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CHANI 1999/0854/A3
IN THE SUPREME COURT OF JUDICATURE CH 1997 H
544
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION - THE HON. MR JUSTICE
NEUBERGER
Royal Courts of Justice
Strand, London, WC2A 2LL
Wednesday 19th April 2000
BEFORE:
THE VICE-CHANCELLOR:
THE RT. HON. SIR RICHARD SCOTT
THE RT. HON. LORD JUSTICE CHADWICK
THE RT. HON. LORD JUSTICE BUXTON
B E T W E E N
|
1)
Harry Hall
2) John Sidney Hall
3) Richard Delaney Hall
4) Dorothy Hilda Mann
|
Appellants
|
|
-
and -
|
|
|
The
Governor and Company of the Bank of England
|
Respondents
|
__________________________________
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040, Fax No: 0171 831 8838
Official Shorthand Writers to the Court)
__________________________________
Mr John Macdonald QC and Mr Nicholas Le Poidevin instructed by Ingram Clegg
&Crowther, Solicitors for the Claimants
Mr Robert Hildyard QC and Mr Bankim Thanki instructed by Freshfields,
Solicitors for the Defendant
__________________________________
Judgment
As Approved by the Court
Crown Copyright ©
Wednesday 19th April 2000
THE VICE-CHANCELLOR:-
1. This is an appeal from the judgment of Neuberger J. given on 14 July 1999.
The appellants, three brothers and a sister, Mr Harry Hall, Mr John Hall, Mr
Richard Hall and Mrs Dorothy Mann, had sued the Bank of England for damages for
misfeasance in public office. The misfeasance complained of related to the
Bank's alleged inaction in supervising a company, Bradford Investments plc, of
which the Halls were the shareholders. The judge struck out the action. He
did so, first, on the ground that the Halls had no prospect of succeeding in
establishing misfeasance in public office against the Bank, and, second, on the
ground that, if the tort had been committed, the proper claimant would be the
company not its shareholders. There was also a minor point regarding delay.
The Halls have appealed.
2. The Halls are a Yorkshire family who carried on business in partnership
under the style Bradford Investments. They formed a company on 2 July 1985
which was registered as a public limited company on 1 November 1986 under the
name Bradford Investments plc (the company). They were the only ordinary
shareholders of the company. They were also directors. Mr Harry Hall was the
chairman. Together they controlled the company.
3. On 31 December 1986 the Halls transferred their partnership business to the
company. The business consisted of taking deposits from the public, investing
the funds in the purchase of cheap terraced houses in Yorkshire and, later, in
Lancashire and disposing of the properties on rental purchase terms under which
the purchaser would pay the purchase price by instalments over a period of up
to ten or eleven years. In the meantime the property would be rented to the
purchaser who would hope to obtain a contribution to the rent from housing
benefit. The company's accounts showed substantial profits.
4. Because the business involved the taking of deposits from members of the
public, authorisation to do so from the regulatory authority was necessary.
The regulatory authority under the Banking Act 1979 and, later, the Banking Act
1987 was the Bank of England. Its role was taken over by the Financial
Services Authority pursuant to the Bank of England Act 1998. For the period
with which this litigation is concerned, however, the regulatory authority was
the Bank of England and the governing Act was the Banking Act 1987. Under
section 3 of the 1987 Act the authorisation of the Bank of England was required
for the carrying on of a deposit-taking business. Section 11 gave the Bank
power to revoke an authorisation on various grounds and section 12 gave the
Bank power to restrict an authorisation instead of revoking it. Sub-section
(2)(b) of section 12 allowed the Bank to restrict an authorisation:-
"by imposing such conditions as it thinks desirable for the protection of the
institution's depositors or potential depositors".
5. Section 13 of the 1987 Act applied where the Bank proposed to revoke or
restrict an authorisation or to vary restrictions which it had imposed. The
section required notice of the Bank's intention to be given to the institution
concerned, and enabled the institution to make representations. It obliged the
Bank to take the representations into account in deciding what next to do and,
under sub-section (7) required the Bank, unless the decision was to take no
further action, to give written notice of and written reasons for its decision.
I should refer also to sections 19 and 20 of the Act under which the Bank,
subject to much the same procedure as applied under sections 12 and 13, could
give an institution directions for the purpose, in the interests of depositors
or potential depositors, of safeguarding its assets.
6. On 31 December 1986, the same date as that on which the partnership business
was transferred to the Bank, the Bank gave the company an authorisation to
carry on the deposit-taking business. But within a fairly short time the Bank
became dissatisfied with the manner in which the business was being carried on.
On 8 February 1988 the Bank gave the company written notice under section 13(7)
of its decision to impose restrictions on the company's section 3
authorisation. The notice said that the Bank had decided to restrict the
authorisation by imposing conditions under section 12(2)(b):-
"... designed to provide the company with a further opportunity to undertake
remedial action rather than, as previously proposed, to allow the company time
to repay its deposits in an orderly manner".
