Fair shares

 

The case of Von Westenholz & Ors v Gregson & Anor relates to a long dispute regarding an undistributed dividend of GBP400,000 due to the Sanders family,^[1] as the beneficiaries of shareholdings held in trust.

The shareholdings in question relate to the companies All Star Leisure Ltd (ASL) and All-Star Leisure (Group) Ltd (ASLG), which were set up in 2003 and 2006, respectively, to run the bowling venue All Star Lanes. Mark Von Westenholz was one of the founders and chief executive of ASL.

It was determined in the case that Michael Sanders had subscribed to a total of 80,000 shares (the Shares) and that the Shares were to be held by Mark for the benefit of Michael Sanders’ wife Thalia Sanders (10,000 shares), daughter (and Mark’s then fiancée) Melissa Sanders (45,000 shares) and son Rupert Sanders (25,000 shares).

Michael was the first claimant in the matter until he died in July 2022. His daughter then continued the claim as the personal representative of her late father’s estate. The claimants were thereby Melissa Von Westenholz (née Sanders)  in her capacity as personal representative and in her personal capacity, Thalia Sanders and Rupert Sanders (the Claimants). The defendants comprised Marcus Gregson and Daniel Evans, who were non-executive directors of ASLG (the Defendants). By 2013, Mark and the Defendants were the only directors of ASLG. Mark ceased to act as chief executive and director in December 2014 for reasons explained below.

The dispute between the parties centred on the payment of a dividend of GBP5 per share by ASLG in the summer of 2018, which would have resulted in a dividend of GBP400,000 being paid to the Claimants in respect of their 80,000 shares. Rather than being paid to the Claimants, the dividend was retained by ASLG and used towards the payment of debts owed to ASLG by Mark.

The Claimants made various trust-related claims against the Defendants to recover the dividend of GBP400,000 they believed they were due in relation to the Shares. They also made several claims for economic torts, which were both unsuccessful and noted by the High Court of Justice, Business and Property Courts of England and Wales (the Court) to have been time barred in any event. The author briefly summarises these claims at the end of this article for completeness.

The Defendants initially disputed that the Shares were not held on trust for the benefit of the Claimants. As mentioned, this fact was determined by the Court in favour of the Claimants, specifically that the Defendants held the Shares on express trust for the Claimants in the proportions set out above. This article does not focus on the initially disputed existence of a trust; however, it is worth noting that the judgment does carefully review the potential existence of a resulting trust,^[2] constructive trust^[3] and/or express trust^[4] and provides a summary of the key requisites for each type of trust that practitioners may find useful.

Background facts relating to the shares and ASLG

A brief summary of the earlier history in relation to the Shares is given below for completeness:

• On incorporation of ASLG, Mark held ten shares in ASL and his father held 14,000 of the total issued share capital in ASL of 58,010. As part of a funding round completed in September 2005, a further 41,000 shares were issued to Mark’s father and an additional 70,000 shares were issued for the benefit of Mark’s father as part of a pension fund held for his benefit.
• As part of this same funding round in September 2005, Mark and his father-in-law Michael agreed that Michael would subscribe to shares in ASL. As a result of this, Michael made a cheque payable to ASL for GBP20,000 and gave this to Mark on the agreement that this payment was in return for 20,000 shares at GBP1 per share. The Court accepted in evidence that Michael intended that these shares were to be held for the benefit of Melissa, as a wedding present.
• In January 2007, after the incorporation of ASLG as a holding company, the shareholders in ASL exchanged their shares for an equivalent shareholding in ASLG.
• The pension fund referred to above was wound up in December 2006 and the 70,000 shares were transferred to Mark so that he subsequently held 70,010 shares. The reasoning behind these shares being transferred to Mark is not touched on in the judgment, and is rather accepted as fact by the Court, and the author does not propose to speculate about the reasons for this.
• ASLG launched a rights issue in March and April 2007 for GBP2 per share and Michael agreed with Mark that he would subscribe to a further 25,000 shares in each round (a total of 50,000 shares). The judgment does not provide details of how the consideration for these shares was paid. However, it does accept as fact that completion of the share issues took place in July 2007 and, although no shares were issued to Michael directly, 62,838 shares were issued to Mark, of which the Court accepted as fact 50,000 were received and held for Michael as a result of the agreement above that was reached between Michael and Mark (and the consideration paid by Michael to Mark).
• ASLG launched a further rights issue in August 2008 whereby Michael agreed with Mark to subscribe to a further 10,000 shares at GBP3 per share and the rights issue was completed in November 2008. Again, the judgment does not provide details of the consideration for these shares, nor were any shares issued to Michael directly. However, 10,000 shares were issued to Mark and the Court accepted the evidence that these shares were intended by Michael to be held for the equal benefit of Melissa and Rupert.
• There were later funding rounds, but Michael did not subscribe to any further shares.

