B e f o r e :
LORD JUSTICE NOURSE
LORD JUSTICE HIRST
LORD JUSTICE SAVILLE
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(1) STANLEY ELLIS HUGHES |
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(2) ALICE HUGHES |
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(3) JANIS DE FRESTON |
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(4) STANLEY ELLIS HUGHES, ALICE HUGHES |
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AND ROBINSON GEAR (MANAGEMENT SERVICES) |
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LIMITED (Trustees of the Component |
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Industries Executive Pension Fund) |
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Plaintiffs |
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-v- |
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ASSET MANAGERS PLC |
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Defendants |
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Computer Aided Transcript of the Palantype Notes of
John Larking, Chancery House, Chancery Lane, London WC2A 1QX
Telephone 071-404-7464
(Official Shorthand Writers to the Court)
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MR. M. MILLER QC and MR. J. FOX (instructed by Messrs. Harfield Pickering, Redditch) appeared on behalf of the Appellants/Plaintiffs.
MR. P HESLOP QC and MR. A. MACGREGOR (instructed by Messrs. D.J. Freeman, London EC4) appeared on behalf of the Respondents/Defendants.
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HTML VERSION OF JUDGMENT
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LORD JUSTICE NOURSE: I will ask Lord Justice Saville to deliver the first judgment.
J U D G M E N T
LORD JUSTICE SAVILLE: In the first half of October 1987 the Appellants entered into five discretionary investment management agreements with the Respondents, there being, as I understand it, one agreement for each of the respective portfolios it was intended to create. Under these agreements, and at the same time, the Appellants remitted, in total, some £3 million to the Respondents, who invested most of this amount in shares on behalf of the Appellants. After a month or so the Respondents sold the shares at the direction of the Appellants and remitted the proceeds, together with the uninvested portion of the funds, to the Appellants. Unfortunately, the market had fallen, and the shares were sold at a loss of just under £1 million, which has led to the present proceedings in which the appellants seek to recover the difference between what they remitted to and what they received from the Respondents.
The Appellants base their claim on a number of grounds, only one of which is the subject of this appeal. This ground is that the management agreements were not in fact legally effective or binding bargains because they were rendered void by Section 1 of the Prevention of Fraud (Investments) Act 1958, which was then in force. The Appellants' case is that in consequence the Respondents are obliged, both in law and equity, to repay to the Appellants all the money remitted to them, and accordingly owe the Appellants the difference to which I have referred.
The matter came before Mr. Crawford Lindsay QC, sitting as a Deputy High Court Judge, in summary proceedings brought by the Appellants. The learned Deputy Judge refused the Appellants summary relief or leave to appeal from that refusal but, at the suggestion of the Appellants, then determined the point in question under Order 14A. Again the decision went against the Appellants, but this time the learned Judge did give leave to appeal, which is how the matter has come before us.
Section 1 of the Prevention of Fraud (Investments) Act 1958 provided as follows:
"(1) Subject to the provisions of the next following section, no person shall --
(a)carry on or purport to carry on the business of dealing in securities except under the authority of a principal's licence, that is to say, a licence under this Act authorising him to carry on the business of dealing in securities, or
(b)in the capacity of a servant or agent of any person carrying on or purporting to carry on that business, deal or purport to deal in securities except under the authority of a representative's licence, that is to say, a licence under this Act authorising him to deal in securities as a servant or agent of any holder of a principal's licence for the time being in force.
(2) Any person who contravenes this section shall be liable, on conviction on indictment, to imprisonment for a term not exceeding two years or to a fine not exceeding five hundred pounds or to both such imprisonment and such fine or, on summary conviction, to imprisonment for a term not exceeding six months or to a fine not exceeding one hundred pounds or to both such imprisonment and such fine.
(3) Proceedings for an offence under this section shall not, in England or Wales, be instituted except by, or with the consent of, the Board of Trade or the Director of Public Prosecutions:
Provided that this subsection shall not prevent the arrest, or the issue or execution of a warrant for the arrest, of any person in respect of such an offence, or the remanding, in custody or on bail, of any person charged with such an offence, notwithstanding that the necessary consent to the institution of proceedings for the offence has not been obtained."
According to Section 26 of the Act, "dealing in securities"
means:
"... doing any of the following things (whether as a principal or as an agent), that is to say, making or offering to make with any person, or inducing or attempting to induce any person to enter into or offer to enter into -
(a) any agreement for, or with a view to acquiring, disposing of, subscribing for or underwriting securities or lending or depositing money to or with any industrial and provident society or building society, or
(b) any agreement the purpose or pretended purpose of which is to secure a profit to any of the parties from the yield of securities or by reference to fluctuations in the value of securities,
and 'deal in securities' shall be construed accordingly."
