Boardman and another v Phipps
[1966] 3 All ER 721[1967] 2 AC 46
(Decision by: Lord Cohen)
Boardman and another
vPhipps
Judges:
Viscount Dilhorne
Lord CohenLord Hodson
Lord Guest
Lord Upjohn
Judgment date: 3 November 1966
UK
Decision by:
Lord Cohen
My Lords, I would dismiss this appeal. I have been privileged to read the speeches to be delivered by my noble and learned friends, Lord Hodson and Lord Guest, who are of the same opinion. Agreeing, as I do in substance, with the reasons which they give for their conclusion I can state my own reasons shortly.
The noble and learned lord, Viscount Dilhorne, has dealt so fully with the facts that I shall confine myself to repeating only so much as is necessary to explain the conclusion that I have reached.
The respondent claims as one of the residuary legatees under the will dated 23 September 1943, of his father who died in 1944. The residuary estate included eight thousand out of the thirty thousand issued shares in a private company Lester & Harris Ltd to which I shall hereafter refer as "the company". By his will the testator, Charles William Phipps, bequeathed an annunity of £3,000 per annum to his widow and the eight thousand shares in the company were part of the fund set aside to assure that annuity. At the end of the year 1955 the trustees of the testator's will were his widow, his daughter, Mrs Noble, and Mr Willam Fox, a chartered accountant. The appellant, Mr Boardman, at all material times was solicitor to the trustees and also to the children of the testator (other than the respondent). Mr Fox was the active trustee of the trust created by the will, the widow was failing in health and took little or no part in the affairs of the trust.
At the end of December, 1955, the appellant Mr Boardman received an inquiry from someone wishing to purchase the said eight thousand shares in the company. This offer was rejected because it was made on behalf of a person who was thought to be in competition with Phipps & Son Ltd most of the shares in which were part of the testator's estate. The appellant, Mr Boardman, and Mr Fox investigated the published accounts of the company and the register of members and directors and they and the appellant, Mr Tom Phipps, a residuary legatee, became dissatisfied with the conduct of the business of the company. In the result, at the request of Mr Fox and with proxies signed by him, the appellants attended the annual general meeting of the company held on 28 December 1956. The appellant, Mr Boardman, expressed the dissatisfaction of the Phipps family with the state of the company's affairs. He asked for further information, which was given, and tried to get the appellant Mr Tom Phipps elected to the Board of the company, but failed to do so. After the meeting Mr Boardman reported to Mr Fox that he and the appellant Mr Tom Phipps were agreed that the only way to get results was to get control of the company, and that they had therefore decided that they would make an offer for all the outstanding shares in the company other than the eight thousand held by the trustees.
I pause here to observe (i) that the trustees could not have made any offer without the sanction of the court, as such shares were not an authorised investment under the testator's will; (ii) that Mr Fox said in evidence that he would not consider the trustees buying these shares under any circumstances.
At the request of Mr Fox, Mr Boardman wrote to Mrs Noble on 17 January 1957, telling her what had happened and that Mr Tom Phipps and he were making an offer of £2 5s per share for the shares in the company not held by the trustees. He sent a copy of this letter to Mr Fox. Mrs Noble appears at first to have thought the trustees were going to find the money for the purchase if it came off, but by letter to her of 28 January 1957, Mr Boardman wrote that the trustees could not properly make an offer of this nature and for that reason Mr Tom Phipps and he were making it personally. It is, I think, clear that both Mr Fox and Mrs Noble approved what was being done but there is no evidence that the widow was consulted; so it cannot be said that the making of the offer by Mr Boardman and Mr Tom Phipps personally was approved by the trustees if their consent was necessary. The appellants afterwards increased their offer to £3 a share but did not obtain sufficient acceptances to induce them to go through with their offer at that time, and by 26 April 1957, it seemed clear that they were unlikely to do so. This may be said to be the end of what was described in argument as the first phase of this matter.
