Neutral citation no. [2002] EWCA Civ 1452                      Case No: CHANF/A3/2001/2033
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Lawrence Collins J.
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: Friday 18 October 2002

Before :

LORD JUSTICE PETER GIBSON
LADY JUSTICE ARDEN
and 
MR. JUSTICE BUCKLEY
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Between :

	SHAKER	Appellant	
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	MOHAMMED AL-BEDRAWI AND OTHERS	Respondents	

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(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040,  Fax No:  020 7831 8838
Official Shorthand Writers to the Court)
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Mr. Alan Steinfeld Q.C. and Mr. Adrian Francis (instructed by Messrs Amhurst Brown Colombotti of London) for the Appellant
Mr. Michael Roberts (instructed by Messrs Dawson & Co. of London) for the 1st Respondent
Mr. Michael Lyndon-Stanford Q.C. and Mr. Guy Newey Q.C. (instructed by Messrs Lovells of London) for the 4th Respondents

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Judgment
As Approved by the Court

Crown Copyright ©

Peter Gibson L.J. (giving the judgment of the court): 
A	Introduction
1.	In Prudential Assurance v Newman Industries (No. 2) [1982] Ch. 204 this court (Cumming-Bruce, Templeman and Brightman L.JJ.) referred to “the elementary principle that A cannot, as a general rule, bring an action against B to recover damages or secure other relief on behalf of C for an injury done by B to C.”  The court said that C was the proper plaintiff because C was the party injured and therefore the person in whom the cause of action was vested.  This, the court said, was sometimes referred to as the rule in Foss v Harbottle (1843) 2 Hare 461 when applied to corporations but commented that it had a wider scope and was fundamental to any rational system of jurisprudence.  The court added (at 222):
“But what [a shareholder] cannot do is to recover merely because the company in which he is interested has suffered damage.  He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a “loss” is merely a reflection of the loss suffered by the company.  The shareholder does not suffer any personal loss.  His only “loss” is through the company, in the diminution in the value of the net assets of the company ....”
2.	This principle (“the Prudential principle”) has recently been affirmed and further explained by the House of Lords in Johnson v Gore Wood & Co. [2002] 2 AC 1.  This appeal is concerned with the applicability, asserted by the Defendants but denied by the Claimant, of the Prudential principle to the particular facts of this case.
3.	It is an appeal by Ghassan Shaker, the Claimant in three actions arising out of a business venture into which he and a friend entered with Mohammed Al-Bedrawi (“Mr. Bedrawi”), the First Defendant in the first action.  The appeal is from the order of Lawrence Collins J. on 26 July 2001 determining as a preliminary issue that the Prudential principle precluded Mr. Shaker proceeding against any of the Defendants in any of the three actions.  The appeal is brought with the permission of the judge after hearing the points which leading counsel other than the counsel who had argued the case for Mr. Shaker before the judge wished to take on the appeal.  Originally it was brought against all the Defendants.  But as against two Defendants it has now been withdrawn:  Dr. Abdullah Masry, who is the Second Defendant in the first action and is the First Defendant in the second action, and MBC Ltd. (“MBC”), the Second Defendant in the second action.
4.	The preliminary issue arose because the Defendants took the point that Mr. Shaker had no claim against them by reason of the fact that his interest in the business venture was in a corporate vehicle established by Mr. Bedrawi.  The Defendants applied for a number of preliminary issues to be determined, principally relating to the applicability of the Prudential principle.  The Master declined to order a preliminary issue and there was no appeal from his decision.  At the commencement of the trial the Defendants took the point that the judge should determine as a preliminary issue whether the Prudential principle applied to defeat Mr. Shaker’s claims.  Counsel then appearing for Mr. Shaker opposed that application on the ground that there were three matters giving rise to disputed questions of fact requiring resolution at the trial:  (1) the scope of the investment agreement; (2) whether the alleged loss to Mr. Shaker and Mr. Adham was reflective of the loss suffered by ANA Inc.; (3) what causes of action might be open to ANA Inc.  The judge thought it plain that the second and third questions were essentially questions of law.  On the investment agreement the Defendants were content for the purpose of the preliminary issue to accept Mr. Shaker’s evidence in the documents and to argue the legal consequences, and the judge said that he retained a discretion to order oral evidence should it be necessary.  He pointed out that if the preliminary issue were decided in favour of the Defendants there would be an enormous saving in costs for all parties and in court time.  He therefore ordered a preliminary issue in these terms:  whether in the light of (a) Mr. Shaker’s statements of case in the three actions, (b) his witness statement dated 6 April 2001 and (c) an answer in May 2001 to a notice to admit facts, Mr. Shaker could proceed against the Defendants or any of them in relation to the proceeds of sale referred to in those statements of case.
5.	Unusually for a preliminary issue some oral evidence was heard by the judge.  But the only application for oral evidence was from Mr. Shaker and the only evidence which the judge heard was that of Mr. Shaker and that was limited to the question whether the investment by him was in shares of a company or in a business.  The judge said that the nature of the investment was the only matter he had to decide on the facts.  He held that the investment was in shares, and there is no appeal from that decision.  The facts therefore set out in section B of this judgment are those assumed by the judge for the purposes of the preliminary issue.  We emphasise that there has been no trial to determine whether the assumed facts are true.
B	The facts
6.	Mr. Shaker is a national of Saudi Arabia and a distinguished businessman and diplomat.  He collaborated with a friend, Kamal Adham, who had been the head of Saudi external intelligence, in a number of business ventures.  Mr. Bedrawi is Mr. Adham’s nephew.  In about June 1989 Mr. Adham contacted Mr. Shaker to ask if he would be interested in investing in a business project which Mr. Bedrawi was setting up.  Mr. Shaker and Mr. Adham then met Mr. Bedrawi who invited them to provide funding for a satellite/cable television and radio station business in the U.S.A. providing a programming service for the Arab American population and catering for Arabic speaking consumers (“the Business”), the proposal being that Mr. Shaker and Mr. Adham would provide all the capital while Mr. Bedrawi would manage and control the Business.  Mr. Adham and Mr. Shaker were supportive but made clear that they did not want an active role in the Business and would not serve as directors of any company through which the Business was operated.  Mr. Bedrawi by letter dated 19 June 1989 sent Mr. Shaker a draft subscription agreement which referred to two companies being set up:  ANA Holdings Ltd. (“ANA Ltd.”), an Isle of Man company, and ANA Inc., an American company.  ANA is the acronym for Arab Network of America.  ANA Ltd. was said to be the holding company and ANA Inc. was to be the operating company.  The draft subscription agreement formed the basis for the parties’ subsequent negotiations.  After a number of meetings in June and July 1989 they entered into an oral agreement on the lines proposed by Mr. Bedrawi.  There is a dispute, which the judge found unnecessary to resolve, as to whether Mr. Shaker and Mr. Adham took a 70% interest, as Mr. Shaker claims, or only 37.5%, as Mr. Bedrawi asserts, in the Business.