7. The allegations made against the Bank in this litigation make it desirable
to refer to some of the written reasons given by the Bank for its decision as
well as to some other parts of the contents of the notice.
8. Part 1 of the notice, which set out the Bank's written reasons, began by
referring to the representations that had been made on behalf of the company.
It included the following passage:-
"... the company asserts that the Bank is blatantly opposed to the company and
suggests that it has adopted an inflexible approach in its supervision because
of political pressure, bad publicity which the company has received, and the
fact that the company is a property company. It also asserts the Bank has no
regard for the truth. The Bank wishes to state that none of these points has
any foundation ... [the Bank] has been concerned for some time at the degree of
concentration of the business of Bradford Investments in a very specialised
area. The company's recent difficulties with regard to disposal of housing
stock and increased re-possessions have crystallised these concerns ...".
9. Paragraph 4 in Part 1 expressed the Bank's opinion that the company's net
assets were
"...neither commensurate with the nature and scale of the company's
operations nor sufficient to safeguard the interests of its depositors and
potential depositors ..." (para . 4.1 )
noted that
"... the company has had difficulty in meeting the Bank's requirement that
unsecured depositors should be protected by unencumbered assets of at least an
equal amount" (para .4.3).
and concluded that
"the company's net assets have not been and are not sufficient to meet the
minimum requirement" (para. 4.12).
10. The Bank expressed the view in paragraph 5.1 that the company's provisions
were inadequate and, in paragraph 6.1, that the company's records and systems
"have been and are inadequate".
11. In paragraph 7.2 the Bank re-iterated its view that the company had
"imprudently pursued high growth whilst its management information systems were
incapable of dealing with the resulting level of business" and, in paragraph.
7.4, emphasised that its duty under the Act was to supervise the company in the
interests of depositors and potential depositors.
12. Under the sub-heading "fit and proper" the Bank expressed its opinion about
Mr Harry Hall and about the company's managing director, a Mr Holdsworth. As
to Mr Hall, the Bank made clear its conclusion that it was he who was
responsible for the formulation of the policy and strategy of the company's
business. It said that
"Mr Hall must be held primarily responsible for the lack of cohesive direction
of the company and the imprudent way in which it has been run"
and that
"Mr H. Hall is not fit and proper to hold his present position as chairman and
effective chief executive".
13. As to Mr Holdsworth the Bank concluded that he, as managing director, had
to bear his share of responsibility for the imprudent way in which the business
had been run (para. 8.7) and that he was "not fit and proper to hold his
position as managing director" (para. 8.8).
14. In paragraph 11 the Bank expressed the view that the remedial measures
necessary to enable the company to meet the criteria for authorisation would
require "substantial reductions in the housing stock and .. changes in the
structure of the management" (para. 11.2).
15. The conditions imposed on the company under section 12 of the Act included
the following:-
(1) the company was barred from advertising for deposits;
(2) the company was barred from accepting deposits if as a result deposit
liabilities would exceed the level of those liabilities outstanding at the date
of the notice;
(3) the company was barred from purchasing any more houses;
(4) the company was barred from paying any dividend or any director's fees to
any shareholder;
(5) the company was given three months within which to ensure that it held
unencumbered assets at least equal to its unsecured liabilities.
16. It is clear from the terms of the notice that the Bank was imposing
restrictions on the company's authorisation for the purpose of protecting
depositors. Paragraph 7.4 said that:-
"The Bank can only emphasise its duty under the Act to supervise the company
in the interests of depositors and potential depositors".
17. By notice dated 26 February 1988 the Bank made some alterations to the
restrictions it had imposed. In doing so it was taking account of
representations made under section 13(9) by Mr Harry Hall and Mr Richard Hall.
It extended the three month time limit to six months. The Bank warned,
however, that:-
"until the company's business is run in what appears to the Bank to be a
prudent manner and the Bank's concerns, in particular about management and the
inadequacy of the Risk Asset Ratio (´RAR'), have been satisfactorily
addressed the Bank cannot agree to any further relaxation of the conditions
...".
18. After the February 1988 notices had been given Mr Holdsworth resigned and a
Mr Hampson was appointed in his place. Mr Hampson was acceptable to the Bank.
He had been chosen by and was appointed by the Halls. Mr Hampson appointed a
Mr Cooper to assist him in marketing the company's portfolio of houses.
19. On 22 August 1988 the bank replaced the February restrictions with new
restrictions. At the end of August 1988 the company surrendered its
authorisation to take deposits from the public. So the restrictions imposed by
the February notices were no longer relevant. Upon the surrender the Bank
issued a notice under section 19 of the Act repeating a number of the
directions given in August for the purpose of safeguarding its (the company's)
assets. The directions included a requirement that the company "as a matter of
urgency take all reasonable steps to sell unoccupied properties as soon as
reasonably possible for the best price reasonably obtainable". Every sale was
to be "for cash settlement upon completion". The directions also barred the
Halls from management of the company. The notice was expressed to be given "in
order to protect the interests of depositors by safeguarding the company's
assets and by ensuring that the company has competent management".