During this phase the appellants acted as proxies of the trustees and obtained information about the company at the annual general meeting on behalf of the trustees. They were, however, making the offer to purchase on their own behalf and I do not understand why, in the headnote (See [1964] 1 WLR 993 ; cf, aliter, [1964] 2 All ER 187) it is said that they were making the initial offer as agents for the trustees. They were no doubt seeing what could be done to improve the position of the company and were doing so at the request of or at least with the approval of Mr Fox, but it is inconsistent with his evidence to conclude that an offer to purchase additional shares in the company was made on behalf of the trustees.
By a letter of 26 April 1957, Mr Boardman suggested to Mr Smith, the then chairman of the company, that they should see whether the assets of the company could be divided between the Harris family and the directors on the one hand and the Phipps family on the other. In the second phase, which continued until well into the year 1958, this suggestion was being pursued and it is, I think, clear that throughout it Mr Boardman was purporting to act on behalf of the trustees. See, for instance, a letter dated 30 April 1958, from Mr Boardman to Mr Smith in which, dealing with the questions of transfers of one share from the trustees to Mr Tom Phipps and the trustees and one share from the trustees to Mr Boardman and the trustees, he says:
"the object of the transfer was that, as we have been required by the trustees to look after their interests in the company, we should be the firstnamed holders of the shares".
During this period Mr Boardman obtained a mass of information about the company which threw light on the potential value of the shares of the company.
The negotiations for the division of the assets of the company between the two groups of shareholders in the end broke down and by 16 August 1958 (see letter of that date from Mr Boardman to Mr Smith), an alternative suggestion had been made that Mr Tom Phipps and Mr Boardman should buy the shares held by the directors' group and should afterwards sell back to the directors the Coventry part of the business of the company. This may be said to be the commencement of the third phase. The proposed resale of part of the business to the directors' group was dropped, and after protracted negotiation it was agreed on 10 March 1959, that Mr Tom Phipps and Mr Boardman should buy the directors holdings at £4 10s per share and should make an offer at a similar price for the other shares in the company not held by the directors or by the trustees or obtained by Mr Tom Phipps and Mr Boardman as the result of the earlier offer of £3 a share. The agreement contained a clause giving either party a right to call off the deal before a specified date, but this right was not exercised. I should mention that the widow had died in November, 1958, so that the sole trustees were Mrs Noble and Mr Fox and the residuary estate had become distributable among the beneficiaries. Accordingly Mr Boardman wrote on 10 March 1959, to the respondent, to Mrs Noble, and to Mrs P M Phipps the widow of a deceased brother of Mr Tom Phipps, giving a concise account of what had happened and ending as follows:
"If we are successful in making the shares worth more than £4 10s. the increased value will, of course, equally reflect upon the shares which are held in the estate of the late C.W. Phipps, and to that extent you will benefit by them. Both of us, however, would like to be re-assured on two points.
"1. The first point, which really concerns me alone, is whether you have any objection to my taking a personal interest in this purchase, bearing in mind that my initial inquiry with regard to it was on behalf of the C. W. Phipps estate. At that time the trustees did not wish to purchase any shares themselves and expressed their agreement to my taking a personal interest. However, as the shares will shortly be distributed amongst each of you, I should like to have your approval of the proposals. They do not, of course, involve you in any liability and there is no conflict of interest, as it will of course be in the interests of yourself as much as it will be for Tom and me, that we should try to realise the maximum value for these shares.
"2. That if you are in agreement with the course we were proposing to take, we should like to know that you are equally in agreement that the votes on the shares belonging to the estate should be exercised as one block with the shares that are offered to us. By doing this we should have a combined voting control which I hope will enable the maximum value to be got for the shares. Without the assurance that these votes would be exercised together it would obviously be unwise to pay anything approaching £4 10s. for the shares, the dividend upon which is, for the year to June 1958, likely to be only 5 per cent.
"It is difficult to put the issues concisely in a letter, but this will I hope give you a summary of what is involved, and if there are any special queries which you would like to raise please let me know."
It is to be observed that Mr Boardman evidently thought that if the consent of the trustees to his taking a personal interest in the purchase of shares in the company was necessary in January, 1957, it had been obtained. In this he was wrong as the widow was alive and had not been consulted.
