Boardman and another v Phipps
[1966] 3 All ER 721[1967] 2 AC 46
(Decision by: Viscount Dilhorne)
Boardman and another
vPhipps
Judges:
Viscount DilhorneLord Cohen
Lord Hodson
Lord Guest
Lord Upjohn
Judgment date: 3 November 1966
UK
Decision by:
Viscount Dilhorne
My Lords, on 1 March 1962, the respondent John Anthony Phipps commenced an action against his younger brother, Thomas Edward Phipps and Mr T G Boardman, a solicitor and partner in the firm of Messrs Phipps & Troup. In that action he claimed a declaration that they held shares in a private company called Lester & Harris Ltd as constructive trustees for him, an account of the profits made by them and transfer to him of the shares held by them as constructive trustees for him and five-eighteenths of the profits made by them. The action was tried by Wilberforce J. He gave judgment ([1964] 2 All ER at p 199) for the respondent. The appellants appealed to the Court of Appeal (Lord Denning MR Pearson and Russell LJJ). The appeal was dismissed and they now appeal to this House.
The estate of Mr C W Phipps, the father of the appellant Phipps and the respondent, included eight thousand shares in Lester & Harris Ltd which was engaged in the textile business. Its issued capital was thirty thousand £1 ordinary shares. Mr Phipps' estate also included a substantial holding in a family company, Phipps & Son Ltd also engaged in the textile business. The appellant Phipps was chairman of this company and Mr Boardman was one of its directors. By his will dated 23 September 1943, Mr C W Phipps left an annuity to his widow and subject thereto five-eighteenths of his estate to each of his sons and three-eighteenths to his daughter, Mrs Noble. In the event of a son not surviving him, that son's five-eighteenth went to his family.
At all relevant times until her death in November, 1958, Mr C W Phipps' widow, Mrs Ethel Phipps, was a trustee of his will. She was, when the events which gave rise to this case occurred, over eighty years of age and suffering from senility. Consequently she did not take an active part in the affairs of the trust. The other trustees were Mrs Noble and a Mr Fox, an accountant. In December, 1955, Mr Boardman, who acted as solicitor to the trust and for several members of the Phipps family, received a letter asking whether the trustees were prepared to sell their holding in Lester & Harris, Ltd. He consulted Mr Fox on this and as there had been some trade connexion between Lester & Harris Ltd and Phipps & Son Ltd Mr T E Phipps, the appellant, was also consulted, for it was thought that what was done with these shares might affect the Phipps' interests in Phipps & Son, Ltd.
Mr Fox and Mr Boardman looked at the accounts of Lester & Harris Ltd According to Mr Boardman they showed that that company was going through a lean time and it was apparently decided to consider the Lester & Harris Ltd holding again when the accounts for the current year were published lith a view to seeing whether anything could be done to improve the value of the trust's holding. In his reply to the enquiry that he had received, Mr Boardman wrote on 13 January 1956, that he did not imagine thats his clients would be prepared to sell except at a price approaching the asset value of the shares which he estimated at £10 a share on the basis of the 1954 balance sheet, and that his clients were far from satisfied with the return that the shares had yielded during recent years.
On 17 December 1956, Mr Boardman wrote to Mrs Noble telling of Lester & Harris Ltd that they were very unsatisfactory and that "we all feel that something should be done to improve the position". He said that the appellant Phipps had suggested that he and Mr Boardman should attend the annual general meeting of Lester & Harris Ltd on 28 December and he enclosed proxy forms to be signed by Mrs Noble and her mother.
The appellants attended the annual general meeting on 28 December 1956, representing the trust holding. Mr Boardman expressed their dissatisfaction with the position of the company and sought without success to get Mr Phipps elected a director. He also asked a number of questions. In his evidence at the trial he said that they got no information which was not in the published accounts. The appellants thought that the attitude of the board of Lester & Harris Ltd was hostile. On their return to Northampton they reported what had happened to Mr Fox. In the course of their discussion Mr Boardman suggeted that the only way in which the matter could be resolve would be by the purchase of a controlling interest in Lester & Harris Ltd Mr Boardman in his evidence said that Mr Fox's reaction was to say that "he did not consider that a takeover bid for shares in a private company was something that he as a trustee or the trust should take any part in". Mr Fox when giving evidence was asked: "Was there ever any question, so far as you were concerned, of the trustees buying all the outstanding shares?" His answer was: "I would not consider the trustees buying those shares under any circumstances." He was then asked: "Did you consider the matter and reject it?" to which his reply was "I considered the matter and rejected it."
When Mr Fox made it clear that he was against the trustees buying the shares, Mr Boardman suggested that the appellant Phipps should try to buy them. Mr Phipps refused to do so unless Mr Boardman agreed to come in with him and Mr Boardman agreed to do so. On cross-examination Mr Fox was asked:
"When Mr. Boardman and Mr. Phipps decided to make an offer for the shares themselves, did they ask your consent on behalf of the trust or anything like that?"
His answer was:
"I do not know that they asked my consent. I was only too glad. Here was I holding eight thousand shares, a minority interest in a company where the directors were unfriendly, and, having had experience in other cases of the weakness of the Companies Act with regard to minority shareholders, as soon as I could see the prospect of getting friendly directors and friendly shareholders I was only too glad."