7.	Mr. Shaker and Mr. Adham advanced in total US $3,840,000, the earlier payments being to ANA Ltd., and from 1990 onwards the remainder to Arab Network of America Inc. (“ANA Inc.”), which is a company incorporated on 24 April 1989 in Pennsylvania. Mr. Shaker’s pleadings in the three actions suggest that ANA Ltd. was the holding company of ANA Inc. and it may be that initially ANA Inc. was owned by ANA Ltd., Mr. Bedrawi as late as 1991 telling Coopers & Lybrand that ANA Inc. was a subsidiary of ANA Ltd.   But the shares in ANA Inc. are held by Mr. Bedrawi and his wife as his nominee and he has at all material times been the sole director.
8.	ANA Ltd. was struck off the Isle of Man companies’ register and dissolved on 24 August 1992.  ANA Inc. began radio broadcasting in September 1989 and television broadcasting in March 1992.  It had two wholly owned subsidiaries incorporated in Virginia on 29 September 1993, ANA Radio Network Ltd. (“ANA Radio”) and ANA Television Network Inc. (“ANA TV”), through which ANA Inc.’s business thereafter was operated.  
9.	MBC ran a business called Middle East Broadcasting Centre of which Dr. Masry was the Chief Executive.  In 1993 Mr. Bedrawi had discussions with MBC for the sale of ANA Inc. to MBC.  MBC offered $10 million.  In September 1993 a letter of intent was signed for an agreement in principle for the sale of ANA Inc. for $9 million.  Ultimately it was agreed that MBC would buy from ANA Inc. ANA Radio and ANA TV, to which the relevant parts of ANA Inc.’s business were hived down in anticipation of the sale.  In the sale agreement of 25 November 1993 (“the Sale Agreement”) between ANA Inc. and the purchaser, ANA Holdings Inc., which is an associated company of MBC, the ostensible price was $3 million; but a side-letter of the same date evidenced the purchaser’s payment to ANA Inc. of an additional $6 million in consideration of what ANA Inc. was granting to the purchaser under the Sale Agreement.  Mr. Bedrawi signed the side-letter on behalf of ANA Inc.  Further, $1 million was paid to an undisclosed agent, later said by Mr. Shaker to be Dr. Masry.
10.	From about 1992 Mr. Bedrawi had English solicitors, Steggles Palmer, acting for him.  They are the Third Defendants in the first action, and they and five former partners are the Defendants to the third action.  Steggles Palmer on his instructions caused Qube Investments Ltd. (“Qube”) to be incorporated in the British Virgin Islands.  The $6 million was paid to Qube on 2 December 1993.
11.	Mr. Shaker claimed that  Mr. Bedrawi  falsely represented the sale price as $3 million when the $6 million referred to in the side-letter was also paid as was $1 million paid to Dr. Masry as a bribe.  Mr. Shaker also claimed that the sale proceeds were dissipated, partly by being invested in a graphics business run by Hot Source Media Inc. (“Hot Source”), 85% of whose shares were owned by another British Virgin Islands company established on Mr. Bedrawi’s instructions, Arabica Communications Ltd. (“Arabica”), and partly by payments to Mr. Bedrawi and others.  Of $9,200,000 (including interest) generated from the sale proceeds, $1 million went to Dr. Masry, up to $2,920,000 was invested in Hot Source and expended in legal fees and other miscellaneous expenditure but the balance went through Qube for Mr. Bedrawi’s personal expenditure and other payments not satisfactorily explained.  Hot Source is in Chapter XI bankruptcy in the U.S.A. 
12.	Mr. Shaker heard of the sale in early 1994 and wrote to Mr. Bedrawi, seeking his share of the investment plus profits.  Despite many promises, Mr. Bedrawi failed to account to Mr. Shaker and Mr. Adham for their investment or any part of the sale proceeds.  On 31 January 1995 Mr. Bedrawi agreed to pay $250,000 to Mr. Shaker.  On 15 May 1995 Mr. Bedrawi signed an undertaking to the effect that the share of Mr. Shaker and Mr. Adham of the sale proceeds was $6 million, that Mr. Bedrawi would pay that sum (less the $250,000 already paid) in two tranches,  that Mr. Shaker and Mr. Adham would receive two thirds of the shares of Arabica and that they would have a nominee director appointed to the board of Hot Source.
13.	The promised payments were not made and subsequent cheques were dishonoured and a share certificate for less than the promised two-thirds of Arabica’s shares was delivered.  
14.	On 6 July 1996 Mr. Adham assigned to Mr. Shaker his right to bring proceedings against Mr. Bedrawi in relation to the recovery of his beneficial entitlement to what he claimed to be the trust property of which Mr. Bedrawi was the trustee.  Mr. Adham has since died.
15.	In 1996 Mr. Shaker commenced an action at law against Mr. Bedrawi in the Virginia State court for the sums due pursuant to the undertaking of 15 May 1995 and also a further chancery action alleging breach of fiduciary duty in failing to account for the proceeds of sale.  Judgment in the action at law was entered for $5,750,000 plus interest.  The chancery action was dismissed “without prejudice”, thereby reserving to Mr. Shaker the right to bring a further action if he wished.
16.	On 20 January 1999 proceedings in this jurisdiction were commenced by Mr. Shaker against Mr. Bedrawi in the Queen’s Bench Division to enforce the Virginia judgment.  In July 1999 Master Ungley gave judgment to Mr. Shaker for nearly $8 million, and an appeal by Mr. Bedrawi was dismissed by consent.  Bankruptcy proceedings were brought by Mr. Shaker against Mr. Bedrawi and a trustee in bankruptcy was appointed on 3 May 2001.