Mark ceased being a director of ASLG around December 2014. This is because in March 2014 it transpired that Mark had a gambling problem and had utilised roughly GBP2 million from ASLG to fund this. As a result, the Defendants took over running ASLG in 2014 but went back to their non-executive functions once a new chief executive was appointed in early 2015.

Mark’s family made payments of GBP950,000 towards the repayment of Mark’s debt to ASLG and the balance was treated by ASLG as a loan between Mark and ASLG. This was accepted to have placed a lot of financial pressure on ASLG. To ensure that ASLG could survive, private loans were obtained in July 2014 of GBP250,000. These charges were placed against the shares that Mark held in ASLG and were repaid in December 2014. A further, similar charge was placed against the shares that Mark held in ASLG in August 2014 on the representation that Mark was the sole legal and beneficial owner of the shares in question. No reference was made to the claim that the Sanders family had to the Shares.

In October 2014, Michael and Melissa instructed Farrers to write to ASLG to make the first formal claim for the Shares and requested that either the subscription price for the Shares should be refunded or the Shares issued to the Sanders family.

Around this time, ASLG and Mark were in discussions about selling the shares that Mark held in ASLG to repay the balance of his loan to the company. It was recognised by the Court that, as a result of the evidence relating to the discussions that took place about this fact, the Shares were considered as being held for Michael and that it was intended that they would be registered with a nominee in the interim period. However, this did not take place. Mark’s shares were sold in April 2015 (excluding the Shares). The Shares were subsequently transferred by Mark to the Defendants in July 2015 and declared to be held on trust for Mark subject to a right to sell the shares and use the proceeds to settle Mark’s debt to ASLG (the Declaration).

Farrers wrote (by way of response) to ASLG’s lawyers on 6 March 2018, seeking confirmation that ASLG would take no steps to prejudice the Claimants rights to the Shares. The judgment does not refer to a substantive response to this request except to set out that ASLG’s lawyers confirmed that they were instructed to accept service of proceedings on 19 April 2018.

In May 2018, the ASLG Board of Directors resolved to pay the aforementioned dividend of GBP5 per share. The dividend was paid on 25 May and the GBP400,000 dividend due in respect of the Shares was not physically paid but instead retained by ASLG and treated as reducing the debt owed by Mark to ASLG. Farrers again wrote to ASLG to reiterate that the Shares were held for the benefit of the Claimants and that the related dividend due should be held on trust for them. Again, no mention is made in the judgment as to a substantive response to this request.

ASLG was subsequently placed into administration in September 2019, with the dividend remaining unpaid to the Claimants.

It is of immediate note that there was no formal documentation in place in relation to the Sanders’ interest/s in the Shares, nor does it appear (at least not from the evidence referred to in the judgment) that any real attempts were made by them to put this formal documentation in place to protect their position as the events detailed above unfolded. Rather, it appears to have been a more casual arrangement. One could speculate that this was a result of the closeness of the family relations (Mark being Melissa’s fiancé for much of the abovementioned timescale) and the difficult and undoubtedly emotional position that Mark’s subsequent actions placed all the parties in.