20. It is, in my opinion, of some importance in the context of this litigation
that no allegation has been made that the Bank acted improperly or unlawfully
in serving on the company the two February 1988 notices or the September 1988
Notice. It must, therefore, be accepted that the Bank's intentions were proper
intentions and that the Bank was entitled thereafter to pursue a policy
directed to achieving the purposes for which it had served these notices. The
Halls' allegations against the Bank of misfeasance in public office must be
assessed against this backcloth.
Misfeasance in Public Office
21. The tort of misfeasance in public office is currently in the public eye.
It is well-known that a major judgment analysing the tort and its ingredients
was handed down by the Court of Appeal on 4 December 1998 in Three Rivers
District Council -v- Bank of England now reported in [2000] 2WLR 15. In this case, too, an application had been made to strike out a
claim against the Bank based on misfeasance in public office. Clarke J. struck
out the claim. The Court of Appeal upheld him. The struck-out claimant
appealed to the House of Lords. The hearing in the House of Lords has
concluded and the verdict of their Lordships is awaited.
22. It might be thought that, in prudence, we should have delayed giving
judgment in the present appeal until the views of the House of Lords on the
issues arising in Three Rivers have been made known. There are
three reasons why we have not done so. First, neither side has asked us to do
so. Second, much of the debate in the House of Lords has centred upon an issue
of European law which does not arise in the present appeal. Third, there is no
real issue between the parties as to the matters that must be found to be
present for a claim based on misfeasance in public office to succeed. The
argument before us, as to whether or not the Halls can establish misfeasance in
public office on the part of the Bank, has not been an argument about the
ingredients of the tort. Nor has it been an argument about any primary facts.
The primary facts pleaded and relied on by the Halls are either common ground
or, this being a strike-out, must be assumed to be correct. The argument has
centred upon the inferences that can be drawn from those facts. The question
is whether the Halls have any real prospect of success in contending that the
requisite inferences can be drawn from the primary facts.
23. The complaints made by the Halls against the Bank are based upon the
alleged failure by the Bank to intervene and prevent damage being caused to the
company by its new management. The Halls contend that Mr Hampson's and Mr
Cooper's management decisions in marketing the houses were disastrous. They
charge Mr Cooper with fraud. They charged Mr Hampson, too, with fraud until,
in the course of the hearing before Neuberger J., they proposed amendments to
the Statement of Claim so as to remove the allegation of fraud against Mr
Hampson. There is no doubt but that the Bank's powers under the 1987 Act would
have enabled the Bank, if it had thought it right to do so, to have intervened
and prevented the marketing processes, to which the Halls so vehemently
objected, from being continued. The Bank, however, did not intervene. It is
this failure that, it is contended, constituted misfeasance in public
office.
24. Section 1(4) of the Banking Act 1987 provides the Bank with an important
protection against liability arising out of its discharge of its statutory
functions. The sub-section provides an immunity from liability for damages
-
"... for anything done or omitted in the discharge or purported discharge of
the functions of the [Bank] under the Act unless it is shown that the act or
omission was in bad faith".
25. There was some debate in the Three Rivers District Council
case as to the extent to which dishonesty was a necessary ingredient of the
tort of misfeasance in public office. But in the present case, in view of
section 1(4), the debate is immaterial. Bad faith must be shown if the Bank is
to be held liable. There is, in my opinion, no relevant difference for the
purposes of the tort between bad faith and dishonesty.
26. The ingredients of the tort are those identified by the majority of the
Court of Appeal in the Three Rivers District Council case. It
was held, approving the approach of Clarke J. at first instance, that the
requisite bad faith could be shown in one or other of two alternative ways. It
would be sufficient to show that the public officer had acted with the positive
intention of injuring the claimant. It is convenient to describe an intention
of that character as "targeted" bad faith. Alternatively, it must be shown
that the public officer knew that he had no power to act in the way he did and
that in so acting he would probably injure the claimant.
27. The second of the two alternative formulations runs into some difficulties
where what is complained of is not an act but an omission. The concept of
acting with knowledge on the part of the public officer that he had no
statutory power to do what he was doing cannot easily be applied to an
omission, to a mere failure to exercise a power available to be exercised. It
is difficult to apply the concept of ultra vires to an omission. Mr Macdonald
Q.C., counsel for the Halls, reformulated the alternative in order to cater for
this difficulty. He submitted, and I would accept, that a failure to exercise
a statutory power would be capable of constituting the tort. But, unless
targeted bad faith were to be relied on, there must, he submitted, be actual
knowledge that to do nothing would, in all the circumstances, be unreasonable
in the Wednesbury sense. If with that knowledge the public
officer continued to do nothing and knew that his inaction would be likely to
injure the claimant, the requirement of bad faith would, Mr Macdonald
submitted, be satisfied.