17.	Also on 20 January 1999 Mr. Shaker commenced what we have called the first action in the Chancery Division.  The original pleadings were as follows.  ANA Ltd. was described as a holding company and ANA Inc. was called “the subsidiary U.S. operating company of ANA Ltd.”  An agreement (“the investment agreement”) was concluded between Mr. Shaker, Mr. Adham and Mr. Bedrawi in late June / early July 1989 under which Mr. Shaker and Mr. Adham would advance monies to ANA Ltd. so that ANA Inc. could trade, Mr. Bedrawi would manage and control ANA Inc. and would be the sole legal proprietor of the shareholding in ANA Ltd., in consideration for the sums advanced by Mr. Shaker and Mr. Adham each would have a beneficial entitlement to 35% of that shareholding, in consideration for services rendered Mr. Bedrawi would have a beneficial entitlement to 30% of that shareholding, and upon Mr. Shaker and Mr. Adham making the payments, a trust would be constituted.  Mr. Bedrawi would hold the beneficial entitlement to 70% of the shares in ANA Ltd. on trust for Mr. Shaker and Mr. Adham.  Mr. Bedrawi’s duties as trustee included a duty to account to Mr. Shaker and Mr. Adham for their 70% share of the profits of the Business and of any proceeds of sale of any trust property including the shares in ANA Ltd. Mr. Bedrawi, purporting to act on behalf of ANA Inc., entered into the Sale Agreement, but Mr. Shaker only became aware of the sale in early 1994, when he asked Mr. Bedrawi to account to Mr. Shaker and Mr. Adham for their share of the proceeds of sale.  Save for $250,000 paid in February 1995, Mr. Bedrawi failed to pay that share. Mr. Bedrawi acted dishonestly and in breach of his duties under the trust.  Mr. Shaker suffered loss and damage and Mr. Bedrawi was liable to account for Mr. Shaker’s and Mr. Adham’s shares of the proceeds of sale.  Mr. Bedrawi in breach of fiduciary duty to Mr. Shaker and Mr. Adham invested the proceeds of sale in Arabica or elsewhere and held the sums invested on a constructive trust for them.  Mr. Shaker claimed against Mr. Bedrawi an account of all Mr. Bedrawi’s dealings with the trust property, an enquiry as to the true sum realised by Mr. Bedrawi and/or ANA Inc. under the Sale Agreement and as to the proportion of the sale price payable to Mr. Shaker, an order for payment of the sums found due to Mr. Shaker, damages for breach of trust and/or contract and equitable compensation for breach of fiduciary duty. Dr. Masry and Steggles Palmer were also joined to obtain an order against them for disclosure of documents and information about the sale and proceeds of sale of the shares in ANA Radio and ANA TV.
18.	By the second action commenced on 27 October 1999 Mr. Shaker alleged that Dr. Masry and MBC fraudulently misrepresented to Mr. Shaker and Mr. Adham the sale price, conspired with Mr. Bedrawi to enable him to make a secret profit and dishonestly assisted him in his breach of trust.
19.	On 3 February 2000 Mr. Shaker gave notice of an application, to be heard on 10 February 2000, to amend his pleadings in the first action to add 8 former partners of Steggles Palmer and to make substantive allegations against Steggles Palmer and those partners.  Steggles Palmer, by a letter dated 9 February 2000 from their solicitors, indicated their opposition to the application.  One objection taken was that the draft amendments took no account of the Prudential principle.  Another was that on Mr. Shaker’s case the proceeds of sale of ANA Radio and ANA TV could not be held on trust for him or Mr. Adham.  The application on 10 February 2000 did not proceed.
20.	Instead, Mr. Shaker commenced the third action on 11 February 2000 against Steggles Palmer and 5 former partners.  He alleged that (i) Mr. Bedrawi was a trustee of 70% of the Business, as well as of the shares in ANA Ltd., for Mr. Shaker and Mr. Adham, (ii) the aggregate price for ANA Radio and ANA TV was not less than $10 million which included payment of $6 million to Qube (described as being at all material times Mr. Bedrawi’s nominee or creature), (iii) Mr. Bedrawi’s breach of fiduciary duty owed to Mr. Shaker and Mr. Adham included diverting $6 million out of the proceeds of sale to Qube and concealing that fact from Mr. Shaker and Mr. Adham and thereby making a secret profit from the sale and to the detriment of Mr. Shaker and Mr. Adham, (iv) Steggles Palmer were informed by Mr. Bedrawi or were aware that the proceeds of sale were at least $9 million and that at least $6 million would be paid to Mr. Bedrawi or for his own benefit and the balance dissipated to pay U.S. debts and taxes, and (v) Mr. Bedrawi informed Steggles Palmer that each of Mr. Shaker and Mr. Adham was a beneficiary of the proceeds of sale in the sum of at least $1 million.  Three specific charges are made against Steggles Palmer: (1) they knowingly received from Qube between February 1994 and January 1996 for their own benefit trust property in the form of their fees retained out of the proceeds of sale, (2) they knowingly participated and/or dishonestly assisted in Mr. Bedrawi’s breach of trust and/or fiduciary duty, and  (3) they were guilty of deceit.  That deceit was in making a statement on 20 January 1995 to Mr. Shaker’s agents that the proceeds of sale paid in the U.S.A. had been dissipated and the remainder of the proceeds had been invested in Hot Source.  Mr. Shaker claimed that in fact Steggles Palmer after 20 January 1995 received into their own client account from Qube $1,595,000, and that Qube at that date still retained some $1,600,000 out of the proceeds of sale.  Mr. Shaker sought accounts and inquiries, equitable compensation and damages for deceit.
21.	Amendments to the pleadings in the first and second actions were then made by Mr. Shaker so as to bring them into line with the pleadings in the third action, in particular by alleging a trust of 70% of the Business in addition to the already pleaded trust of 70% of the shareholding in ANA Ltd. and pleading a breach of fiduciary duty by Mr. Bedrawi making a secret profit.
22.	In his reply in May 2001 to a notice to admit facts, Mr. Shaker admitted that the proceeds of sale of ANA Radio and ANA TV were due to ANA Inc.  Asked whether ANA Inc. had a cause or causes of action against Mr. Bedrawi if he caused or procured the misappropriation or any breach of trust in respect of any part of the proceeds of sale from or in respect of ANA Inc., Mr. Shaker said it was not capable of admission as a fact and took the point that ANA Inc. was the creature of and alter ego of Mr. Bedrawi and would not have authorised the commencement of any claim against him.
23.	The Defences of the Defendants in the three actions all enabled the point that the Prudential principle applied to be asserted.