It is also interesting that the judgment goes into little detail about the evidence placed before it. More specifically, it barely refers to correspondence from ASLG’s lawyers. It is assumed by the author that they did not respond to Farrers’ case either substantively or at least not in a manner that impacts on the agreed facts on which the Court founded its basis for the outcome of the judgment. Any response of ASLG that may have provided evidence to the contrary would undoubtedly by a key piece of evidence in the judgment.

The trust-related claims

As mentioned above, it was determined by the Court that there was an express trust over the Shares in favour of the Claimants. The author, therefore, will not go any further into the related points. With this in mind, the first trust-related claim that was raised by the Claimants was that Mark breached the express trust in their favour and that the Defendants dishonestly assisted him in doing so.

Three further trust-related claims were made by the Claimants in relation to the transfer of the Shares to the Defendants in July 2015 and the subsequent retention of the dividend that was payable to them in relation to the shares. These claims were that the Defendants:

• wrongly allowed the dividend to be paid to ASLG knowing that the Claimants had an interest in the Shares, based on the Guardian Trust principle;^[5]
• dealt with the dividend in a manner that was not consistent with the terms of trust under which the Shares were held; and/or
• breached their fiduciary duties as trustees.

These four claims are considered in turn.

Dishonest assistance to commit a breach of trust

In determining whether there had been dishonest assistance by the Defendants to commit a breach of trust, the Court had to consider the following.

First, was there a breach of trust? The Claimants claimed that Mark breached the trust created in their favour in respect of the Shares by creating the two charges against the Shares in his name and made a third breach of trust by transferring the Shares to the Defendants in July 2015 to be held pursuant to the Declaration.

The Court found with ‘no doubt’ that on all three points, the use of the Shares as security for Mark’s own liabilities was a breach of trust.

Second, did the Defendants assist with the breach of trust? There was no dispute that the Defendants assisted with the transfer of the Shares and the Defendants accepted that they assisted with the transfer. This point was therefore accepted by the parties as fact.

Accordingly, did the Defendants do so dishonestly? The Court set out the test for dishonesty that is applicable in this context and confirmed that it is a fact-specific determination as to what the individual’s knowledge or belief of the facts is in the circumstances in question.^[6]

The history of this matter was considered carefully by the Court in this context. Although there was some dispute about the Defendants’ knowledge of the existence of a claim by the Claimants to a beneficial interest in the Shares, as a result of the evidence provided in cross-examination, the Defendants were found by the Court to be aware of a potential claim on the Shares by the Claimants. However, it was accepted by the Court that the Defendants were in a difficult position during this time (2014–2015) in trying to prevent ASLG from going into administration as a result of the liabilities that Mark had incurred as a result of his gambling problem.

It was thereby acknowledged by the Court that saving the company was the immediate priority for the Defendants at that time and demanded their keen attention, and that this explained why further investigations were not made by the Defendants into the terms of a potential trust in respect of the beneficial ownership of the Shares, noting that the Defendants asserted that they had essentially relied on this matter being ‘sorted out’ between the Claimants and the Von Westenholz family. Correspondence between the Defendants, Mark and the families during the relevant period supported this point, and the Court did accept the assertion that it was genuinely accepted by the Defendants that the families would account for the sum due to the Sanders family (in relation to their claim to the Shares) by another means.

The Court also acknowledged that during this timeframe keeping the other shareholders on side was a key task for the Defendants and careful negotiations were being held to prevent the other shareholders from reporting Mark to the police, which would no doubt have resulted in him being made bankrupt, thereby impacting the arrangements made with his family to repay the sum due to ASLG.

With specific reference to the transfer of the Shares by Mark to the Defendants, the change in legal ownership of the Shares was a protective measure in the event that Mark was made bankrupt. The Court did not find that the transfer placed the Claimants at a disadvantage in respect of their claim. A circular to the shareholders on 8 December 2014 referred to a claim over the Shares being held by a nominee, pending resolution of the dispute relating to the Shares. The Declaration (perhaps intentionally, from ASLG’s perspective) made no mention of the Claimants’ beneficial rights over the Shares.