28. I would accept those submissions. So, too, I think would Mr Hildyard Q.C.,
counsel for the Bank. He submitted that the Halls had to show a deliberate and
dishonest decision by the Bank to refrain from exercising the statutory powers
available to them. There is, in my view, no relevant difference between the
respective tests formulated by counsel. They are consistent with the
principles expressed by the Court of Appeal in the Three Rivers District
Council case.
The Facts
29. What happened after Mr Hampson had been appointed managing director and Mr
Cooper had been appointed to assist in marketing the houses is fully and
clearly set out in Neuberger J's judgment. It is unnecessary for me to set out
the facts again in this judgment. I shall do so only to the extent necessary
for me to explain my conclusions about the grounds of appeal relied on by the
Halls and to draw attention to the particular matters which have featured in
the argument before us.
30. The Bank continued, after the February 1988 notices had been served and
until the company went into liquidation in July 1991, to keep an eye on the
company and its progress in selling its housing stock. There were a number of
meetings between Bank officials and Mr Hampson, or the Halls, or both. The
official within the Bank with whom Mr Hampson and the Halls had most contact
was Mr Ball.
31. Although Mr Hampson had been chosen and appointed by the Halls, the
relationship between him and them deteriorated rapidly. The reason for this
was that there were fundamental disagreements as to the steps to be taken in
order to sell the company's housing stock. This had to be done in order to
comply, first, with the conditions imposed by the February 1988 and August
1988 notices and, later, with the directions given by the September 1988
notice. The disagreements were never resolved and led to the charges of fraud
against Mr Hampson and Mr Cooper.
32. In particular, the Halls challenged the valuations of the company's housing
stock that had been made by Mr Cooper and that formed the basis of the prices
at which the properties were offered for sale. The Halls reiterated that the
properties were being sold at undervalues. This complaint lay at the root of
the fraud allegations. Mr Hampson took the view that because of the need for
prompt sales and because the properties were deteriorating in condition,
discounts off what might otherwise have been achievable sales price were
justified. The judge accepted that there was nothing inherently improbable in
Mr Hampson's explanations of his policy, given both to the Halls and to the
Bank. The Bank was entitled to accept them.
33. Moreover, when the valuations were challenged by the Halls, Mr Hampson
brought in two independent valuers, a local firm, Robinsons, and a Leeds firm,
Donaldsons. The latter firm had some criticisms to make, but made none that
could be said to demand the intervention of the Bank. Mr Macdonald has not
suggested otherwise.
34. Although the allegations being made by the Halls against Mr Hampson and Mr
Cooper did not lead the Bank to intervene and insist upon a further change in
management of the company, a number of investigations of the allegations were
instituted over the period between June 1988 and July 1991 when the company
went into liquidation:-
(i) In September 1988 the Bank appointed KPMG to provide monthly reports to
the Bank under section 41 of the 1987 Act. The matters on which KPMG were to
report included the company's compliance with the directions the Bank had given
under the September 1988 notice and, also, "any other matters which come to
your attention which in your view are relevant to the Bank's supervisory
responsibilities under the Act in relation to the company".
(ii) On 6 September 1988 the company appointed Mr Wilson, of Baker Tilly, to
investigate the allegations. The Bank agreed that Baker Tilly's charges for
this investigation could be met by the company. Mr Hampson's letter of
instructions to Mr Wilson confirmed that he was "to carry out an investigation
into allegations made by the shareholders against the present Executive
Directors of the company and certain of the company's appointed agents". By a
letter dated 9 September 1988, Mr Harry Hall confirmed Mr Wilson's
instructions.
(iii) In April 1989 the Bank instructed Price Waterhouse under section 41 of
the 1987 Act to investigate and report on the Halls' allegations. The Bank's
letter of instructions said:-
"You should report on whether there is any basis for the allegations of the
shareholders that fraud has been perpetrated on the company in the manner in
which it has disposed of houses in its possession and in which it has paid for
repairs to houses held by it in stock. You should also report on whether the
company's procedures and practices, which have given rise to those allegations,
are appropriate in respect of the sale of and repairs to its housing stock".
(iv) In addition, the Bank on several occasions urged the Halls to place their
fraud complaints before the Police. In April 1989 the Halls did so and a
police investigation followed.
35. None of the investigations to which I have referred produced any basis on
which it could arguably be contended that the Bank's failure to intervene in
the management of the company was Wednesbury unreasonable, let
alone dishonest or in bad faith.
(i) As to KPMG's monthly reports, it has not been contended that
any part of the contents of any of the reports was such as to require the Bank
to intervene.
(ii) As to Mr Wilson's investigation he produced a final report on 12 October
1988. He reported that he had not found "any evidence whatsoever that would
indicate any dishonest or fraudulent activity" (para. 7.01). He expressed some
criticism of the quality of the professional advice that Mr Hampson had
received:
"We would conclude that although the taking of advice is commendable, the
sources of the advice and their recommendations are inappropriate to the
company's current status and problems".