C	The judgment
24.	The full and careful judgment of the judge reflected the way in which the matters in dispute were argued before him.  Notwithstanding the pleading that the trust for Mr. Shaker and Mr. Adham was of 70% of the shareholding of ANA Inc., the arguments before the judge concentrated on whether the trust was of a share of the Business, as Counsel then appearing for Mr. Shaker contended, or of a share of the shareholding in a corporate vehicle, as the Defendants argued, and for this purpose it mattered not whether the vehicle was ANA Ltd. as pleaded or ANA Inc.  If the interests of Mr. Shaker and Mr. Adham were in a shareholding, then the question of the applicability of the Prudential principle arose.  Although no express allegation was made in Mr. Shaker’s pleadings that Mr. Bedrawi had misappropriated any proceeds of sale which belonged to ANA Inc., Counsel for Mr. Shaker appear not to have argued that Mr. Bedrawi did not misappropriate money out of the proceeds of sale in causing $6 million to be paid to Qube.
25.	The judge reviewed the authorities on the Prudential principle.  He quoted the following statement by Lord Bingham in the Johnson case at pp. 35 - 6:
“(1)  Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss.  No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder’s shareholding where that merely reflects the loss suffered by the company.  A claim will not lie by a shareholder to make good a loss which would be made good if a company’s assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss....  (2)  Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding.... (3)  Where a company suffers loss caused by breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other.”
26.	The judge expressed his conclusion on the questions for him in the light of the authorities in this way:
“40.  Consequently the first question is whether the claimant has a personal cause of action against the defendant.  In particular, a shareholder does not normally have a direct cause of action against a wrongdoing director who has misappropriated company assets.  If the claimant does not have a personal cause of action, then no further questions arise.  If the claimant has a cause of action, but the company does not, then there is no bar to an action by the claimant.  If each has a cause of action, the shareholder may sue to recover damages in respect of all heads of non-reflective consequential loss which are not too remote, i.e. loss which is separate and distinct.  So, for example, even if a deceit is practised on the claimant shareholder and reliance on the false representation makes the shares worthless, he cannot sue if the company has a cause of action for the same damage which deprives the shares of all value....”
27.	The judge noted (in para. 94) what he described as the acceptance that the principal questions which would determine the preliminary issue were (1) whether Mr. Shaker had an interest in the shares of ANA Ltd. and/or ANA Inc.; (2) whether the loss claimed was reflective of a loss suffered by ANA Inc.; (3) whether ANA Inc. had a cause of action in respect of that loss.
28.	On the first question the judge had no doubt that Mr. Shaker intended to invest in and receive interests in corporate vehicles established by Mr. Bedrawi and did not intend to have an interest in a business (para. 108).  After reviewing the evidence and noting the attitude adopted by Mr. Shaker in the American and in the English proceedings, the judge held that the company in whose shares Mr. Shaker and Mr. Adham had a beneficial interest was ANA Inc. (para. 138). 
29.	The judge then proceeded to consider the consequences on the assumption that Mr. Shaker was right in his claim that (a) Mr. Bedrawi misappropriated the proceeds of sale, (b) Dr. Masry took a $1 million bribe, (c) MBC, Dr. Masry and Steggles Palmer dishonestly assisted Mr. Bedrawi’s breaches of fiduciary duty and (d) Steggles Palmer were guilty of deceit and had grounds for knowing that funds which they received had been misappropriated (para. 139).  The judge held that on the assumed facts ANA Inc. would have claims for breach of fiduciary duty against Mr. Bedrawi and wholly adequate causes of action in dishonest assistance and knowing receipt against the other Defendants (para. 140).  The judge said that Mr. Bedrawi would also have been liable for making unlawful distributions.  He noted that ANA Inc. was a Pennsylvania company, but said:  “there is no pleading or evidence that Pennsylvania law is substantially different, and although it may seem rather artificial to apply the provisions of the Companies Act 1985 to a foreign company, the relevant provisions reflect general principles of corporate law.”  He said that ANA Inc. had no distributable reserves and that the misappropriation of $6 million was an unlawful distribution which was prohibited by Part VIII of the Companies Act 1985, ultra vires and could not be ratified (paras. 141 and 143).
30.	The judge said that Mr. Shaker in principle would not have a cause of action against Mr. Bedrawi for the misappropriation of ANA Inc.’s assets unless Mr. Shaker were able to establish independent duties in contract, tort or equity which Mr. Bedrawi owed him (para. 144).  Accordingly Mr. Shaker would have no basis for the claim against Mr. Bedrawi for an order for payment of a proportion of the sale price or equitable compensation for breach of fiduciary duty in diverting the funds to Arabica and elsewhere, and even if Mr. Shaker had a cause of action on the principal claims, the proceedings would still be barred on the basis that the damages were purely reflective of ANA Inc.’s loss (para. 145).
31.	The judge further said that in principle therefore in view of the finding that Mr. Shaker and Mr. Adham had only interests in shares, Mr. Shaker had no cause of action against Mr. Bedrawi for an account or in constructive trust which would enable him to develop the accessory liability of the other Defendants.  The judge pointed out that the reality of the proceedings was to make the other Defendants liable, nothing having been recovered from the judgment against, and bankruptcy of, Mr. Bedrawi (para. 146).  The judge then rejected the claims against Dr. Masry and MBC for reasons into which it is unnecessary to go in view of the abandonment of the appeal against them (para. 149).  He said of the claim against Steggles Palmer for knowing receipt and knowing assistance that it was not available to shareholders where the accessory liability is claimed to be the liability of a director for breach of duty.  The claim in deceit, he found, was specifically related to the residue of the $6 million and reflected the damage to ANA Inc. (para. 150).
32.	The judge accordingly concluded that the answer on the preliminary issue was that Mr. Shaker could not proceed against the Defendants or any of them in relation to the proceeds of sale. 
D	Mr. Shaker’s principal arguments on appeal
33.	On this appeal Mr. Steinfeld Q.C. and Mr. Adrian Francis, neither of whom appeared before the judge, represent Mr. Shaker.  The arguments which are now advanced differ from those advanced before the judge though, subject to one point,  they are not inconsistent with Mr. Shaker’s pleaded case; nor, subject to a further point, do they rely on evidence not before the judge.
34.	What is now argued is this. Mr. Steinfeld says that the case against Mr. Bedrawi is essentially a claim that as trustee of 70% of the shareholding in ANA Inc. for Mr. Shaker and Mr. Adham Mr. Bedrawi was bound to account to them for 70% of all profits he was enabled to obtain by use of those shares and that the $6 million out of the proceeds of sale represents such profits, for 70% of which he was bound to account.  He argues that Mr. Shaker has a cause of action quite independent of any which ANA Inc. may have against Mr. Bedrawi for breach of fiduciary duty in misappropriating its assets or in making an unlawful distribution.  He says that the Prudential principle does not apply to a case such as this of a proprietary claim by a beneficiary under a trust to a profit obtained by a trustee through the use of trust property consisting of shares in a company even if the company may have a claim against the trustee for breach of fiduciary duty owed to it as a director in respect of the monies constituting the claimed profit.
