A Long-Winded Account – Goyal v Florence Care Ltd
20th March 2020
What to do in a lock-down but write about one’s latest case? Fortunately, the decision of Morgan J in Goyal v Florence Care Ltd. and others  EWHC 659, handed down just yesterday, has enough of interest to fill…well, at least several minutes of the next few weeks.
In 2011, my client Mr Goyal (G) was persuaded by a Mr Edwards (E) to invest £750,000 in a property venture involving the acquisition of several care homes by E’s company Florence Care Ltd. (F). In February 2012, he was asked to provide funds to a firm of solicitors (S). He sent a first instalment of £160,000. A few hours after transferring the money, he sent an e-mail to a generic “contactus” address used by S. This notified S of the transfer of the £160,000; it also requested that the funds be held by them pending further instructions “and should only be used as proof of funds for exchange until advised further”. The evidence showed that this e-mail was received by an office manager responsible for monitoring the account but, whether through oversight or otherwise, was not forwarded to the relevant solicitor.
Contrary to this instruction, some minor use was made of small amounts of the £160,000 in the weeks after it was sent, but the fund was always replenished.
In August 2012, G sent the balance of £590,000. Several weeks after doing that, in October, he sent a further e-mail to the same e-mail address, seeking confirmation that this money was being held for the purchase by F.
In the meantime, however, E had instructed S to release £377,000-odd of G’s £750,000, and S had complied with that instruction. It subsequently emerged – but only at trial – that this part of G’s money had been used by E in the acquisition of another care home, which was nothing to do with the joint venture.
The joint venture foundered. G sought to recover his money, and E repaid much of it. But in March 2015, with £290,000 outstanding, G issued proceedings against (among others) F, E and S.
The claim proceeded slowly to trial, via a series of procedural mishaps none of which were G’s fault. Shortly before trial, E repaid the outstanding capital sum and some interest. G persisted with the claim for the remaining interest, and/or an account of profits. At trial, the Judge (a) held that E was in breach of fiduciary duty to G; (b) ordered E to pay the outstanding interest; (c) declined to order E or F to provide an account, holding that to do so would be disproportionate and that “too much water had gone under the bridge”; and (d) dismissed the claim against S.
G appealed against the refusal of an account, and the dismissal of his claim against S. By the time the appeal was heard, F had been dissolved, and E had been adjudged bankrupt.
The first question for Morgan J was how to deal with the appeal against F and E. As against F (the dissolved company) he stayed the proceedings. As against E, he acceded to my submission that, although s.285 Insolvency Act 1986 denies a creditor “any remedy against the person or property of the bankrupt”, that did not prevent the appeal from continuing. Nor – an account not being a remedy per se – did it prevent him from directing E to provide an account, if of the view that such an order was justified.
The next question was whether an account should be ordered. On that question, he held that the Judge’s reasons for refusing to direct E to provide an account were not well-founded. Having established that E was a fiduciary, G was prima facie entitled to an account, and neither the facts nor the procedural history disclosed a good reason to displace that entitlement.
Turning to the appeal against S, the essential question was whether the e-mail sent by G in February 2012 had the effect of creating a Quistclose trust. The Judge held that by its wording it was capable of doing so. But he held that it was a requirement of a Quistclose trust that the trustee knew of the limitation on the use of the money. The fact that the practice manager received the e-mail did not mean that she knew of its contents. The trial judge had found that the solicitor himself did not know of it, and that factual finding had not been (nor sensibly could have been) challenged on appeal. In the circumstances, it could not be said that S as an entity knew of the restriction, and the attempt to establish a trust therefore failed.
Morgan J was also concerned that the timing of G’s e-mail prevented the creation of a trust. The default position, when a solicitor receives money from a third party for use by its client, is that the solicitor held the money on trust for the client (Bellis -v- Challinor  EWCA Civ 59). That trust is created the moment the money arrived. In the Judge’s view G would not, even by an e-mail sent a few hours later, have been able to cause that trust to be brought to an end and replaced by a trust in his favour. But – this timing point not having been taken at trial by S, and not being the subject of a Respondent’s Notice – Morgan J did not decide the case on this basis.
Finally, even if there had been a trust in relation to the first instalment, the second instalment (received without further communication some 6 months later) could not be regarded as being subject to the terms of the same trust. Since the balance on the ledger had never fallen below the amount of the first instalment – or, put another way, all the misapplied money had come from the second instalment – the Judge would not have been prepared to hold that there was a breach of trust even if, contrary to his conclusion, one had been created.
This judgment contains many nuggets for practitioners, with useful guidance on a) how to proceed against dissolved or insolvent litigants; b) on what grounds an entitlement to an account against a fiduciary might be displaced; and c) the process of taking that account. The judgment distinguishes between the account (essentially, the process of obtaining an explanation from the fiduciary as to the treatment of trust money) and the account of profits (which may follow the giving of the account but is distinct from it). The timing point alluded to above also has far-reaching implications – while obiter, it suggests that solicitors must be extremely wary of following instructions from a third party funder which are given after the funds have been provided.
The judgment in Goyal v Florence Care Homes can be found here.