The respondent, after receipt of the letter of 10 March expressed his satisfaction at what had been done. The agreement of 10 March was carried through, and in June and July, 1959, transfers of 21,986 shares to the appellants were completed. Thereafter parts of the business of the company were sold off and the company made returns of capital amounting in the aggregate to £5 17s 6d per share. The appellants thus acquired 21,986 shares in the company and still hold the same. They received the said sum of £5 17s 6d per share and the shares are probably still worth at least £2 per share, as Mr Tom Phipps offered that sum to the respondent if he wished to sell the shares in the company which he received on the distribution of the residuary estate of the testator.
The respondent became critical of the action of the appellants, and on 1 March 1962, issued the writ in this action claiming (i) that the appellants held five-eighteenths of the above mentioned 21,986 shares as constructive trustees for the respondent and (ii) an account of the profits made by the appellants out of the said shares. He based his claim on an allegation that the information as to the said shares and the opportunity to purchase the same and the shares when purchased were assets of the testator's estate and that the appellants were accountable to him for five-eighteenths of the profit made by them in breach of their fiduciary duty. The appellants denied any breach of duty and alleged that the purchase of the shares personally and for their own benefit was made with the knowledge and consent of the respondent. The action was tried by Wilberforce J and on 25 March 1964, he made an order declaring that the appellants held five-eighteenths of the 21,986 ordinary shares in the company as constructive trustees for the respondent, and he directed an account of the profits which had come to the hands of the appellants and each of them from the said shares and an inquiry as to what sum was proper to be allowed to the appellants or either of them in respect of their or his work and skill in obtaining the shares and the said profits. From this order the appellants appealed to the Court of Appeal, who dismissed the appeal.
The ratio decidendi of the trial judge is conveniently summed up in the following passage from the judgment in the Court of Appeal of Pearson LJ where he said ([1965] 1 All ER at p 858, letter h; [1965] Ch at p 1022):
"... the [appellants] were acting with the authority of the trustees and were making ample and effective use of their position as representing the trustees and wielding the power of the trustees, who were substantial minority shareholders, to extract from the directors of the company a great deal of information as to the assets and resources of the company; and that this information enabled the [appellants] to appreciate the true potential value of the company's shares and to decide that a purchase of the shares held by the directors' group at the price offered would be a very promising venture. The [appellants] made their very large profit, not only by their own skill and persistence and risk-taking, but also by making use of their position as agents for the trustees. The principles stated in Regal (Hastings), Ltd. v. Gulliver are applicable in this case."
The trial judge also held ([1964] 2 All ER at p 205, letter b) that the appellants could not rely by way of defence on the consent of the respondent given in answer to Mr Boardman's letter of 10 March 1959, as neither in the letter nor in the subsequent interview did he give sufficient information as to the material facts. This defence was not pressed in the Court of Appeal nor raised before your lordships. Accordingly, only one issue remains for decision, namely, were the appellants in such a fiduciary relationship vis-à-vis the trustees that they must be taken to be accountable to the beneficiaries for the shares and for any profit derived by them therefrom?
In the statement of claim the respondent based his claim on an allegation of agency but it is, in my opinion, plain that no contract of agency which included the purchase of further shares in the company was ever made; it is plain for two reasons: first, in 1957 the widow was alive and her approval was not sought nor obtained; secondly, Mr Fox was clear in his evidence that he would never have given his consent to such acquisition. Wilberforce J was, I think, of this opinion but he held ([1964] 2 All ER at p 200, letter e) that the appellants assumed the character of self-appointed agents for the trustees for the purpose of extracting information as to the company's business from its directors and if possible to strengthen the management of the company by securing representation on the board of the trust holding. I agree that the appellants were the agents of the trustees for this purpose. I doubt, however, whether "self-appointed" is the correct adjective. Mr Fox was the active trustee and, where it is not a question of delegating authority to make binding contracts, I agree with Russell LJ ([1965] 1 All ER at p 864; [1965] Ch at p 1031), that two trustees, or for that matter one trustee, can come to an arrangement with a third party which will have the effect of placing the latter in a fiduciary position vis-à-vis the trust.