35.	Mr. Steinfeld argues that the claim against Steggles Palmer, based on their knowing assistance in a breach of trust by Mr. Bedrawi as trustee, does not rely on any breach of duty owed by Mr. Bedrawi to ANA Inc., and similarly the claim based on knowing receipt has nothing to do with ANA Inc.  The claim in deceit, based on Steggles Palmer fraudulently misrepresenting to Mr. Shaker’s agents what had happened to that part of the $6 million which Mr. Shaker might have stopped being dissipated, he says, is not one which ANA Inc. could assert.
36.	The one point on the pleadings with which those arguments are inconsistent is the absence of any reliance on the inclusion of the shareholding in ANA Inc. in the trust.  Mr. Steinfeld applied on the second day of the appeal to amend Mr. Shaker’s statements of case in the first and third actions.  His primary purpose in seeking to amend was to bring Mr. Shaker’s pleadings into line with what the judge had found in respect of ANA Inc.  The amendments he sought were (1) that the investment agreement included a term that Mr. Bedrawi would be the sole legal proprietor of the shareholding in (further or alternatively to ANA Ltd.) any corporation, not being itself a subsidiary company, utilised by Mr. Bedrawi to own and operate the Business, in the event ANA Inc., (2) the trust was of the beneficial entitlement in 70% of that shareholding, and (3) the duties owed to Mr. Shaker and Mr. Adham included a duty to account to them for their 70% share of any profit derived from any trust property.
37.	Mr. Steinfeld submits that 4 conditions must be satisfied for the Prudential principle to apply:
(1)  a claim is brought by or on behalf of a shareholder in a company;
(2)  the claim is for damages for loss to the shareholder;
(3) the loss, through a diminution in value of shares or in distributable assets, is reflective of loss to the company; and
(4)  the company has its own cause of action to recover its loss.
38.	Here, he submits, the conditions are not satisfied in relation to the primary claim against Mr. Bedrawi.
(1)  The claim is by a beneficiary to recover from his trustee a profit for which the trustee is liable to account by reason of his use of trust property to obtain it.
(2)  The claim is not one for damages for loss in the diminution of the value of shares or distributable assets:  it is a proprietary claim to the profit taken by the trustee.
(3)  What is claimed is not reflective of a loss to the company.  The claim is for an account from the trustee.
(4)  The company has no cause of action to obtain such an account.
39.	Mr. Steinfeld stresses that no claim is or has been made that Mr. Bedrawi was in breach of the fiduciary duty which as the sole director of ANA Inc. he owed to it when he caused the payment of $6 million to Qube.  He says it is at least likely that part of that money was properly paid to Mr. Bedrawi.  Thus some money could have been taken as repayment of a loan to ANA Inc.  In this context he points to the balance sheet in the management accounts for the 10 months ended 31 October 1993, which accounts were annexed to the Sale Agreement.  That shows an item “Advances from Shareholders” of $3,514,602.  Mr. Bedrawi was in effect the sole shareholder.  Further, it is said for Mr. Shaker that the Sale Agreement is likely to have produced a substantial profit for ANA Inc. from the $9 million proceeds, and that part, at least, of that profit could have been taken by the sole shareholder as a dividend.  Yet further, part of that profit could have been taken by way of remuneration by Mr. Bedrawi as director, such remuneration being authorised by himself as sole shareholder.  To the extent that money was properly extracted from ANA Inc., there would be no breach of fiduciary duty owed to ANA Inc., but that would not defeat Mr. Shaker’s proprietary claim against Mr. Bedrawi that he should account for that profit.
40.	Mr. Steinfeld, however, accepts, as he must, that there may be an overlap between what Mr. Shaker claims and what ANA Inc. might claim in respect of the payment of $6 million to Mr. Bedrawi for which Mr. Shaker is seeking an account.  He further accepts that ANA Inc.’s claim has primacy, so that if and to the extent that ANA Inc. recovers in respect of that payment, Mr. Shaker’s claim will be reduced.  But he argues that this is an example of competing claims to a single fund.  He submits that the possibility that the fund might be reduced or exhausted by the company’s claim should not be treated as defeating the beneficiary’s claim, based as it is on the principle that a trustee must account to the beneficiary for any profit from the trust.
41.	In suggesting that Mr. Bedrawi might have received at least part of the $6 million as a distribution out of realised profits, Mr Steinfeld challenges the judge’s view in para. 141 of the judgment that Mr. Bedrawi would have been liable for making unlawful distributions, based as that view was on the application of the Companies Act 1985 (“the 1985 Act”) to a Pennsylvania corporation.  He submits that the judge was wrong to apply provisions of English company law implementing a European directive to a company not subject to such provisions.
42.	The one point in respect of which Mr. Steinfeld seeks to rely on evidence not before the judge is Pennsylvania law.  By an application dated 18 June 2002 Mr. Shaker applied for permission to adduce the report of John G. Harkins Jnr., a member of the Pennsylvania Bar.  That report is said to show that the judge was wrong to assume that the Prudential principle is of universal application or is recognised by the Pennsylvania courts or that the English company law on distributions reflects general principles of corporate law of universal application so as to be applicable in Pennsylvania to a Pennsylvania company.  Mr. Steinfeld submits that the admission of the new evidence would further the Civil Procedure Rules’ overriding objective by resolving what he says is an issue on this appeal, viz. whether this was an appropriate case for the presumption of similarity between English and Pennsylvania law.
E	The Defendants’ principal arguments
43.	Mr. Lyndon-Stanford Q.C., appearing with Mr. Newey Q.C. for Steggles Palmer, submits that Mr. Shaker, having chosen before the judge to base his case on there being a trust of the Business and having lost on that point should not be allowed to rely on a different case, not advanced before the judge, that of Mr. Bedrawi being liable to account for a profit from a trust of the shares in ANA Inc. when that is not even pleaded.  Further he drew our attention to various statements made by Counsel then appearing for Mr. Shaker, disclaiming that Mr. Shaker had any interest in ANA Inc.  For similar reasons he opposed the application to amend.  He said that if Mr. Shaker were to be allowed to amend, Steggles Palmer would want to appeal against the judge’s decision that the corporate vehicle in which Mr. Shaker and Mr. Adham were interested was ANA Inc.; for that purpose, we were told, he would seek permission to appeal out of time.