The Court's conclusions

As a result of the above facts, and considered objectively, it was determined by the Court that the Defendants had not acted dishonestly in assisting Mark to grant the charges over the Shares and, therefore, these two breaches of trust by Mark were not dishonestly assisted by the Defendants.

In respect of the third breach by Mark, by way of the transfer of the shares from him to the Defendants, the Court again did not find that the Defendants acted dishonestly as, in practice, the Declaration changed very little in respect of the potential beneficial ownership of the Shares. In addition, it was accepted by the Court that it was expected by the Defendants that they would respect the pending outcome of the claim by the Claimants to the Shares as alluded to in the circular and supported by the evidence given by the Defendants in cross-examination. The Court found that sufficient investigations were made by the Defendants to evidence that they had not acted dishonestly in this regard.

The Guardian Trust principle

The Guardian Trust principle is an important common-law rule based on equitable principles that the trustees have a fiduciary duty to deal with trust property in a manner that is consistent with the terms of the trust, thereby benefiting the beneficiaries of that trust property pursuant to the terms of the trust in question.

Essentially, if the trustees distribute trust property that they know is subject to a claim, then they may be personally liable to the beneficiaries of the trust property for any resulting loss relating to that claim. Of course, if the trustees are put on notice of a claim, the result of the claim may impact the distribution of the trust property, such as the extent of the trust property or the beneficiaries that are entitled to it. The trustees will be liable if they apply the trust property in a manner that is inconsistent with the actual beneficial interest in the trust property and, with knowledge of a claim, place themselves at risk if they distribute trust property knowing that the distribution may not be consistent with the terms of the trust.

Clearly, this can cause significant delays to distribution of trust property to the beneficiaries, and it should be recognised that the Guardian Trust principle relates to a potential liability; it does not prevent trustees from making distributions. However, it does place them at risk of personal liability and, of course, trustees must remain neutral in the midst of any claim to trust property.

In this case, the key facts and findings are as follows:

• The Defendants asserted that there was no liability under the Guardian Trust principle, referring specifically to the letters from Farrers and suggesting that these letters claimed the return of the GBP150,000 subscription price as opposed to the issued Shares. However, this argument was disregarded by the Court as it was considered to be contrary to the contemporaneous evidence.
• As a result of the evidence (more specifically the letters from Farrers and correspondence between the relevant parties), it was determined that the Defendants were aware from 6 May 2018, if not before, that there was a claim against the Shares by the Claimants. It was acknowledged that, although the retention of the dividend was in accordance with the Declaration, in retaining the dividend in this manner the Defendants consciously disregarded the Claimants’ claim to the Shares, thereby putting themselves at risk of a claim relating to those Shares.
• The Claimants’ claim to the Shares being proved by the Court in the judgment, the Defendants were found to be liable to the Claimants for the resulting loss (i.e., the dividend of GBP400,000) pursuant to the Guardian Trust principle, because of their disregard towards the potential claim.
• It was also suggested by the Defendants’ counsel that an injunction should have been placed by the Claimants, but the Court made it clear that the Guardian Trust principle does not require this step to protect the party’s position and that trustee liability because of the application of the Guardian Trust principle cannot be avoided on this basis.

This claim was therefore successful and the Defendants were found to be personally liable under the Guardian Trust principle to the Claimants for the dividend due. This outcome was the crux of the judgment in the Claimants’ favour.

Inconsistent dealings

A third party that receives trust property may be liable if they do not deal with the trust property in a manner that is consistent with the terms of the trust.^[7]

The Claimants claimed that allowing the dividend to be retained by ASLG (rather than being paid to the Defendants as trustees) amounted to inconsistent dealing as the dividend was not dealt with in a manner that was consistent with the trust in favour of them, and this point was agreed by the Court. However, a key question was whether the Defendants had sufficient knowledge of the terms of a trust in the Claimants’ favour. The Defendants’ knowledge (at that point in time) of a trust being in existence was therefore considered more carefully. Although it was acknowledged by the Court that the Defendants had notice of a claim against the Shares, as well as the fact that there may well be a trust over those shares in favour of the Claimants, there was not found to be sufficient evidence that they had knowledge of the existence of a trust or its specific terms, just the mere possibility that a trust may exist.

