[2010] EWHC 1449 (Ch); Ch D (Norris J) 21st June 2010
The individual defendant was the sole shareholder and director of the corporate defendant, which was in severe trading difficulties.
The company received a large sum of money from a solicitor, who was later found to have been involved in mortgage fraud. There was no commercial reason for the transfer of the funds. The company used the money in various ways. The Law Society sought to recover the money from the individual and the company, on the ground that it had been transferred in breach of trust and they had received it with knowledge of that breach. The judge said:
[13] The Society alleges (and must prove) knowing receipt by Habitable making it accountable in equity. I have already held that the £450,150 was money that was subject to a trust. It is admitted that it was transferred to Habitable. I have already held that the transfer was in breach of trust. According to the summary of the constituent elements of the cause of action approved in BCCI v Akindele [2001] Ch 437 it remains for the Society to prove: (a) that the receipt by Habitable was beneficial; and (b) that Habitable received the payment with the requisite knowledge.
He held that, as the company was not a bank, any money that came into its hands must be taken to have been received beneficially, unless it was proved otherwise. The judge continued:
[15] The question then is: what was [the company's] state of knowledge? [The company] is a legal person: the relevant knowledge is that of its human agent. The sole director and shareholder at the relevant time was [the individual], and it is his knowledge that his material. The requisite knowledge is that stated in Akindele (supra ) at p 448 viz. that it "must be such as to make it unconscionable for him to retain the benefit of the receipt". To what circumstances can the Society point to make good its need to prove that it is unconscionable for Habitable to retain the money? The Society must adduce some evidence to establish its case: it cannot simply point to the inadequacy of Habitable's Defence.
The defendants did not appear at the trial and the judge accepted the evidence of the Law Society. He said:
[19] ... I accordingly find and hold that Habitable knowingly received money paid by the Practice in breach of trust. It must account as constructive trustee for the money so received: and the Society can trace into the proceeds of the payment so far as they are now ascertainable."
The Law Society wanted to pierce the corporate veil of the company. The judge said:
"[20] The Society submits that it is entitled to pierce the corporate veil. This course is appropriate only whether are special circumstances which indicate that the company is a mere façade concealing the true facts: per Lord Keith of Kinkel in Woolfson v Strathclyde Regional Council (1978) SC (HL) 90 at 96. The judgment of Munby J in Ben Hashem v Al Shayif [2009] 1FLR 115 contains at paragraphs [158] to [185] a convenient survey of the principles and of their recent application. I am guided by the principles there collected. In essence they require control of [the company] by [the individual] and (in relation to the relevant transaction out of which liability arises) the use by [the individual] of [the company] as a façade or device to facilitate or conceal his own wrongdoing. I hold that on the proper application of those principles [the individual] is not to be made personally liable for [the company's] knowing receipt.
"[21] The relevant wrongdoing is the knowing receipt of a payment made by the Practice in breach of trust. The receipt was by [the company]. The Society's argument must be that receipt by [the company] was a façade or device to facilitate or conceal receipt by [the individual] (in the way that receipt by Burnstead concealed receipt by Mr Dalby of the proceeds of his misfeasance as the director of ACP in Gencor [2000] 2 BCLC 2000, or the receipt by Infocom concealed receipt by Mr Smallbone of the proceeds of his misfeasance as a director of Trustor in Trustor AB [2001] 1 WLR 1177)."
He then went on to consider whether the individual had dishonestly assisted in a breach of trust. He was satisfied that there was a breach of trust and that the individual had assisted in it. As to the dishonesty of the assistance, he said:
"[24] According to Barlow Clowes International Ltd v Eurotrust International Limited [2006] 1WLR 1476 at paragraph [15], what has to be established is that [the individual's] knowledge about the payment by the solicitor had to be such as to render his participation contrary to normal and acceptable standards of honest conduct. This involves looking at his state of knowledge; and then measuring his conduct in the light of that knowledge by reference to the objective standards of honest conduct.
"[25] As to knowledge, it is sufficient for [the individual] to know that the money received by the company was not at the free disposal of the solicitor: see per Lord Millett in Twinsectra Ltd v Yardley [2002] 2 AC 164 at paragraph [135]. This is established by the admitted receipt from the solicitor and by the narrative appearing alongside the credit in the company's bank statement; and also from the absence of any commercial relationship between the solicitor and the company that would justify the payment."
He found that the individual had been dishonest and held that both the company and the individual were liable to account as constructive trustees for the sum transferred by the solicitor to the company.