44.	Save for the decision that ANA Inc. was the relevant corporate vehicle, Mr. Lyndon-Stanford supports the reasoning and conclusions of the judge.  In particular he argues for the applicability of the Prudential principle  to the facts of this case.  He relies in particular on the misappropriation by Mr. Bedrawi of ANA Inc.’s assets and submits that Mr. Shaker cannot be allowed to achieve the same extraction of assets from ANA Inc. to the prejudice of the creditors of the company as Mr. Bedrawi’s misappropriation had done.  He says that in laying claim to the misappropriated proceeds of sale, Mr. Shaker is not merely seeking relief in respect of loss suffered by ANA Inc. but is attempting by way of equitable relief to appropriate to himself money belonging to ANA Inc. which, he maintains, it has always been Mr. Shaker’s case was stolen.  Such money, he argues, cannot represent a profit acquired by Mr. Bedrawi as trustee of shares in ANA Inc.
45.	Mr. Lyndon-Stanford submits that the claims of Mr. Shaker against Steggles Palmer are essentially for loss and that is the same money as that which ANA Inc. has lost.  Accordingly he says the loss claimed against Steggles Palmer merely reflects the diminution in ANA Inc.’s assets.
46.	Mr. Lyndon-Stanford challenges Mr. Steinfeld’s assertion that it is an issue in the appeal whether in this case there is a presumption of similarity between English and Pennsylvania law in the absence of evidence to the contrary.  He submits that the true rule is the rule of convenience stated in Dicey & Morris, The Conflict of Laws, 13th ed. para. 9-025: “where foreign law is not proved, the court applies English law.”  He submits that the judge was right to apply the 1985 Act when holding that Mr. Bedrawi was liable for unlawful distributions because the court must, in the absence of evidence that the applicable foreign law is to the contrary, apply the rule of convenience so that the general English law is treated as governing the position mutatis mutandis.
47.	Mr. Lyndon-Stanford opposes the admission of new evidence.  He relies on the many statements in this court since the Civil Procedure Rules came into force that the guidance in Ladd v Marshall [1954] 1 WLR 1489 on the conditions to be satisfied if new evidence is to be admitted continues to be relevant, and submits that none of those conditions is satisfied.
48.	Mr. Michael Roberts for Mr. Bedrawi advances arguments supportive of the stance adopted by Mr. Lyndon-Stanford.  He opposes Mr. Shaker being allowed to rely on a new case merely because there has been a change of counsel.  He says that it was assumed in the court below that money was misappropriated by Mr. Bedrawi, and he points out that it is not part of Mr. Bedrawi’s case that he had some legal right to the proceeds of sale.  Mr. Bedrawi’s Defence takes the point, which has not yet been determined, that he was entitled under the investment agreement to invest the proceeds of sale in a further project.  He argues that it follows from the finding by the judge that Mr. Shaker’s interest was in shares that there was a misappropriation of money due to ANA Inc.  He says that the judge made a clear finding that there were unsatisfied creditors of ANA Inc. and he submits that that cannot be reconciled with any submission that the monies paid to Qube were taken out properly.  He does not accept that any part of the $6 million could be a profit for which Mr. Bedrawi must account to Mr. Shaker.
F	Conclusions
New case
49.	Commendable though the attempt was to secure a saving in time and costs through a preliminary issue at the commencement of a lengthy trial, this case provides an example of the difficulties inherent in such a course and of the complications which may result.
50.	It is right to emphasise the limited nature of the exercise on which the judge was engaged and the limited factual enquiry which he undertook and for which he allowed oral evidence to be heard.  His stated aim was to determine whether by reason of the Prudential principle Mr. Shaker had no cause of action against the Defendants.  Whether he had such a cause of action was to be determined on the footing that the facts asserted in his statements of case, his witness statement and his answer to the notice to admit were true, and on the basis of such oral evidence as the judge allowed, in the event that of Mr. Shaker alone and that only on the question whether the investment by him was in shares or in a business.  In fact the judge, having determined that the investment was not in the Business but in shares, unsurprisingly went on to declare the company in which Mr. Shaker had his interest.  But the finding that the shares were those in ANA Inc. when it was not part of Mr. Shaker’s pleaded case that he had an interest in the company has itself given rise to a problem in this court, and it is unfortunate that the question whether the pleadings should be amended to accord with the judge’s conclusion was not raised below.
51.	When Mr. Shaker’s application to amend in this court was opposed and countered with an application by Steggles Palmer to appeal out of time on the finding in relation to ANA Inc., which would have involved consideration of whether there was material before the judge to justify that conclusion, we indicated that we would not determine either application on this appeal hearing.  We said that we would continue to hear the appeal on the same basis as the matter was before the judge, with the pleadings unamended, and that any application to amend should be made to the High Court.  We left it to Steggles Palmer to choose whether to seek an extension of time to appeal against the finding on ANA Inc., it being noted that they had taken the point on this appeal.
52.	It is not in doubt that this court has a discretion whether to allow a new point to be taken on appeal.  It is the settled practice not to allow such a point if it depends on further evidence or, if the point had been taken below other evidence would have been called or sought to be elicited in cross-examination which was not called or sought to be elicited.  But this is not such a case.  Mr. Lyndon-Stanford drew our attention to a number of authorities (ex p. Reddish (1877) 5 Ch. D. 882, Ley v Hamilton (1935) 153 LT 384, Wilson v Liverpool Corporation [1971] 1 WLR 302, Re Barrell Enterprises [1973] 1 WLR 19).  But we intend no discourtesy to him when we say that we did not derive much assistance from them.  None is comparable to the present case.  Each case turns on its own facts and in each the court must exercise its discretion to do what is just in all the circumstances, having regard to the overriding objective.
53.	There is no doubt but that the thrust of the argument for Mr. Shaker below was that his interest was in the Business and not in shares and that thereby the Prudential principle was avoided.  That argument is not repeated in this court, and so Mr. Shaker’s appeal would fail if he were not permitted to put his case in any other way.  However, in considering whether it is just to allow Mr. Shaker’s case in this court to be put as Mr. Steinfeld urges, it is relevant to see to what extent that case is a new one.