The most serious problem referred to in the report was Mr Wilson's
apprehension that the company was insolvent and that the realisations policy
and the policy for repayment of depositors were not taking that feature
sufficiently into account. The report contained no serious criticism of
management. The Halls contend that the absence of such criticism was
attributable to the intervention of the Bank and to pressure brought to bear
on Mr Wilson by the Bank. I will return to this allegation.
(iii) The Price Waterhouse report was handed over to the Bank on 10 November
1989. The Report, like the Baker Tilly report, said that no evidence of fraud
had been found (para. 41). The report did, however, conclude, that Mr Cooper
had had an unacceptable potential conflict of interest (para. 24) and provided
support for the allegation that some of the company's properties had been sold
at an undervalue (paras. 28 to 33) and that there had been other errors of
judgment in the steps taken to market the properties (e.g. para. 42).
(iv) Nothing resulted from the police investigations. No charges were
brought.
36. In summary, none of these several investigations gave any support to the
serious allegations of fraud that the Halls were making.
The "Threat" and the "Secret Instruction"
37. There were two matters in particular on which reliance was placed by Mr
Macdonald in arguing that the Halls had shown an arguable case for contending
that the Bank's failure to intervene in the management of the company by Mr
Hampson was in bad faith.
38. The first matter relates to a meeting on 23 June 1988 at which the Halls
complained that the company's properties were being offered for sale at an
undervalue and threatened to bring proceedings for an injunction restraining
the sales unless independent valuations were obtained. Mr Harry Hall, in his
Witness Statement of 26 May 1999, referred to the incident and then says
this:-
"[Mr Ball] later said in the interview that if we did apply to the court he
would ensure that the company was put into liquidation and all its properties
auctioned, and he made clear what sort of prices the company could expect if he
did that . .... The Bank considered taking legal advice about our proposal to
seek an injunction ...".
39. The Halls rely on the threat to place the company in liquidation, made by
Mr Ball at the 23 June 1988 meeting, as evidencing the Bank's bad faith.
40. The second matter relates to a secret instruction that, it is alleged, the
Bank gave to Mr Wilson. Mr Wilson, it is said, was told to confine his
investigation of the allegations being made by the Halls to their allegations
of fraud and not to make any criticisms of management decisions.. The Bank has
denied that this instruction was ever given. Mr Wilson, too, has denied it.
The Halls' case in support of their contention is that on 29 September 1988, at
a meeting between Mr Wilson and the Halls, "Mr Wilson ... told us ´off
the record' (his words) that the Bank had informed him that it did not want to
see any criticism of management decisions in the report". (per Mr Harry Hall
in para. 56 of his witness statement). This was said, according to Mr Harry
Hall, at a time when Mr Wilson was alone with the Halls, his associate having
temporarily left the room. In paragraph 57 of his witness statement, Mr Harry
Hall completes the story:-
"Mr Wilson's associate then re-entered the room with coffee and as he placed
it on the table Richard said to Mr Wilson "So its the Bank then?" and Mr
Wilson gave him a slight nod and then shut up".
41. The Halls rely on this alleged secret instruction from the Bank as
evidencing the Bank's bad faith.
The Judge's Findings
42. Neuberger J. asked himself whether the Halls had a ´real prospect of
success in establishing that the Bank reacted to the vociferous complaints
being made by the Halls in a way in which no reasonable person in the position
of the Bank could have done (p. 75 of the judgment). The judge described the
Halls' case as weak but concluded:-
"Although I have strong doubts as to whether the claimants can succeed in
establishing the Bank acted in a "Wednesbury unreasonable" way, I consider that
they have made out a case for saying that they have a chance, indeed a real
chance, of establishing that" (p. 76).
43. There has been no respondent's notice from the Bank challenging that
conclusion. So we must accept it. I doubt very much, however, whether it is
one that I would have come to.
44. The judge then went on to consider whether the vital ingredient of
dishonesty on the part of the Bank could be shown to be present. He directed
himself, in my view, impeccably and concluded as follows:-
"... even on the most generous view, it appears to me that [the claimants'
arguments] get nowhere near giving the claimants a case on dishonesty which
could even be pleaded against the Bank. As I understand it Mr Macdonald
accepts that, and it is for this reason that he relies, and understandably
relies so strongly on the alleged threat and the alleged instruction".
45. As to the alleged threat, the judge said he could not see how, taken on its
own, it could be said "to constitute dishonesty, to be evidence of dishonesty,
or even to be something from which dishonesty could fairly be inferred" (p.
79).
46. As to the alleged secret instruction, the judge found the allegation so
improbable as to have no real chance of success.
47. Before this Court Mr Macdonald has relied on the threat and the secret
instruction every bit as strongly as he did below. He was probably bound to do
so, for the history of the Bank's dealings with the Halls and the company over
the period May 1988 to July 1991 contains nothing else which could be of the
slightest assistance in fixing the Bank with bad faith in not interfering with
Mr Hampson's management role and management decisions regarding the marketing
of the company's properties.