The Court distinguished clearly between these two questions and focused on the level of knowledge that the Defendants had about the terms of the trust. The Court accepted that a high burden of proof was required in this regard and that the Defendants should have either had actual knowledge of the terms of the trust or ‘wilfully or recklessly failed to make enquiries that an honest person would have made’.^[8]

It is clear that the Defendants were ‘on notice’ of a claim against the Shares and were aware that there may have been a trust in favour of the Claimants, but this was also noted to be a point of dispute at the relevant time and it had, therefore, not been absolutely determined or agreed. It was also accepted by the Court that the Defendants did not have actual knowledge of a trust, nor had they wilfully or recklessly disregarded the potential existence of one; rather they had instead been preoccupied with, and conflicted by, their duties as directors of ASLG and did not make further enquiries into the potential nature of a trust as a result.

The Defendants were therefore not found to have made inconsistent dealings as they were not considered to have had sufficient knowledge of the terms of any potential trust.

The Court did comment that no pleadings were made by the Claimants to argue that the Defendants had constructive knowledge of the terms of a trust. The lacking written evidence about the intended distribution of the Shares between the Sanders family (i.e., Michael’s intentions when subscribing to the Shares), and the resulting lack of clarity about the nature of the Sanders’ claim to the Shares in correspondence, may well not have supported such a pleading and may have been the reason behind it not being pursued in the first place.

Breach of trustee fiduciary duties

On the finding that the Defendants were holding the Shares on express trust for the Claimants, with the potential beneficiaries being Mark or ASLG pursuant to the Declaration, it follows that the Defendants would have fiduciary duties as trustees.

A fiduciary relationship can arise through means other than a trust. For the reader’s ease of reference, a fiduciary is someone that ‘has undertaken to act for or on behalf of another in a particular manner in circumstances which give rise to a relationship of trust and confidence’,^[9] with there being no specific legal definition so as to preserve the wide scope of the fiduciary relationship.

The Defendants asserted that, as the Claimants were not named in the Declaration, they were not owed any fiduciary duties.

However, the Defendants had accepted in their evidence that they considered themselves to be holding the Shares subject to a resolution with the Claimants of the dispute in relation to the Shares and this was found by the Court to have objectively placed them in a position of trustee, meaning they owed fiduciary duties to the Claimants. The Court also noted that it was on this basis that there could be no finding of dishonesty (in relation to which these claims are briefly considered below).

The Defendants also expressly accepted in their evidence that they put the interests of ASLG before the interests of the Claimants, thereby placing their duties as directors ahead of their duties as trustees. Although, as set out above, it was accepted by the Court that the reasoning for this was understandable in the circumstances due to the pressures that the Defendants were under in trying to save ASLG from liquidation, it does not avoid the fact that there was a conflict between the two roles and that there was a resulting breach of their fiduciary duties.

The Court found that the Defendants placed themselves in a direct position of conflict between their duties as trustees and as directors of ASLG, thereby breaching their fiduciary duties as trustees of the Shares.

Economic torts

For completeness, the Claimants brought a ‘full suite’ of economic torts, namely that the Defendants:^[10]

• procured a breach of contract;
• caused loss by unlawful means;
• conspired to cause loss by unlawful means; or
• conspired to cause loss by lawful means.

It was not found by the Court that there was a breach of contract, a loss by unlawful means or conspiracy by either unlawful or lawful means. The Court noted that any such claims would have been time-barred in any event and, for this reason, the author does not propose to explore these potential claims in any further detail.