Later, as will be seen, Mr Boardman entered into an agreement under which the appellants purchased 14,567 shares in Lester & Harris Ltd and Mr Fox was asked the following question:
"What would your reaction have been if Mr. Boardman and Mr. Mr. Phipps, having concluded an agreement, had come to you and said 'We have agreed to buy the whole of the issued capital of these shares, and of course we were doing that as agents for the trustees with whom you must now complete the agreement.,'
His answer: "They were not doing it for the trustees; that was the whole point."
After the meeting at the end of 1956 Mr Boardman wrote, on 11 January 1957, to Mr Fox telling him that the appellants' efforts to buy the shares privately had failed and that they proposed to make an offer to buy the shares personally by circular. He pointed out that this would not involve the trustees who would share in any advantage gained and he asked Mr Fox to confirm that the circular was in order and that it was in order "with regard to Mr Phipps and my position vis-à-vis the trust".
Mr Fox raised no objection to this, but suggested that Mr Boardman should write to Mrs Noble and tell her what was proposed. Mr Boardman did so on 17 January 1957, and in his letter, said:
"We [i.e. the appellants] both feel that the only real hope of getting the true value of the shares is by acquiring a controlling holding so that a large part of the assets can be liquidated and only those parts of the business retained that are profitable. By so doing we should be able to put up the value of the shares and get some cash out. This involves making an offer for all the remaining shares and hoping that we will get sufficient acceptances to get control. The making of an offer in this form is not a matter which trustees should properly do and Tom and I have, therefore, agreed to make an offer personally. Our offer price is £2 5s. per share, which exceeds the value of the shares on an earnings and dividend basis, but is below their value on an asset basis. Although the offer is formally made to the trustees it is not intended, of course, that they should accept, as we hope that they will join with us in putting the company in order and getting full value for their holding.
"Our intention is that if we acquire sufficient shares which, with the trusts holding, will give us control, to reorganise the boards and see to what extent a repayment of capital can be made. It will depend upon the number of acceptances whether Phipps & Son are also asked to support the offer, but initially the proposal is that it should be a personal one. I have discussed this with Mr. Fox who is in agreement with the proposal, which as I have said does not involve the trustees in any liability and will I hope be to their advantage."
In the same letter he said that the profits of the company had gone down in the last few years, that the dividend for the year to December, 1955, was 7 1/2 per cent instead of a previous ten per cent, that no dividend was paid for the six months to June 1956, and that the company's assets on the balance sheet came out at a net surplus of £314,000.
Mrs Noble replied on 27 January and said that she thought that the line the appellants were taking was the only possible one and asked where the money to pay for the shares was coming from. Mr Boardman replied on 28 January saying that he did not think that the trustees could properly make an offer of this nature and for that reason he and Mr T E Phipps were making it personally "with the object of taking such shares as we can and the balance being taken by Phipps & Son, Ltd."
Messrs Phipps & Troup sent an advance copy of the circular letter to Lester & Harris Ltd with a letter which made it clear that the offer was by the appellants. In the same letter they said that they were instructed to ask on behalf of the executors of C W Phipps for a list of the members of the company and their addresses. This information was obviously wanted so that the circular might be sent to them. The directors of Lester & Harris Ltd advised their shareholders not to sell. The appellants then increased their offer to £3 per share. This offer was conditional on acceptance by the holders of not less than 15,500 shares. It was accepted by the holders of 2,925 shares. It was not until June, 1959, that it was declared unconditional and the shares were then transferred to the appellants.
In the course of his judgment Wilberforce J expressed the opinion ([1964] 2 All ER at p 200, letter g) that Mrs Noble accepted the appellants' "action as a trust action, and the transaction and proposed action as trust matters". If by this he meant that Mrs Noble thought that they were proposing to buy the shares on behalf of the trust, with the greatest respect I must venture to disagree with him. In his letter of 17 January to which I have referred, Mr Boardman clearly stated that the appellants were going to make an offer for the shares personally and not for the trust. Her answer of 27 January shows that she did not appreciate this but Mr Boardman's letter to her of 28 January put the matter beyond all doubt.
Wilberforce J went on to say ([1964] 2 All ER at p 200, letter h):
"It seems to me that the true interpretation of this initial phase is that the agency of Mr. Tom Phipps and Mr. Boardman was continued, the nature of it being to use and exploit the trust holding and its voting power to obtain information and, if possible, to strengthen the management of the company by securing representation on the board of the trust holding. Added to this was an intention that Mr. Boardman and Mr. Phipps should acquire additional shares with a view to obtaining control. This was no departure from the agency."
I regret that I do not agree with this conclusion. It is, I think, clear both from the correspondence and from the evidence to which I have referred that Mr Fox would not agree to the trustees seeking to buy the shares and that, in seeking to do so, the appellants were acting on their own behalf. Far from the proposed acquisition being no departure from the agency, it was, in my opinion, wholly outside the scope of any agency. As Mr Fox said: "They were not doing it for the trustees: that was the whole point."
The trust could not in fact have bought the shares without the sanction of the court and whether the court would have sanctioned this speculation at a time when on the death of his widow, then in failing health, Mr C W Phipps' estate would have become divisible among the beneficiaries of his will and when the proposed investment was in a private company which was not doing well, and the trust had no money available for investment, may well be open to doubt.
In my opinion, the position was that from the time of the meeting in December, 1956, when Mr Fox stated that he as trustee would not take any part in a take-over bid for the shares, the appellants' efforts to acquire the shares were wholly outside the scope of their agency; and that Mr Fox, as trustee, believing that it was in the interests of the trust that they should do so, gave them such assistance as he could. In one sense it was a joint operation for the benefit of the trust, but there is no doubt that the efforts of the appellants to buy the shares were made solely on their own behalf. If they succeeded in doing so, it must have been clear to Mr Fox and Mrs Noble that the appellants would make a profit if the speculation was successful.