48. For my part I do not see how the alleged threat adds anything at all to the
Halls' case. It is plain that the Bank wanted sales of the company's
properties to take place urgently. The Bank's reasons for wanting this to
happen have not been challenged as being unreasonable or improper. The
directions given on 1 September 1988 have not been challenged. An
interlocutory injunction would have prevented sales from taking place until, at
best, the trial of the action when the injunction could be discharged. In the
meantime depositors interests would be at risk. I can see nothing surprising
in Mr Ball responding to the Halls' threat of injunction proceedings by
referring to the possible consequence that a winding-up application would be
made. The incident, if it happened, gets nowhere in fixing the Bank with bad
faith.
49. The alleged secret instruction likewise, in my opinion, has no weight.
First, it is quite clear that the Bank's main concern, and rightly, was whether
there was any substance in the fraud allegations that were being made by the
Halls. If it were the case that some official of the Bank had indicated to Mr
Wilson that his priority should be to investigate the fraud allegations I would
not find it surprising or a matter of criticism. Positive instructions from
the Bank to Mr Wilson that he was to make no criticisms of management would
have been plainly improper and, if established, might provide the basis for an
inference of bad faith on the part of the Bank to be drawn. But, in my
judgment, the Halls' have no prospect at all of establishing that the alleged
instruction was given. Mr Wilson does not support them. The probabilities are
entirely against them. Mr Wilson is a professional accountant. His client was
the company. His instructions came from Mr Hampson. Why would he accept such
obviously improper instructions? Mr Wilson plainly owed a professional duty to
the company. If the Halls are right he was in gross breach of that duty. But
no claim against him for the loss caused by his alleged breach of duty to the
company has ever been made or intimated. Why have the Halls reserved the
incident for the purpose of making a far-fetched claim for misfeasance in
public office against the Bank when, if they are right in claiming that the
secret instruction had been given, the company would have had an open and shut
claim against Mr Wilson?
50. Neuberger J. concluded that the alleged secret instruction was not of
sufficient weight in the scales to allow the Halls' contention of bad faith on
the part of the Bank to have any real prospect of success. I agree with him.
He gave careful consideration to other matters alleged to point to bad faith on
the part of the Bank. He found none of them to be of any weight. I agree
with him.
51. Mr Macdonald invited us to view the history of the Bank's dealings with the
Halls and the company in the round. We should not, he submitted, concentrate
on any particular incident in isolation. The particular incidents, viewed in
the context in which they took place, provide, he submitted, a reasonably
arguable case of dishonesty against the Bank. My conclusion is exactly the
reverse. The particular incidents relied on, viewed in the context of the
whole history, seem to me to deprive the incidents of whatever weight they
might have had in isolation. It seems to me impossible to suggest that the
Bank's decisions, whether or not ill advised, were taken in bad faith. The
judge's conclusion that the Halls' case against the Bank ought to be struck out
seems to me to be one that he was entitled to reach. I would dismiss the
appeal.
The Prudential -v- Newman Industries Issue
52. The other major issue that was dealt with by the judge and has been debated
before us is whether it is open to the Halls to recover by way of damages the
loss to the value of their shares brought about by the Bank of England's
conduct towards the company in which they held the shares. I can, I think,
deal with this issue relatively quickly since the appeal no longer depends on
it.
53. Prudential Assurance Co Ltd -v- Newman Industries Ltd (No. 2) [1982]
Ch. 204 is Court of Appeal authority for the proposition that, where a
wrong has been committed against a company, the company is the proper claimant
for the damage caused to it by the wrong, and that shareholders cannot sue the
wrongdoer for the loss in value of their shares that has resulted from the
damage to the company. As Lord Justice Templeman put it at p. 223.
"The shareholder does not suffer any personal loss. His only "loss" is
through the company, in which he has, say, a 3 per cent, shareholding ... The
shares themselves ... are not directly affected by the wrongdoing".
54. The proposition for which the Prudential case stands as
authority was applied in Johnson -v- Gore Wood [1999] PNLR 426
(C.A.). An appeal to the House of Lords is pending. The
Prudential case was distinguished in George Fischer (GB)
Ltd -v- Multi Construction Ltd [1995] 1BCLC 260 (C.A.). That was a
case in which the claimant entered into a contract with the defendant under
which the defendant was to install equipment on the premises of one of the
claimant's subsidiaries. The equipment was to be used by the subsidiary. The
equipment was defective and damage was suffered by the subsidiary in
consequence. The claimant sought to recover in a breach of contract action the
loss caused to its subsidiary. The claim was allowed. Prudential
Assurance -v- Newman Industries was distinguished on the ground that
there the company, Newman Industries, had a cause of action to recover the
damage it had suffered, whereas in George Fischer the subsidiary
had no cause of action to recover the damage it had suffered (see Sir Michael
Kerr at p. 270). Accordingly, it was held, the Prudential Assurance
case did not bar the action.
