’s-length investment by a third party, was a permissible and cogent factual finding. The judge’s exercise of discretion (including refusal of an account of profits and the limited allowance of £3,000 per month) was within permissible bounds.

The appeal and the cross-appeal are dismissed. The Court held (i) the liability judge’s list of breaches in paragraph 272 was the operative and exhaustive basis for quantification; (ii) claims in knowing receipt require receipt of identifiable trust property traceable to a breach and cannot extend to all business opportunities or the whole enterprise unless those are shown to be trust property; (iii) equitable compensation in this case should be assessed on a reparative basis; and (iv) the trial judge’s valuation of GBRK and discretionary decisions on remedy and equitable allowance were not wrong.

Appeal to the Court of Appeal from the High Court (Chancery Division) decision on quantum by David Holland KC (the Quantum Judgment [2021] EWHC 2550 (Ch)). Liability had earlier been determined by Adam Johnson KC (the Liability Judgment) [2020] EWHC 686 (Ch). The Quantum Order was made on 17 November 2021. This Court delivered judgment on 17 February 2023 ([2023] EWCA Civ 167).