The failure to secure sufficient acceptances of their offer of £3 a share did not lead Mr Boardman and Mr Phipps to abandon their efforts. On 26 April 1957, Mr Boardman wrote to Mr Smith, the chairman of Lester & Harris Ltd pointing out that Mr Smith and his colleagues held just under fifty per cent of the shares and that most of the other shares are "held by my clients or on offer to them". It is not clear to whom Mr Boardman was referring. The appellants held no shares at that time in Lester & Harris Ltd though some were on offer to them. The trustees held shares, but none were on offer to them. Mr Boardman suggested that to avoid difficulties in the future a possible solution might be to divide the Lester & Harris "group" so that
"the Harris family and the directors own the whole of one part, and the Phipps interests own the balance with suitable adjustments, of course, for the few shareholders who may be 'in neither camp'."
This letter marks the commencement of the second phase of the negotiations that took place with the directors of Lester & Harris, Ltd.
Mr Smith and his colleagues on the board of Lester & Harris did not reject this suggestion and from this time until October, 1958, negotiations were continued with a view to finding an acceptable basis for splitting up the business of Lester & Harris Ltd. In the course of these negotiations the appellants obtained information as to the property that Lester & Harris Ltd owned in Australia and as to Lester & Harris, Ltd's factory at Nuneaton and the nature of the business carried on at each place. They inspected the factory at Nuneaton and the Park Street premises of Lester & Harris, Ltd. A valuation of their property was made by valuers employed by Lester & Harris, Ltd and valuers employed by the appellants were also allowed to make a valuation.
Lester & Harris Ltd also sent them a valuation of their property and fixed assets in Australia. Lester & Harris Ltd also had a factory at Coventry. The value placed on the factories at Coventry and Nuneaton by Lester & Harris, Ltd's valuers was £215,675, whereas the appellants' valuers valued them at £90,650. After further correspondence, on 3 October 1958. Mr Boardman wrote to Mr Smith saying that the appellants were
"able to control about twelve thousand shares. These, on the asset values submitted with your letter would require an allocation of assets valued at £126,000. Such proportion might be satisfied by either: (a) the transfer to us of the Nuneaton factory and plant, at a value of £88,000 plus net current assets adjusted to produce £38,000; or (b) the transfer of the whole of the Australian company plus U.K. assets of the value of £26,000."
On 13 October 1958, Mr Smith suggested that they should make an offer for the whole of the remaining share capital, and on 17 October told Mr Boardman that he would be prepared to recommend a figure of £5 a share. On 21 October Mr Boardman wrote to Mr Smith saying that he and Mr Phipps would like to give further consideration to obtaining the whole share capital. He said that so far they had only seen the balance sheet and summarised accounts, and he asked to be supplied with copies of "the detailed trading and profit and loss accounts for the last five years or so, both for the English company and for the Australian company". At first Mr Smith refused to agree to this, but after a further letter from Mr Boardman pointing out that although they had received "a good deal of information as to the assets" the figures which they had been given and the published accounts gave no real guidance to the "going concern" value of the business, Mr Smith agreed that their accountants should meet. Mr Fox was employed for this purpose by the appellants and examined the trading accounts for five years. After receipt of his report, on 5 January 1959, Mr Boardman made an offer of £4 5s a share. A little later after a discussion with Mr Smith, he agreed with Mr Smith a price of £4 10s a share, "subject to various safeguards and escape clauses".
The making of this agreement may be taken to mark the conclusion of the second phase of the negotiations during which the appellants were seeking to secure the division of the assets of Lester & Harris Ltd between the two groups of shareholders. During the whole of this time the appellants kept open the possibility of acquiring the 2,295 shares by extending the period within which the offers might be made unconditional.
In what capacity was Mr Boardman acting during this second phase? He was, no doubt, acting on behalf of the appellant Phipps as well as for himself, and it is clear that he was not instructed to seek to secure a division of the assets by the trustees. Nevertheless, he clearly represented to Mr Smith that he was acting on their behalf. In a letter dated 30 April 1958, he told Mr Smith that the appellants had "been required by the trustees to look after their interests in the company". On 12 June 1958, he wrote to Mr Smith asking, if no progress in the negotiations could be made, that the Phipps interest should be represented on the board of Lester & Harris Ltd and saying that if they could not reach agreement "either as to a division or as to representation" they would be forced to exercise their legal remedies to protect the minority interest. In his letter of 19 June 1958, to Mr Smith, he stated:
"Our primary interest is, and always has been, to increase the value of our investment by endeavouring to secure a greater profitability for the business, and only if the directors were not prepared to accept our co-operation in this, to have some form of division of the assets."
In a letter to Mr Fox on 24 January 1958, he thanked him for sending him the notice convening the annual general meeting of Lester & Harris Ltd and said:
"I shall be glad if I can receive any communications from that company as soon as they arrive because, as you know, I am involved in some rather delicate negotiations with them."
He went on to say that it would be helpful if the appellants were registered as shareholders and suggested that one share should be transferred by the trustees into his name and that of the trustees and another into the names of Mr Phipps and the trustees to ensure that notices were sent direct to them and that they would have the right to speak at any meeting. On 11 February he wrote to Mrs Noble telling her of the proposal that Lester & Harris Ltd should be divided and part of it allocated in satisfaction of the estate shares. "This" he wrote "should produce much more capital for those shares than they are ever likely to realise as a minority holding ... " He sent her transfers for two shares with the request that they should be executed by her and her mother, so as to give the appellants greater rights to enquire into the company's affairs than they had at that moment.