55. Barings plc -v- Cooper & Lybrand [1997] 1 BCLC 427 (C.A.)
was another case in which Prudential Assurance -v- Newman
Industries was distinguished. Coopers & Lybrand (C&L) were
auditors of the claimant, Barings plc. C&L's associated firm in Singapore
were the auditors of the Barings' Singapore subsidiary. For the purpose of
auditing Barings' accounts, C&L required their Singapore firm, C&L
Singapore, to report to them any matters of significance which came to their
attention regarding the Singapore subsidiary's accounts. Barings sued C&L
Singapore for alleged negligence in detecting frauds in the conduct of the
subsidiary's business. C&L Singapore relied on Prudential Assurance
-v- Newman Industries as barring an action by Barings to recover damage
which had been caused to the subsidiary by the alleged negligence. The Court
of Appeal declined to strike out Barings' action. Leggatt L.J. distinguished
the Prudential Assurance case on the ground that:-
"... here the person in the position of shareholder, namely Barings, has a
right of action independent of the company, BFS. On the other hand unlike the
situation in the George Fischer case, BFS does have a right of
action itself. As that case shows, there is no legal principle that a holding
company is unable to recover damages for loss in the value of its subsidiaries,
resulting from a breach of duty owed to it, as distinct from a duty owed (or
not owed as the case may be) to the subsidiaries" (p. 435).
56. The circumstances giving rise to the cause of action relied on by the
shareholder, the Prudential, in Prudential Assurance -v- Newman
Industries were part of the circumstances creating the cause of action
on which the company could, and eventually did, rely. The defendants were
directors of Newman Industries. They had put together a deal under which a
bundle of assets, consisting of shares in other companies, were to be purchased
by Newman Industries. The deal was required, under Stock Exchange rules, to be
approved by a general meeting of Newman Industries. The directors prepared a
prospectus recommending the deal to the shareholders. It was alleged that the
prospectus contained misrepresentations known by the directors not to be true,
that the shareholders in reliance on the prospectus had approved the deal and
that the company had been induced by the same misrepresentations to enter into
the deal. If the allegations were true, both the shareholders and the company
would have causes of action for the tort of deceit.
57. The conduct on the part of the directors that was complained of gave rise
to both causes of action. The damage suffered by the shareholders was the loss
in value of their shares, brought about by the company having paid an excessive
price for the assets it had purchased. The excessive price was the damage
suffered by the company.
58. It is easy enough to follow the basis on which, in George
Fischer, the court was able to distinguish the Prudential
Assurance case. In George Fischer the subsidiary had no
cause of action at all. It is less easy to follow the distinction drawn in
Barings. The facts relied on by the Barings parent as giving the
parent a cause of action were the same facts that could have been relied on by
the Singapore subsidiary as giving the subsidiary a cause of action. The damage
caused by the alleged negligence of C&L Singapore and sought to be
recovered by the parent was the damage to the Singapore subsidiary. This was
exactly the same damage which the subsidiary, if the negligence were
established, would have been entitled to recover. Moreover, the assets of the
subsidiary would include the chose in action represented by its damages claim
against C&L Singapore. So it is very difficult to see how the Barings
parent could have a claim to recover for itself the amount of that damage.
However, the judgment of Leggatt L.J. expressly refrained from expressing a
concluded view as to whether Barings' action was maintainable. The decision
was simply to refuse to strike the action out as being unarguable.
59. Neuberger J. concluded that even if the Halls could establish that the Bank
was guilty of misfeasance in public office, they would have no realistic
prospect of recovering damages for loss in value of their respective shares in
the company. I agree with that conclusion. The conduct of the Bank relied on
by the Halls is conduct directly affecting the company. This is not a case in
which any targeted malice directed at the Halls personally is alleged. The
requisite dishonesty or bad faith on the part of the Bank has to be inferred
from the Bank's knowledge that its failure to protect the company against the
managerial incompetence or dishonesty of Mr Hampson and Mr Cooper was
Wednesbury unreasonable. But if this premise were correct, and
if the other ingredients required for the tort of misfeasance in public office
were present, the primary victim would be the company. Next in line, as
secondary victims, would be the company's depositors and other creditors. The
Halls, as victims would come behind these creditors. In such a case the
secondary victims cannot, in my judgment, recover the damage allegedly caused
to the company. The company is the only proper claimant. The Prudential
Assurance case is, in my judgment, binding authority for that
proposition. None of the subsequent cases has weakened its authority in
respect of a case such as this.
Delay
60. Neuberger J. held, also that in respect of other items of damage claimed by
the Halls, additional to the main item, namely, the loss in value of their
shares in the company, the action was barred by delay. On this aspect of the
case I would simply say that, in my view, the judge was entitled to come to the
conclusion to which he came for the reasons which he gave.