It is common ground both that the Respondents carried on the business of dealing in securities and that the making of the management agreements constituted a deal in securities within the meaning of Section 1 of the Act, not excepted by Section 2. It is also common ground that, while the Respondents held a principal's licence, the person who actually made and signed the agreements on behalf of the Respondents (a director and investment manager of the Respondents) did not at the time hold a representative's licence and thus acted in contravention of Section 1(1)(b) of the Act. It is this latter fact which the Appellants rely upon to support their contention that the management agreements were thereby rendered void.
The Appellants submit that the Act was passed for the protection of the investing public, by not only prohibiting unlicenced persons from engaging in the business of dealing in securities, but also by prohibiting dealings in securities by unlicenced persons acting on behalf of those engaged in that business. In the present case the individual concerned had, by making the agreements, purported to do the very thing prohibited by the Act. It must follow, submit the Appellants, that what was done was a nullity, since the Act, by its prohibition, had stripped the individual of any legal power to do that thing. The fact that the Respondents were licenced was an irrelevancy, since the prohibition on unlicenced agents dealing was in addition to the prohibition on unlicenced persons carrying on a dealing business. The further fact (if such it be) that the failure to hold a licence was, according to the Respondents, a matter of innocent misunderstanding was also an irrelevancy since the statute contained an absolute prohibition.
To my mind this argument contains within it the assumption that by prohibiting the unlicensed representative from dealing in securities the legislature was, in effect, rendering it legally impossible for such a representative to make deals in securities; that is to say, legally binding contracts between third parties, on the one hand, and his principals, on the other. This is not expressly spelt out by the Act, so that the question is whether this is the true meaning and intent of the Act. As Devlin J (as he then was) put it in St John Shipping Corporation v. Joseph Rank Ltd. [1957] 1 QB 267 at 285, "did the statute mean to prohibit the contract", in the sense of rendering any purported contract void.
As a matter of pure construction, the language used by Parliament does not, to put it at its lowest, clearly indicate that the statute meant to prohibit (that is to say, make void) contracts made by unlicenced representatives, for the subsection prohibits such a representative both from making deals (which ex hypothesi he could not do) and purported deals in securities. Indeed, as a matter of language, this could be said to indicate that Parliament was not seeking to render unlicenced dealings a nullity, but instead was confining itself to imposing criminal sanctions on those who engaged in such activities. Nevertheless, if there were other indications that Parliament intended to strike down deals made by unlicenced representatives, I would not myself regard this point as conclusive, since to do so would be to prefer the form to the substance. In my judgment, however, there really is nothing to indicate that this was the intention of Parliament.
In this connection there are two matters worthy of note. The first of these is that the particular prohibition under discussion is not on its face directed against deals themselves but against the servant or agent making the deals; while the second is that this prohibition is not directed against either of the contracting parties to the deal but to the agent of one of them. Thus the case is distinguishable both from those instances where specific transactions (or their performance) are prohibited, and those where the prohibition is directed against one or both contracting parties to the transaction: see, for example, Re Cavalier Insurance Co. Ltd. [1989] 2 Lloyd's Rep 430 (a prohibition on effecting and carrying out contracts of insurance) and Cornelius v. Phillips [1918] AC 199 (a prohibition on moneylenders carrying on business at an unregistered address).
The case therefore stands at one remove from the cases cited by the Appellants. This again is not fatal to their argument, provided considerations of public policy and the mischief against which this part of the Act was directed pointed to the need to render void deals in securities by unlicenced representatives. Decisions on different statutes using different words and directed at different ends are necessarily of limited assistance in this regard. I should say at this point that I did not find helpful the old cases cited to us, which were concerned with a licencing requirement imposed by a statute of Queen Anne (and indeed licencing requirements under other Acts going back as far as the reign of Edward I), save to note that in Cope v. Rowlands (1836) 2 M & W 149 Baron Parke propounded the test adopted by Devlin J in the case I have cited.
I readily accept that the purpose of the Act was to protect the investing public by imposing criminal sanctions on those who, as principals or agents, engaged in or in the business of dealing in securities without being duly licenced. Parliament clearly intended to provide the investing public with the safeguard of the approval and licencing of professional dealers by the Board of Trade. However, I can see no basis in either the words the legislature has used or the type of prohibition under discussion, or in considerations of public policy (including the mischief against which this part of the Act was directed), for the assertion that Parliament must be taken to have intended that such protection required (over and above criminal sanctions) that any deals effected through the agency of unlicenced persons should automatically be struck down and rendered ineffective. On the contrary, it seems to me that not only is there really no good reason why Parliament should have taken up this stance, but good reason why Parliament should have held the contrary view.