54.	Subject only to the point that the relevant company was ANA Inc. and not ANA Ltd. Mr. Steinfeld in his primary argument does not rely on any fact, nor make any claim, which is not within Mr. Shaker’s statement of case.  Mr. Shaker’s claim is as a beneficiary under a trust against the trustee, Mr. Bedrawi, who is liable to account for the profit he has taken from the sale of ANA TV and ANA Radio.  On this point we do not regard the failure to plead that the trust extended to the shares of ANA Inc. as a weighty consideration against Mr. Steinfeld being allowed to advance his primary argument.  For the Defendants’ arguments on the preliminary issue, it was immaterial whether ANA Inc. or ANA Ltd. was the relevant company and, for the purpose of arguing the trustee’s liability to account to his beneficiary for a profit, it matters not whether the company was ANA Inc. or ANA Ltd.
55.	A more difficult point arises from Mr. Steinfeld’s argument that the $6 million paid to Qube could have been lawfully extracted by Mr. Bedrawi.  That argument, the Defendants say, was not merely not put to the judge but it was accepted by Mr. Shaker that the moneys were misappropriated.  That the moneys were stolen was forcefully argued for some of the Defendants.  Further the judge appears to have thought that Mr. Shaker’s case was to that effect.  Thus, as appears from the Transcript for 27 June 2001 at p.122, the judge put to counsel for Mr. Shaker:
“The whole basis of your case is that Mr. Bedrawi was stealing the money from the company and hiding that fact from the claimant.”
Counsel did not challenge that suggestion.  There are passages in the judge’s judgments (including a judgment on 29 June 2001 on whether amendments to Mr. Shaker’s pleadings should be allowed) which show that he was proceeding on the footing that there had been a misappropriation by Mr. Bedrawi of the assets of ANA Inc. for which he was answerable to the company.
56.	However, we have not been able to see where in fact that point was put as any part of Mr. Shaker’s case.  It is not in Mr. Shaker’s pleadings.  In para. 34 it is pleaded that Mr. Bedrawi acted in breach of fiduciary duty to the Beneficiaries in that (a) by “diverting the sum of US $6 million out of the proceeds of the Sale to Qube and concealing that fact from the Beneficiaries, Mr. Bedrawi made a secret profit from the Sale to his own benefit and to the detriment of the Beneficiaries.”  That is clearly an allegation of misappropriation of what should have gone to the Beneficiaries and says nothing about a breach of duty to ANA Inc.  In the answer to the notice to admit facts it is denied that ANA Inc. has any claim against Mr. Bedrawi.  Nor have we been shown any clear statements that Mr. Shaker was alleging misappropriation from the company.  In the judgment the judge in para. 139 assumes in section X that Mr. Shaker is right in his claims that Mr. Bedrawi misappropriated the proceeds of sale.  But Mr. Shaker’s claim was that the misappropriation was from Mr. Shaker and Mr. Adham.  The judge says in para. 140 that “On the assumed facts, there can be no doubt that ANA Inc. would have claims for breach of fiduciary duty against Mr. Bedrawi”, but there is no finding that there was a misappropriation by Mr. Bedrawi of the company’s moneys, nor could there be given that the judge had expressly limited himself to the finding of fact he was making.  
57.	Mr. Lyndon-Stanford also argued that this point was not covered by Mr. Shaker’s grounds of appeal in his Appellant’s Notice.  We do not agree.  The grounds include the following:
“(2)  The Judge was wrong in law or misdirected himself or took into account irrelevant facts ...
(e)  in assuming that there has been an unlawful distribution of assets of ANA Inc. in breach of its director’s fiduciary duty under Pennsylvanian law, despite the absence of any pleading or admissible evidence of any facts relating to such distribution or breach of such law.”
58.	There could of course be costs consequences for Mr. Shaker if he is allowed to pursue his primary argument and succeeds on this appeal on that argument when it was not argued before the judge.  Mr. Steinfeld accepts that.  In our judgment in all the circumstances, to deal with this case justly it is appropriate to exercise the discretion to allow the primary argument, heralded in the pleadings, to be advanced on this appeal.
Accounting for a profit
59.	Mr. Steinfeld, in submitting that a trustee is prohibited from taking a secret profit derived from the use of trust property, has referred us to a number of cases including Boardman v Phipps [1967] 2 AC 46, Re Macadam [1946] Ch. 73, Re Gee decd. [1948] Ch. 284, Swain v Law Society [1982] 1 WLR 17 and A-G for Hong Kong v Reid [1994] 1 AC 324.  He argues that by virtue of Mr. Bedrawi’s holding of 70% of the shares in ANA Inc. as trustee for Mr. Shaker and Mr. Adham, he was the sole director and in sole control of ANA Inc.’s affairs and able to take $6 million in Qube.  We did not understand Mr. Lyndon-Stanford to submit that if there was a trust of the shares of ANA Inc.  Mr. Bedrawi would not be liable to account to Mr. Shaker for any profit to the extent that the $6 million was not stolen from the company but was lawfully taken by Mr. Bedrawi.  Mr. Lyndon-Stanford’s stance was that the monies were stolen and that equity would not allow a beneficiary to make a claim to share in the stolen proceeds.  Mr. Steinfeld’s riposte was that if a bribe had to be accounted for as in the Reid case, there was no reason why the trustee should not be required to account to a beneficiary for stolen monies.  It is unnecessary to resolve that dispute.  It is sufficient to say that we accept Mr. Steinfeld’s submission that to the extent that Mr. Bedrawi took at least part of the $6 million without being in breach of any fiduciary duty to ANA Inc., he would have to account to his beneficiary for that profit, referable as it was to the trust holding of shares in ANA Inc.
Unlawful distribution
60.	If the correct characterisation of the payment by ANA Inc. is that it constituted a breach of duty owed by Mr. Bedrawi to ANA Inc. (whether because it was an unlawful distribution or because he stole the money from ANA Inc.), then under English law ANA Inc. would have a right of action against Mr. Bedrawi for the whole of the loss which Mr.  Shaker seeks to recover in this action from Mr. Bedrawi and the Prudential principle  would apply.  However, as already explained, it was not part of Mr. Shaker’s case that the abstraction by Mr. Bedrawi from ANA Inc of $6 million was in breach of his duty to ANA Inc or an unlawful distribution or otherwise involved a breach of duty by Mr. Bedrawi to ANA Inc.  Accordingly, the Defendants had to satisfy the court that it was the inevitable conclusion from the facts which were admitted or agreed to be assumed for the purposes of the preliminary issue that the abstraction of funds was a breach of duty by Mr. Bedrawi to ANA Inc. and that it was appropriate for the court to apply English law as there was no evidence of Pennsylvanian law, being the law which would otherwise apply to the question whether a director of ANA Inc. had acted in breach of duty to it.