Conclusion
61. Accordingly, this appeal, in my judgment, fails. It fails, first, because
no arguable case of misfeasance in public office on the part of the Bank has
been shown and, second, because it is not open to the Halls as shareholders to
bring an action in tort to recover the damage allegedly caused to the company
by the Bank's conduct.
62. I am relieved to be able to come to this conclusion because the litigation
seems to me to bear all the signs of having been vexatiously brought and
pursued. If the allegations made by the Halls are correct, the company would
have had a case against Mr Hampson for breach of duty as a director. It would
have had, on the same premise, a cause of action against Mr Cooper for fraud.
It would have had, on the same premise, a cause of action against Mr Wilson of
Baker Tilly for breach of duty in carrying out his investigation. For Mr
Wilson to have allowed himself to be influenced by the alleged "secret
instruction" would have been an obvious breach of duty.
63. No step was taken by the Halls to have any of these conceptually
straight-forward causes of action instituted by the company. Instead they
commenced an improbable action against the Bank based on a far fetched
allegation of misfeasance in public office. No explanation why they preferred
this cause of action as a means of remedying the wrongs they believed the
company had suffered rather than the more obvious ones has been offered.
64. For the reasons given, I would uphold Neuberger J's judgment and dismiss
the appeal.
THE RT. HON. LORD JUSTICE CHADWICK
65. I agree that, for the reasons given by the Vice-Chancellor, the judge was
entitled to reach the conclusion that the claims based on allegations of
misfeasance in public office had no real prospect of success. On that ground,
alone, an appeal against the judge's order must fail.
66. I agree also that, even were the allegations of misfeasance arguably
well founded, the claims for damages in respect of the loss to the claimants of
the value of their shares in Bradford Investments plc are misconceived. The
reason is that the loss in the value of the shares is attributable, and
attributable only, to the loss suffered by the company as the result of the
wrong (if any) done to the company. The loss in the value of the shares is not
attributable to any wrong done to the shareholders. The company is the proper
claimant in respect of the wrong done to the company. If the company recovers
damages by way of full compensation for the loss which it has suffered, the
shareholders will be fully compensated for any loss in the value of the shares.
To allow the shareholders to sue the wrongdoer in those circumstances would be
to invite a duplication of proceedings and a risk of double recovery. The
principle was affirmed by this Court in Prudential Assurance Co Ltd v Newman
Industries Ltd (No 2) [1982] Ch 204 - see, in particular, the passage in
the judgment of the court at pages 222H-223D to which the judge referred. The
principle was endorsed, again by this Court, in Johnson v Gore Wood
[1999] PNLR 426.
67. The position is otherwise where the shareholder suffers loss in the value
of his shares as the result of a wrong done to him in circumstances in which
the company itself has no cause of action against the wrongdoer. In such a case
there is no possibility of double jeopardy and no risk of double recovery.
George Fischer (Great Britain) Ltd v Multi Construction Ltd [1995] 1
BCLC 260 provides an example. But that is not this case.
68. The position is otherwise, also, where the shareholder suffers a loss other
than a loss in the value of his shares in the company as the result of a wrong
done to him. In such a case it is immaterial that the company may, itself, have
a cause of action against the same wrongdoer in respect of a loss caused to the
company. Recovery by the company in respect of its loss does not compensate the
shareholder for the loss (not being, on this hypothesis, a loss in the value of
his shares) which he has suffered.
69. The more difficult case is one where the shareholder suffers both a loss in
the value of his shares and a loss of some other nature in circumstances where
a wrong has been done to the company but where the shareholder has a separate
and independent cause of action in respect of a wrong done to him. Barings
plc v Coopers & Lybrand [1997] 1 BCLC 427, as pleaded, was such a case.
This, for the reasons which I shall explain shortly, is not.
70. If the claims made in these proceedings in respect of loss of reputation
and loss of remuneration were otherwise well founded, those claims should not,
in my view, be struck out on the Prudential ground. But, in the present
case, those claims are founded on allegations of misfeasance in public office
which (even if they could be made good) would not lead to the conclusion that
there had been a wrong done to the shareholders as individuals. There is no
allegation of "targeted" bad faith in the present case. The allegations are
that the Bank failed to exercise powers which were exercisable for the benefit
of the company or, perhaps, the depositors. There is no arguable case that the
claimants suffered loss of reputation or loss of remuneration as a result of
any actionable wrong done to them.
71. It is unnecessary to address the question of delay. But I see no reason to
differ from the view, expressed by the Vice-Chancellor, that the judge was
entitled to reach the conclusion to which he came on that question for the
reasons which he gave.
72. I am content with the order proposed by the Vice-Chancellor.
THE RT. HON. LORD JUSTICE BUXTON
73. I agree that this application should be disposed of in the manner proposed
by the Vice-Chancellor, and for the reasons that he has given.
Order: Appeal dismissed minute of order to be provided by
counsel.
(Order does not form part of the approved judgment)
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