Mr Fox, Mrs Noble and her mother executed the transfers, but the directors of Lester & Harris Ltd refused to accept them. The appellants attended the annual general meeting as holders of proxies signed by the three trustees. In so doing they acted as agents for the trustees but, as I have said, they were not authorised to act for them in seeking a division of the assets. The trustees were not asked to pay and did not pay for the valuation procured by the appellants. The appellants paid for that and they paid Mr Fox for the work which he had done at their request.
I do not doubt that the appellants' primary interest was, as Mr Boardman stated in his letter of 19 June 1958, to increase the value of the trust investment. The only profit that they would have made on a division of the assets among the shareholders would have been on the 2,295 shares offered to them if they had acquired those shares. I think that throughout this phase the appellants were continuing to act in pursuance of the common design agreed with Mr Fox at their meeting in December, 1956, on their return from Lester & Harris, Ltd's annual general meeting and assented to by Mrs Noble in January, 1957, namely, to seek to improve the value of the trust holding. One question for consideration is whether, having got the information about Lester & Harris Ltd in the way that they did, they were in breach of any duty which they owed to the trustees in making use of it to increase their offer for the shares from £3 to £4 5s a share and when agreeing to the price of £4 10s per share. I shall revert to this question later.
On 10 March 1959, an agreement was made between Mr Smith and the appellants for the sale to them of 14,567 shares in Lester & Harris Ltd at £4 10s a share. Completion was to be on 30 May 1959, but provision was made for the rescission of the agreement by the appellants by notice given before a specified date. The appellants also agreed to offer the other shareholders £4 10s a share.
In April, 1959, the appellants went to Australia at their own expense to get an assessment of the realisable value of the business there. In a letter dated 5 March 1959, Mr Boardman said that Mr Phipps took the view that neither party should be bound until after their return from Australia.
"By that time [he wrote] we should have a much clearer picture as to what is involved and the risks and we hope also to know a little more about the prospects of a rapid sale of the English interests."
The same day Mr Boardman wrote to Mr Phipps a letter which contained the following paragraph:
"I think we should have a meeting with your brother [the respondent] and sister and Mrs. F.M. Phipps [representing the estate of the dead brother] as soon as possible after your return to Northampton to inform them of the proposals and to get their views on the family holding. They may wish to sell their shares, but if they wish to retain them, we should like to know that they will vote with us. I should also like to know that they have no objection to my taking a personal interest in this despite the fact that my knowledge of the company came through my professional connexion with the family trust."
Mrs Ethel Phipps, the widow of Mr C W Phipps, having died in November, 1958, the beneficiaries under his will were entitled to their respective shares in Lester & Harris Ltd on the distribution of his estate. For reasons unconnected with this case, that distribution did not take place until April, 1960.
The suggested meeting did not take place, but on 10 March 1959, Mr Boardman wrote to the respondent, Mrs Noble and Mrs F M Phipps (representing the estate of the dead brother) letters in identical terms, telling them of the offer to sell the shares to Mr Phipps and to him at £4 10s per share "about twice the price at which they acquired them", and saying:
"Whilst we consider this to be a high price, we feel that there is probably quite a lot of asset value in the company and that we may well be able, by better management or by liquidation, to make the shares worth a good deal more than this. We are proposing, therefore, subject to this letter, to accept the conditional offer of these shares and to see whether we can effect some sales of the Australian interest, and possibly some of the English interest to yield a profit above the price at which the shares are now offered. We are proposing to go to Australia next month ...
"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 enquiry 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 possible for these shares."
It must have been obvious to the recipients of this letter that approval of the proposals must involve, if their efforts were successful, the appellants obtaining a profit for themselves. Mr Boardman was not entirely accurate in saying that the trustees had expressed their agreement to his taking a personal interest, for Mrs Ethel Phipps, the widow, had not been approached and had not, therefore, agreed, though the other trustees, Mr Fox and Mrs Noble, had done so.
In an earlier letter on 25 February 1959, to a gentleman through whom he was seeking to obtain finance for the purchase of the shares, Mr Boardman had stated that, on their valuer's valuation, the equity was worth approximately £250,000 and if the values put forward by Lester & Harris, Ltd's valuers were obtained, the equity would be worth over £380,000. He went on to say:
"At the agreed price of £4 10s. the equity is costing us £135,000 ... and I feel that there is a most attractive margin to go for. It is of course true that the earnings do not support a figure as high as the asset values, but I think that this is largely due to bad management."
On the figure of Lester & Harris, Ltd's valuers, this meant that each share was worth £12 13s 4d. In his letter of 13 January 1956, Mr Boardman had put their value, based on the 1954 balance sheet, at £10 a share.
Mr Boardman's letter to the respondent was followed by a meeting at which he, the respondent and the respondent's wife were present. Mr Boardman's note of that meeting records that the respondent agreed to the appellants "undertaking the adventure on their own behalf".
Then the appellants went to Australia. On 3 June the purchase of the 14,567 shares was completed. By 19 June the appellants had paid for 16,442 shares and were about to acquire a further one thousand four hundred shares. Taking into account the trust holding of eight thousand, this left a balance of 4,158 shares to be acquired. They eventually made up their holding to 21,986 shares. At the end of July Mr Boardman made a further visit to Australia with a view to the sale of the Australian business.