Summary of judgment

To summarise, the outcomes of the judgment on each claim made by the Claimants were as follows:

• The Court did not find that the Defendants dishonestly assisted the breach of trust (by Mark) on the basis that there was not found to be any dishonesty from the Defendants.
• It was determined that the Defendants were on notice of a claim relating to the Shares (and the Claimants’ interests in them) and the Defendants were therefore found to be liable for the related loss to the Claimants (the GBP400,000 dividend retained by ASLG) by virtue of the Guardian Trust principle.
• However, it was not found that there were any inconsistent dealings with the terms of the trust that the Court found to be held over the Shares as it was not considered that the Defendants had actual knowledge of the specific terms of the trust at the relevant time, only the knowledge that there may have been a trust in existence.
• The Court ruled that there was a clear breach by the Defendants of their fiduciary duties to the trust, specifically that the Defendants placed themselves in a position of conflict whereby they prioritised their duties as directors of ASLG over their fiduciary duties to the trust. Although the Court appreciated the reasons for this, it did not take away from the fact that there had been a direct conflict between the two roles and a resulting breach of the Defendants’ fiduciary duties to the trust, which resulted in the Defendants overlooking the potential nature of the trust and failing to engage in more explorative investigations into this.
• No economic torts were found. The Court noted that even if there had been a case, this may well have been time-barred, albeit it did not consider it necessary to consider this point in the circumstances in light of the result of its findings in favour of the Claimants on the trust-related claims.

A subsequent costs order was made by the Court on 23 December 2022.

Practice points

This case is of interest to practitioners in that it comprises judgments on several key areas of trust law. It provides a summary of the key requirements for express, resulting and constructive trusts (albeit this section of the judgment was not the topic of this article). It also provides an up-to-date judgment in relation to the Guardian Trust principle and highlights the issues that arise when individuals are faced with a conflict between their fiduciary roles.

Specifically, the judgment in relation to the breach of fiduciary duties primarily resulting from the Defendants’ conflict between their roles as directors and as trustees is a firm lesson in the importance of appointing appropriate trustees, particularly when there are business interests involved that require a different skill set and priorities.

For practitioners, a key takeaway from the judgment is the need to carefully consider who is appropriate to take on the role of trustee when establishing a trust for clients. Practitioners should consider not only whether the individual can take on that particular fiduciary position (namely, the role of trustee) but also whether they have other related fiduciary appointments that may result in an inadvertent conflict. Practitioners should discuss this with their clients in some detail, particularly when there are related business interests, as it is important to consider the potential conflict between trustees’ and directors’ duties. In such instances, it is likely to be preferential to ensure that independent trustees are appointed when there are related directorships, which will ensure that independent decision making can take place and minimise the risk of a conflict of interest.

There is also little doubt that this case highlights the importance of professional advice being sought from the outset. It also highlights the importance of having clear documentation in place both to establish a trust and subsequently to formalise every step taken in relation to that trust (including the preparation of trustee resolutions). This enables the settlor and trustee/s to clearly document the intentions between the relevant parties as to the ultimate beneficial ownership and treatment of the trust property at the point of settlement, and throughout the trust’s lifetime. The same care should be taken to ensure that there is a clear paper trail in relation to all company holdings. Trustee and shareholder resolutions can be particularly strong pieces of evidence in such circumstances. In this case, it seems strange that Michael took such a casual stance in relation to his share subscriptions and, specifically, that he did not take steps at the outset of his involvement in ASLG to ensure that the shares were held at least in his name so that he could hold them on bare trust for the benefit of his family, rather than relying on the word of his son-in-law. Such steps to document one’s intentions and subsequent dealings with a trust or company holdings should be taken regardless of the relations and, arguably, are just as, if not more, important when relations are close to avoid a breakdown in personal relationships. It certainly cannot always be relied upon that the families in question will ultimately agree to sort things out between themselves.

In this instance, it was accepted by the Court throughout the judgment that the documentary evidence was lacking and that there were gaps in the disclosure. It is unknown whether this additional documentation could have assisted either side in the case but it would have gone some way towards documenting the intentions of the parties and could have prevented the matter from reaching the Court.