In the case before your lordships it seems to me clear that the appellants throughout were obtaining information from the company for the purpose stated by Wilberforce J ([1964] 2 All ER at pp 200, 201), but it does not necessarily follow that the appellants were thereby debarred from acquiring shares in the company for themselves. They were bound to give the information to the trustees, but they could not exclude it from their own minds. As Wilberforce J said ([1964] 2 All ER at p 203), the mere use of any knowledge or opportunity which comes to the trustee or agent in the course of his trusteeship or agency does not necessarily make him liable to account.
In the present case had the company been a public company and had the appellants bought the shares on the market, they would not I think have been accountable. The company, however, is a private company and not only the information but also the opportunity to purchase these shares came to them through the introduction which Mr Fox gave them to the board of the company and, in the second phase, when the discussions related to the proposed split up of the company's undertaking, it was solely on behalf of the trustees that Mr Boardman was purporting to negotiate with the board of the company. The question is this: when in the third phase the negotiations turned to the purchase of the shares at £4 10s a share, were the appellants debarred by their fiduciary position from purchasing on their own behalf the 21,986 shares in the company without the informed consent of the trustees and the beneficiaries?
Wilberforce J and, in the Court of Appeal, both Lord Denning MR and Pearson LJ based their decision in favour of the respondent on the decision of your lordships' House in Regal (Hastings) Ltd v Gulliver. I turn, therefore, to consider that case. Counsel for the respondent relied on a number of passages in the judgments of the learned lords who heard the appeal, in particular on (i) a passage in the speech of Lord Russell of Killowen where he said ([1942]1 All ER at p 386, letter a):
"The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made."
- (ii)
- a passage in the speech of Lord Wright, where he says ([1942] 1 All ER at p 392, letters c and d):
"That question can be briefly stated to be whether an agent, a director, a trustee or other person in an analogous fiduciary position, when a demand is made upon him by the person to whom he stands in the fiduciary relationship to account for profits acquired by him by reason of his fiduciary position, and by reason of the opportunity and the knowledge, or either, resulting from it, is entitled to defeat the claim upon any ground save that he made profits with the knowledge and assent of the other person. The most usual and typical case of this nature is that of principal and agent. The rule in such cases is compendiously expressed to be that an agent must account for net profits secretly (that is, without the knowledge of his principal) acquired by him in the course of his agency. The authorities show how manifold and various are the applications of the rule. It does not depend on fraud or corruption."
These paragraphs undoubtedly help the respondent but they must be considered in relation to the facts of that case. In that case the profit arose through the application by four of the directors of Regal for shares in a subsidiary company which it had been the original intention of the board should be subscribed for by Regal. Regal had not the requisite money available but there was no question of it being ultra vires Lord Russell of Killowen said ([1942] 1 All ER at p 387, letter f):
"I have no hesitation in coming to the conclusion, upon the facts of this case that these shares, when acquired by the directors, were acquired by reason, and only by reason of the fact that they were directors of Regal, and in the course of their execution of that office."
He went on to consider whether the four directors were in a fiduciary relationship to Regal and concluded that they ([1942] 1 All ER at p 389, letter b). Accordingly, they were held accountable. Counsel for the appellants argued that the present case is distinguishable. He puts his argument thus. The question one asks is whether the information could have been used by the principal for the purpose for which it was used by his agents? If the answer to that question is no, the information was not used in the course of their duty as agents. In the present case the information could never have been used by the trustees for the purpose of purchasing shares in the company; therefore purchase of shares was outside the scope of the appellants' agency and they are not accountable.