In this connection it must be remembered (as Kerr LJ pointed out in Phoenix General Insurance Co. of Greece SA v. Halvanon Insurance Co. Ltd. [1988] QB 216 at 273-275) that rendering transactions void affects both the guilty and the innocent parties. The latter, just as much as the former, cannot enforce a void bargain or obtain damages for its breach. In the context of the Section under discussion this could well produce very great hardship and injustice on wholly innocent parties; for example, where the dealer fails to perform a bargain which would have resulted in a profit or saved the investor from a loss. In other words, the argument put forward by the Appellants necessarily involves the proposition that Parliament has chosen to provide a defence against claims for breach of contract in favour of the very people who have ignored its licencing requirements. I repeat that I can find nothing to indicate that this is what Parliament did, or intended to do, when enacting this statute, nor anything to indicate any good reason or public need for such a result.
As I have said, in the case of other statutes of course other considerations might well apply; as, for example, in Cornelius v. Phillips. In the context of the Moneylenders Acts, a transaction of lending (with which the House of Lords in that case was concerned) would hardly give rise to obligations which the borrower would wish to enforce; so that (as Kerr LJ pointed out in the Phoenix case at page 273) rendering the loan void would be unlikely to carry with it any injustice to the borrower. Thus the factor which to my mind militates against the effect contended for by the Appellants was not present in that case. As I have said, it is distinctions such as these that make unhelpful the citation of other cases on other statutes where other considerations apply, except of course for the purpose of finding expressions of the general principles applicable. In the end the question in each case is the one to which I have referred, namely, whether the Act in question has prohibited the contract in the sense of rendering any purported contract void.
In these circumstances I would dismiss this appeal. Since, in my judgment, the Appellants have failed to persuade me that the agreements which they made were void for the reasons advanced on this appeal, it is not necessary to consider whether (which the Respondents dispute) it would have followed, had I reached the opposite conclusion, that in the circumstances of this case the appellants were entitled to recover the balance of the sums remitted to the Respondents, and I express no view on this point.
LORD JUSTICE HIRST: I agree that this appeal should be dismissed, for the reasons given by Lord Justice Saville.
The starting point is the classic and much cited judgment of Parke B. in Cope v. Rowlands (1836) 2 M & W 149 at 157, where he stated:
"It is perfectly settled that where the contract which the plaintiff seeks to enforce, be it express or implied, is expressly or by implication forbidden by the common or statute law, no court will lend its assistance to give it effect."
In my judgment, upon the proper construction of Section 1(1) of the Prevention of Fraud (Investments) Act 1958, the contracts between the Appellants and the Respondents which are at issue in this case are not expressly forbidden by the statute. What is forbidden by Section 1(1)(b) is the dealing by the servant or agent of one of the two parties to the contract, in this case the Respondents.
The question therefore is whether these contracts are impliedly forbidden. On this issue I gain the greatest assistance from the judgment of Kerr LJ in Phoenix General Insurance Co. of Greece SA v. Halvanon Insurance Co. Ltd. [1988] 1 QB 216. The ratio of the relevant part of this judgment, to which my Lord has already referred, is that, because of the express prohibition in the Insurance Companies Act 1974 of "carrying out contracts of insurance" of the relevant kind, contracts made without the necessary authorisation were impliedly prohibited and therefore void: see per Kerr LJ at page 273 F and page 274 C and F.
I find nothing in any way inconsistent, let alone muddled, in Kerr LJ's analysis, despite Mr. Miller's somewhat bold suggestion to this effect.
Looking at that judgment as a whole, it is quite clear that, but for the embargo against carrying out contracts of insurance, the decision would have gone the other way. Although this part of that judgment is strictly obiter, it is of the greatest persuasive force and, indeed, was adopted and applied as the ratio of the decision in Re Cavalier Insurance Co. Ltd. [1989] 2 Lloyds Rep 430 by Knox J, who also reached his conclusion with the greatest reluctance because, though undesirable, it was inescapable. If Mr. Miller were right and these contracts were void, the innocent client might well suffer loss which he could not recover in the circumstances already described by Lord Justice Saville which (as Pearce LJ stated in Archbolds (Freightage) Ltd. v. Spanglett Ltd. [1961] 1 QB 374 at 387) would be a most unsatisfactory result, and one which, in my judgment, would be inimical to public policy, which is the ultimate test to be applied.
I would add that I think the public interest under this statute was fully met by the exaction, in appropriate cases, of the quite severe penalties prescribed by Section 1(2) of the Act. I would therefore hold that these contracts are not impliedly forbidden by the statute, and for these reasons I would also dismiss this appeal.
LORD JUSTICE NOURSE: I agree with both judgments and do not wish to add anything of my own.
Order:appeal dismissed with costs to be taxed and paid forthwith.