On 13 January 1960, Mr Boardman who had become chairman of Lester & Harris Ltd informed the shareholders of that company that the Australian business had been sold for £88,000 and announced the distribution of a capital bonus of £3 a share. On 20 January Mr Boardman wrote a long letter to the respondent telling him what the appellants had done, of "the sale of the Australian business" at twice the amount that "had at one time seemed obtainable", that the appellants were on the board of the English company and that they had had a very busy six months reorganising it, and that apart from the capital bonus of £3 a share which meant that C W Phipps' estate benefited to the extent of £24,000, his holdings remained unchanged and that they hoped that they could produce a level of profit which would make the shares worth considerably more than their previous value. To this the respondent replied on 24 January:
"This is indeed welcome news. You must be feeling very satisfied that your hunch backed by much hard work and perspicacity has turned out so well for all concerned."
In April, 1960, transfers for the shares in Lester & Harris Ltd to which the respondent was entitled on the distribution of Mr Phipps' estate were sent to him by Mr Boardman, and shortly thereafter the Lester & Harris Ltd shares held by the estate were distributed. Mr Boardman appears to have acted at this time professionally for the respondent in connexion with the transfer of some shares in Phipps & Son Ltd by the respondent to his wife. The correspondence shows that Mr Boardman and the respondent were then on good terms. Later in the year the appellants sold the Coventry factory of Lester & Harris Ltd and secured a very substantial capital profit. They then made a further capital distribution of £2 17s 6d a share and so the respondent received £5 17s 6d in respect of each share which came to him as against the original probate value of £2 7s 6d while retaining the shares which were still worth more than £2 a share.
Nearly two months after the receipt by the respondent of this good news, Mr Boardman received a letter from solicitors employed by the respondent alleging that at all times he had been acting in a fiduciary capacity and was therefore accountable to the beneficiaries for any profit he had made. A similar letter was sent to the appellant Phipps. Mr Boardman, on 28 July 1961, sent a long letter in reply, denying liability and pointing out "there was not at any stage any possible conflict of duty and personal interest". It included the following paragraph:
"Although I am not aware of any duty or moral obligation requiring me to do so, I did not contemplate taking any personal interest in the affairs of Lester & Harris except with the full knowledge and approval of the trustees and beneficiaries under the will of C.W. Phipps deceased (the trustees include a chartered accountant who had as full information as I had on the affairs of Lester & Harris, Ltd.). Approval was obtained."
Mr Boardman also pointed out that the vendors of the controlling holding, the then directors of Lester & Harris Ltd were the then chairman, a solicitor in Coventry with wide commercial experience, the then managing director who had spent most of his life in the business, the son of the founder, who had been in the business all his working life, and a practising chartered accountant, who had detailed knowledge of all the affairs of the company and its underlying value. He then wrote:
"You may, therefore, think that these experienced men, who collectively held control, were not likely to sell at an undervaluation, that they extracted from us the full worth of the shares at that time, and that the substantial appreciation in value is due to the ability brought into the company by the new purchasers."
This did not satisfy the respondent and after some further correspondence the writ in this action was issued on 1 March 1962.
Throughout this long history the appellants acted with the object of securing an improvement in the value of the trust's holding in Lester & Harris, Ltd. Throughout they thought that they were acting with the approval of the active trustees, Mr Fox and Mrs Noble, and, in relation to the purchase of the shares at £4 10s a share, with the approval of the beneficiaries under the will of C W Phipps. At the outset they thought that if they could get control, they would be able to increase the value of the holding but it was not until a considerable time later that Mr Boardman, as a result of information they had received from Lester & Harris Ltd their valuer's report and the report of Mr Fox, was able to write to the gentlemen through whom he sought financial aid, saying that he felt that there was a most attractive margin to go for. When they offered to buy the shares in 1957 and when they bought them in 1959, they did not act or purport to act as agents for the trustees. The acquisition of the shares brought no immediate profit. The substantial profits that were obtained were made as a result of the appellants' work when they had gained control of Lester & Harris, Ltd.
Does equity require the appellants to account at the instance of one of the four beneficiaries under Mr C W Phipps will for the profits that they made? Equity, may, where there has been some impropriety of conduct of conduct on the part of a person in a fiduciary relationship as, for instance, a trustee purchasing trust property, require that person to account.
Counsel for the respondent argued that as the appellants had acquired knowledge and information about Lester & Harris Ltd in the course of acting as agents of the trustees and had used this knowledge and information when making their offers for the shares, they were liable to account. He relied strongly on the decision in this House in Regal (Hastings) Ltd v Gulliver. The facts of that case were very different from those of this. In that case the directors of the Regal company had formed a subsidiary company with the intention that all the shares in the subsidiary company should be held by Regal. When the landlord of two cinemas was not prepared to grant a lease of them to the subsidiary company without either the rent being guaranteed by the directors of Regal or the subsidiary company having a paid-up capital of £5,000, the directors of Regal decided that Regal should invest £2,000 in the subsidiary company and that the balance of £3,000 should be found by each of the directors and Regal's solicitor investing £500. Thus the directors of Regal and Regal's solicitor became the owners of shares which were to have been the property of the Regal company. These shares were later sold at a profit. This House held that the directors were in a fiduciary relationship to the company; that they had made a profit on the shares in the course of their execution of their office as directors; and that those directors who had made a profit on the shares were liable to account.