This is an attractive argument, but it does not seem to me to give due weight to the fact that the appellants obtained both the information which satisfied them that the purchase of the shares would be a good investment and the opportunity of acquiring them as a result of acting for certain purposes on behalf of the trustees. Information is, of course, not property in the strict sense of that word and, as I have already stated, it does not necessarily follow that, because an agent acquired information and opportunity while acting in a fiduciary capacity, he is accountable to his principals for any profit that comes his way as the result of the use he makes of that information and opportunity. His liability to account must depend on the facts of the case. In the present case much of the information came the appellants' way when Mr Boardman was acting on behalf of the trustees on the instructions of Mr Fox, and the opportunity of bidding for the shares came because he purported for all purposes except for making the bid to be acting on behalf of the owner seems to me that the principle of the Regal case applies and that the courts below came to the right conclusion.
That is enough to dispose of the case but I would add that an agent is, in my opinion, liable to account for profits which he makes out of the trust property if there is a possibility of conflict between his interest and his duty to his principal. Mr Boardman and Mr Tom Phipps were not general agents of the trustees, but they were their agents for certain limited purposes. The information which they had obtained and the opportunity to purchase the 21,986 shares afforded them by their relations with the directors of the company--an opportunity they got as the result of their introduction to the directors by Mr Fox--were not property in the strict sense but that information and that opportunity they owed to their representing themselves as agents for the holders of the eight thousand shares held by the trustees. In these circumstances they could not, I think, use that information and that opportunity to purchase the shares for themselves if there was any possibility that the trustees might wish to acquire them for the trust. Mr Boardman was the solicitor whom the trustees were in the habit of consulting if they wanted legal advice. Granted that he would not be bound to advise on any point unless he were consulted, he would still be the person they would consult if they wanted advice. He would still be the person they would consult if they wanted advice. He would clearly have advised them that they had no power to invest in shares of the company without the sanction of the court. In the first phase he would also have had to advise on the evidence then available that the court would be unlikely to give such sanction: but the appellants learnt much more during the second phase. It may well be that even in the third phase the answer of the court would have been the same but, in my opinion, Mr Boardman would not have been able to give unprejudiced advice if he had been consulted by the trustees and was at the same time negotiating for the purchase of the shares on behalf of himself and Mr Tom Phipps. In other words, there was, in my opinion, at the crucial date (March, 1959) a possibility of a conflict between his interest and his duty.
In making these observations I have referred to the fact that Mr Boardman was the solicitor to the trust. Mr Tom Phipps was only a beneficiary and was not as such debarred from bidding for the shares, but no attempt was made in the courts below to differentiate between them. Had such an attempt been made it would very likely have failed, as Mr Tom Phipps left the negotiations largely to Mr Boardman and it might well be held that, if Mr Boardman was disqualified from bidding, Mr Tom Phipps could not be in a better position. Be that as it may, counsel for the appellants rightly did not seek at this stage to distinguish between the two. He did, it is true, say that Mr Tom Phipps as a beneficiary would be entitled to any information that the trustees obtained. This may be so, but none the less I find myself unable to distinguish between the two appellants. They were, I think, in March, 1959, in a fiduciary position vis-a-vis the trust. That fiduciary position was of such a nature that (as the trust fund was distributable) the appellants could not purchase the shares on their own behalf without the informed consent of the beneficiaries: it is now admitted that they did not obtain that consent. They are therefore, in my opinion, accountable to the respondent for his share of the net profits which they derived from the transaction.
I desire to repeat that the integrity of the appellants is not in doubt. They acted with complete honesty throughout, and the respondent is a fortunate man in that the rigour of equity enables him to participate in the profits which have accrued as the result of the action taken by the appellants in March, 1959, in purchasing the shares at their own risk. As the last paragraph of his judgment clearly shows, the trial judge evidently shared this view. He directed an inquiry as to what sum was proper to be allowed to the appellants or either of them in respect of their or his work and skill in obtaining the said shares and the profits in respect thereof. The trial judge concluded by expressing the opinion that payment should be on a liberal scale. With that observation I respectfully agree.
In the result I agree in substance with the judgments of Wilberforce J ([1964] 2 All ER at p 199) and of Lord Denning MR ([1965] 1 All ER at p 851; [1965] Ch at p 1011) and Pearson LJ ([1965] 1 All ER at p 858; [1965] Ch at p 1021) in the Court of Appeal, and I would dismiss the appeal.