In the present case the appellants did not make a profit out of buying shares which it was intended that the trust should acquire or which, unless Mr Fox changed his mind and the sanction of the court was obtained, there was any possibility of the trust acquiring. There are, however, passages in the opinions delivered in that case which are very relevant to the issues your lordships have to determine. Viscount Sankey said ([1942] 1 All ER at p 381, letter e):
"The general rule of equity is that no one who has duties of a fiduciary nature to perform is allowed to enter into engagements in which he has or can have a personal interest conflicting with the interests of those whom he is bound to protect."
Lord Russell of Killowen 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. The profiteer, however honest and well intentioned, cannot escape the risk of being called to account."
He held ([1942] 1 All ER at p 387, letter f) that the directors were in a fiduciary relationship to the company and that they had acquired the shares "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". Lord MacMillan said ([1942] 1 All ER at pp 391, 392):
"We must take it that they entered into the transaction lawfully, in good faith and indeed avowedly in the interests of the company. However, that does not absolve them from accountability for any profit which they made, if it was by reason and in virtue of their fiduciary office as directors that they entered into the transaction ...
"The issue thus becomes one of fact. The plaintiff company has to establish two things: (i) that what the directors did was so related to the affairs of the company that it can properly be said to have been done in the course of their management and in utilisation of their opportunities and special knowledge as directors: and (ii) that what they did resulted in a profit to themselves."
Lord Wright said that the question to be decided was ([1942] 1 All ER at p 392, letter c):
"... 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 a 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 the 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."
and a little later ([1942] 1 All ER at p 392, letter g):
"... both in law and equity, it has been held that, if a person in a fiduciary relationship makes a secret profit out of the relationship, the court will not inquire whether the other person is damnified or has lost a profit which otherwise he would have got. The fact is itself a fundamental breach of the fiduciary relationship."
And Lord Porter said ([1942] 1 All ER at p 395, letter c):
"The legal proposition may, I think, be broadly stated by saying that one occupying a position of trust must not make a profit which he can acquire only by use of his fiduciary position, or, if he does, he must account for the profit so made."
In the light of these passages, the first question to be decided is whether the appellants were throughout the negotiations or during any part of them in a fiduciary relationship to the trust.
They had been authorised by the trustees to represent the trust holding at two annual general meetings of Lester & Harris Ltd, Mr Boardman as trust solicitor had dealt with the inquire whether the trust would sell their holding and Mr Boardman as solicitor and Mr Phipps had discussed with Mr Fox in December, 1956, Lester & Harris, Ltd's accounts and what should be done to improve the value of the trust holding. Apart from these occasions, I agree with Lord Denning MR ([1965] 1 All ER at p 855, letter d; [1965] Ch at p 1017) that there was not any contract of employment of the appellants made by the trustees or any of them.
Wilberforce J held ([1964] 2 All ER at p 200, letter e) that in 1956 the appellants assumed the character of self-appointed agents of the trustees; that the agency continued throughout the negotiations; and, as I have said in my view wrongly, that the acquisition of shares by them was no departure from the agency. In the Court of Appeal Lord Denning MR ([1965] 1 All ER at pp 855, 856; [1965] Ch at pp 1017, 1018) agreed with Wilberforce J ([1964] 2 All ER at p 200) that they had assumed this character and said that they had taken on themselves an authority which they did not possess. Pearson LJ ([1965] 1 All ER at p 859; [1965] Ch at p 1022) held that they were acting with the authority of the trustees and Russell LJ ([1965] 1 All ER at p 864, letter h; [1965] Ch at p 1031) expressed the view that two out of three trustees could come to an arrangement with a third party which would have the effect of placing the latter in a fiduciary position.
In my opinion, despite the able arguments advanced by counsel for the appellants the unanimous opinion of the Court of Appeal and of Wilberforce J, that their relationship to the trust was fiduciary is correct. In my opinion that relationship arose from their being employed as agents of the trust on the occasions that I have mentioned and continued throughout. It does not, however, necessarily follow that they are liable to account for the profit that they made. If they had entered into engagements in which they had or could have had a personal interest conflicting with the interests of those they were bound to protect, clearly they would be liable to do so. On the facts of this case there was not, in my opinion, any conflict or possibility of a conflict between the personal interests of the appellants and those of the trust. There was no possibility so long as Mr Fox was opposed to the trust buying any of the shares of any conflict of interest arising through the purchase of the shares by the appellants.
If in February, 1957, their offer of £3 a share had then led to their acquisition of seven thousand five hundred shares in Lester & Harris Ltd that acquisition would not and could not have involved any conflict of interest. If then they had raised their offer to £4 10s a share and that offer had been accepted, the position would have been the same.
Lord Russell of Killowen in the Regal case held ([1942] 1 All ER at p 387, letter f) that the directors had acquired the shares "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". Lord MacMillan ([1942] 1 All ER at p 391), said that the directors were accountable for any profit which they made if it was by reason and in virtue of their office. Lord Wright ([1942] 1 All ER at p 392), said that an agent must account for profits secretly acquired "in the course of his agency", and Lord Porter ([1942] 1 All ER at p 395), said that
"one occupying a position of trust must not make a profit which he can acquire only by use of his fiduciary position, for, if he does, he must account for the profit so made."
If the profits made by the appellants had been made as a result of the acquisition of shares by them in 1957, it could not, in my view, be said that the shares were acquired "only by use of" their "fiduciary position", or "in the course of" their "agency" or by reason and only by reason of the fact that they were agents of the trust for certain limited purposes.
Between 1957 and 1959 when they acquired the shares did anything occur which altered the position? In my view, nothing occurred during this period which gave rise or could have given rise to a conflict of interest. Mr Fox is a chartered accountant. He had, according to Mr Boardman--and it was not disputed--as much information as Mr Boardman possessed of the affairs of Lester & Harris, Ltd. He had seen their trading accounts for the past five years. In his evidence at the trial he stated that he would not consider the trustees buying the shares under any circumstances. This being his attitude, there was no possibility of a conflict of interest arising through purchase of the shares by the appellants either in 1957 or in 1959. In fact, as his evidence shows, far from there being a conflict of interest, Mr Fox thought that it would be to the advantage of the trust if the appellants bought the shares.
Between 1957 and 1959 the appellants obtained a mass of information about Lester & Harris, Ltd. They had been shown the valuation made by Lester & Harris, Ltd's valuers. They had been allowed to employ their own valuers. As I have said, Mr Fox examined Lester & Harris, Ltd's trading accounts for the past five years at the request of the appellants. At the start of the negotiations they had obtained some information, a small part of the total, when acting as agents of the trust. A great deal of it was obtained during the second phase of the negotiations when Mr Boardman was representing that he was acting for the trust, but it was not until their return from Australia and after they had seen for themselves the psition there that the appellants finally committed themselves to the purchase of the 14,567 shares at £4 10s a share.
The information which they obtained during the second phase was clearly of great value to the appellants for it enabled them to form an estimate of the profits that they might secure if all went well. Without it they might not have been prepared to pay £4 10s a share and without it they might not have been able to secure the necessary finance. Was the information which they obtained the property of the trust? If so, then they made use of trust property in securing a profit for themselves and they would be accountable. While it may be that some information and knowledge can properly be regarded as property, I do not think that the information supplied by Lester & Harris, Ltd and obtained by Mr Boardman as to the affairs of that company is to be regarded as property of the trust in the same way as shares held by the trust were its property. Nor do I think that saying that they represented the trust without authority amounted to use of the trust holding.
What was said in Aas v Benham throws some light on this question. That was a partnership case and a partner is not only a principal but also an agent of his fellow partners. In his capacity as agent he is in a fiduciary relationship with them. In that case it was claimed that the defendant had made use of information gained by him as a partner for his own use and benefit. Lindley LJ said ([1891] 2 Ch at pp 255, 256):
"As regards the use by a partner of information obtained by him in the course of the transaction of partnership business, or by reason of his connection with the firm, the principle is that if he avails himself of it for any purpose which is within the scope of the partnership business, or of any competing business, the profits of which belong to the firm, he must account to the firm for any benefits which he may have derived from such information, but there is no principle or authority which entitles a firm to benefits derived by a partner from the use of information for purposes which are wholly without the scope of the firm's business ...
"It is not the source of the information, but the use to which it is applied, which is important in such matters. To hold that a partner can never derive any personal benefit from information which he obtains from a partner would be manifestly absurd."
Bowen LJ ([1891] 2 Ch at p 257) agreed with this and went on to comment on and explain a dictum of Cotton LJ, in Dean v MacDowell, Dean v MacDowell. Bowen LJ said ([1891] 2 Ch at pp 257, 258):
"I think that when COTTON, L.J., said [(1878), 8 ChD at p 354] that a partnership was entitled to the profits which arose out of information obtained by one of the partners as a partner, he was speaking of information to which the partnership was entitled in the sense in which they are entitled to property. I think you can only read the sentence in which the expression occurs in that way. It is as follows: 'Again, if he makes any profit by the use of any property of the partnership, including, I may say, information which the partnership is entitled to, there the profit is made out of the partnership property' ... He is speaking of information which a partnership is entitled to in such a sense that it is information which is the property, or is to be included in the property of the partnership--that is to say, information the use of which is valuable to them as a partnership, and to the use of which they have a vested interest. But you cannot bring the information obtained in this case within that definition."
Thus it was held that use by a partner for his own benefit of information obtained by him as a partner did not always render him liable to account for the profits he made and that not all the information gained as a partner was to be regarded as the property of the partnership.
Lindley LJ, said ([1891] 2 Ch at pp 255, 256) that if a partner avails himself of information for any purpose which was within the scope of the partnership business, he must account to the firm for any benefit he may have derived from such information.
In this case the acquisition of the shares was outside the scope of the trust and outside the scope of the agency created by the employment of the appellants to act for the trust.
I think that the principle stated by Lindley LJ ([1891] 2 Ch at p 255) applies also to other agents and to trustees. If it did not, no trustee could safely use information obtained while engaged on the business of one trust for the benefit of another or his own benefit. This would place trustees of a number of trusts and corporate trustees, like the Public Trustee, in a difficult position. Whether or not there is a breach of duty by a trustee in the use of information so obtained appears to me to depend on whether the information could be used in relation to the trust in connection with which it was obtained, and, if it could, whether the use made of it was to the prejudice of that trust.
While information is not infrequently described as property, Bowen LJ held ([1891] 2 Ch at p 258) that not all information obtained as a partner was the property of the partnership. The test which he applied was whether use of the information was valuable to the partnership and a use in which they had a vested interest.
The information obtained by the appellants was not, in my opinion, of any value to the trust. Wilberforce J described ([1964] 2 All ER at p 203, letter h) the knowledge which they acquired as of "a most extensive and valuable character". So it was to the appellants, but it could be of no use or value to the trust unless the trust could and wanted to buy the shares or to surrender them in exchange for assets.
Lord Denning MR said ([1965] 1 All ER at p 857, letter f; [1965] Ch at p 1020) in the Court of Appeal that he thought that Mr Boardman had placed himself in a position where there was a conflict between his duty to advise an application to the court and his interest to acquire the shares himself. There can only be two occasions when such a duty arose, if it arose at all; first, when the appellants were discussing in December, 1956, what should be done about the trust's holding in Lester & Harris Ltd; and secondly, when in the light of all the information obtained, Mr Boardman was in a position to forecast that purchase of the shares at £4 10s a share could reasonably be expected to yield a profit. I do not consider that Mr Boardman was under any duty to advise an application to the court when Mr Fox said that he would not consider the trust purchasing the shares under any circumstances. If one takes the second occasion as at the time Mr Boardman wrote on 25 February 1959, saying that he thought that there was a most attractive margin to go for, can it be said that Mr Boardman then was under a duty to advise the trustees to apply to the court?
Mr Fox too, must have known that there was a most attractive margin to go for, and, as a chartered accountant, that it was possible on occasions to secure the sanction of the court to an investment not within the investment clause of the trust. I do not therefore see that it became Mr Boardman's duty to advise him on an application to the court. He was in a position, as good a position as Mr Boardman's, to assess the prospects of the speculation being successful and, as so much would depend on what was achieved after control was obtained, it could not be said that there was not some risk involved. He would not consider the trust buying the shares under any circumstances.
That there was such a conflict of interest and duty was not alleged in the pleadings. It was not an issue at the trial. No evidence was directed to it. If Mr Fox had been asked about it, he might well have said: "I would not consider the trust buying the shares and so I would not consider an application to the court to allow it to do so." There is no indication in the evidence or in the correspondence of any change of attitude on the part of Mr Fox.
In my opinion, there was no conflict between the interests and duties of the appellants or between the interests of the trust and the appellants at any time.
Russell LJ ([1965] 1 All ER at p 864; [1965] Ch at p 1031) based his judgment on different grounds to those of Lord Denning MR ([1965] 1 All ER 849 at p 851; [1965] Ch at p 1011) Pearson LJ ([1965] 1 All ER at p 858; [1965] Ch at p 1021) and Wilberforce J ([1964] 2 All ER at p 199). He held ([1965] 1 All ER at p 864, letter f; [1965] Ch at p 1031) that:
"The substantial trust share holding was an asset of which one aspect was its potential use as a means of acquiring knowledge of the company's affairs, or of negotiating allocations of the company's assets, or of inducing other shareholders to part with their shares. That aspect was part of the trust assets."
He thus held that this potential use of an aspect of an asset was the property of the trust. I do not think that this potential use can properly be so regarded. The fact that the appellants claimed to represent the trust holding and threatened minority action did not, in my opinion, involve use of any trust property. Russell LJ went on to say ([1965] 1 All ER at p 864, letter g; [1965] Ch at p 1031):
"That aspect was put into the hands of the defendants by two only of the three trustees, and must in their hands have remained part of the trust assets. The [appellants] exploited that aspect--that potential use--and as a result were able to profit by acquiring other shares: for that profit they must on general principle be accountable."
I do not take the view that Mr Fox and Mrs Noble by assenting to the appellants' proposals and facilitating the obtaining of information by them parted with an asset of the trust. I am for these reasons unable to agree with Russell LJ ([1965] 1 All ER at p 864; [1965] Ch at p 1031).
If the making of the profits by the appellants constituted a breach of their fiduciary duty, they would be liable to account unless they established that they had done so with the consent of their principals. They could not claim that they had the consent of the trustees for they had not sought and had not obtained the consent of Mrs Ethel Phipps, nor can it be said that they obtained a binding consent from the respondent. Wilberforce J held ([1964] 2 All ER at p 205, letter b) that the letter to him, which was expressed to be a summary, did not sufficiently disclose the situation and that the deficiencies were not remedied at the meeting between Mr Boardman, the respondent and the respondent's wife. From this finding there was no appeal.
I do not consider that it was ever necessary for the appellants to obtain the consent of their principals to their course of action for, in my opinion, that course of action did not involve any breach of the fiduciary duty which they owed in consequence of their employment as agents.
I have not sought to distinguish between the position of the appellants, Mr Phipps and Mr Boardman. Throughout they acted together both in the negotiations and in this litigation. I see no reason to distinguish between them. Nor have I drawn any distinction between the position of the trust and that of the respondent vis-à-vis the appellants. The appellants were not his agents nor did they represent that they were. On occasions they acted for the trust and they represented that they were so acting, although not in fact authorised to do so. The trust continued in existence until a very short time before the completion of the purchase of the 14,567 shares. If what they did was not a breach of the duty which they owed by reason of the fiduciary relationship to the trust, their principals, I do not see how it can be regarded as a breach of any duty to the beneficiaries of the trust.
I do not think that my conclusion involves any departure from the principles, so often and firmly laid down, as to the liability of agents to account if there has been a conflict or possibility of conflict between their interests and duties and in breach of their fiduciary duty they have made profits out of their agency without the knowledge and consent of their principals. In this case, as Lord MacMillan said in the Regal case ([1942] 1 All ER at p 391, letter h), the result depends on issues of fact. Liability to account must depend on there being some breach of duty, some impropriety of conduct on the part of those in a fiduciary position. On the facts of this case I do not consider that there was any breach of duty or impropriety of conduct on the part of the appellants.
For the reasons which I have given I would allow the appeal.