61.	At this stage, the legal basis for the abstraction of the $6 million is neither admitted nor the subject of an agreed assumption.  One possibility is  that the $6 million was a distribution of profits arising on the sale of assets to MBC .  The judge considered this possibility but, as there was no evidence as to the law of Pennsylvania, he applied provisions of Part VIII of the 1985 Act. Part VIII applies to companies registered in England under the Companies Acts (and thus not to companies which are incorporated here but not under the Companies Acts).  Part VIII re-enacts certain provisions of the Companies Act 1980 which (in relation to public companies) were designed to implement provisions of the Second EC Directive on Company Law (77/91/EEC) (reprinted in Buckley on the Companies Acts, 15th ed. at vol. 3, division U, A[11]).  The Second Directive was a harmonisation measure which was required to be implemented into the domestic law of the member states and represented the minimum safeguards to be given to members and creditors. Member states could therefore extend these safeguards.
62.	The incorporation of the provisions of the Second Company Law Directive relating to distributions into domestic law made a number of changes to English law.  In particular, distributions could in general only be made out of net "realised" profits (see now section 263(3) of the 1985 Act) whereas prior to 1980 companies could in general pay dividends out of unrealised profits subject to certain conditions.  Moreover, after the Companies Act 1980 came into force, public companies could not make a distribution out of current trading profits if there was a deficit on reserves (see now section 264 of the 1985 Act).  This is contrary to the position prior to 1980.  Furthermore no distribution could be made unless there were accounts (called relevant accounts) which showed that the company had the requisite profits and complied with certain statutory requirements. The requirements are mandatory and if a distribution is made in breach of these requirements it is no answer to show that the company  could have drawn up accounts which complied with the requirements (see Precision Dippings Ltd. v Precision Dippings Marketing Ltd. [1986] Ch. 447).  This is a harsh consequence and a matter on which different legal systems might take a different view.  Previously, under English law it had not been necessary to have "relevant" or any accounts.
63.	The judge applied the provisions of the 1985 Act, in particular the provision requiring companies to have "relevant accounts" before making any distribution.  He held that this was a generally applicable rule. The inevitable result of the application of Part VIII was that (if the $6 million was not otherwise stolen from ANA Inc.) it must have been an unlawful distribution. Was the judge correct to apply English law and specifically these provisions?
64.	According to Dicey & Morris, op. cit, para. 9 - 025, where a party adduces no evidence or insufficient evidence of foreign law, the court applies English law and there is only one true exception to this principle, that is in a trial for bigamy where the first marriage was contracted abroad.  In the opinion of Dicey & Morris, it is not clear that there is a further exception where the question is purely one of statute law.  However, it is apparent that there are other exceptions apart from those which Dicey & Morris cites.  For instance, the court does not apply English law to a foreign transaction to which it would not otherwise be applicable simply because a party fails to prove the applicable foreign law in a situation where English law creates some special institution: see the obiter dictum of Roskill L.J in Osterreichische Landerbank v S'Elite Ltd. [1981]1 QB 565, 569 (fraudulent preference).  Nor does the principle apply in prosecutions generally in respect of acts committed abroad where the acts in question may be lawful under the law of the place of performance. Nor need the principle be applied in proceedings for summary judgment: National Shipping Corporation v Arab [1971] 2 Lloyd's Law Rep. 363.  In certain circumstances, the court does not apply the principle where it is asked to construe a document governed by foreign law. These authorities show that the principle is not applied inflexibly.  For a discussion of the exceptions generally, see Fentiman, Foreign Law in English Courts (1998) (Oxford), chapters III and IV, and Trevor C Hartley, Pleading and Proof of Foreign Law: The Major European Systems Compared (1996) 45 ICLQ 271.  We further note that in Carl Zeiss Stiftung v Rayner Keeler Ltd. (No. 2) [1967] 1 AC 853, Lord Wilberforce described the principle as one “never more than a fragile support” in the context of an issue as to the effect of a foreign judgment where its effect under foreign law was not proved.
65.	Mr Lyndon-Stanford relied on a large number of authorities to show that the court had to apply English law if foreign law was not pleaded and proved, for instance Dynamit AG v Rio Tinto Ltd [1918] AC 260, 294, 300, 301.  He submitted that, in cases where the courts had declined to apply this “default” rule, there was some explanation on the particular facts of the case, as in Alfred Dunhill v Sunoptic SA [1979] FSR 337 (issue as to whether threat of passing off abroad), and Guépratte v Young (1851) 4 De G & SM 217 (appeal from Master’s finding as to French law).  Apart from the dictum of Roskill L.J. referred to above, no English authority was cited to us by Mr Lyndon-Stanford (or by other counsel) dealing with the question whether, under the “default” rule, the court can apply a purely domestic statute of the lex fori which would otherwise have no application.  However, Mr Lyndon-Stanford relied on authorities from other jurisdictions, including The Ship Mercury Bell v Amosin (1986) 27 DLR (4th) 641, a decision of the Federal Court of Appeal of Canada.  In that case, the court recognised the undesirability of applying purely local legislation to disputes having no connection with the jurisdiction.  It rejected any simple division between the common law and statute law and held that domestic statute law could be applied under the “default” rule where the statute potentially had some degree of universality.  In the present case, the parties were content for this court to proceed on the basis that that was also a requirement of the English “default” rule.  Indeed the judge proceeded on that basis as well.  Mr Lyndon-Stanford submitted that the court was bound to apply the “default” rule unless the result was unfair, as on an interim application.  However, he contended that the court was bound to apply the “default” rule in the present case, even though the court was deciding a preliminary issue only, because the issue was heard at the start of the trial.  In our judgment, the trial of the preliminary issue in this case was more akin to an interim application than to the trial itself, since it was heard on a factual basis agreed for the purpose of that preliminary issue only.
66.	Furthermore, in the present situation, the 1985 Act cannot be applied literally to the Pennsylvanian company since Part VIII is only applicable to companies registered under the Companies Acts, and the statutory requirement to produce "relevant accounts" in a particular form (such as, in the case of the annual accounts, in the form required by Part VII of the 1985 Act) cannot apply to it.  Mr Lyndon-Stanford accepts that Part VIII can only apply in an adapted form, meaning that if to satisfy Part VIII ANA Inc. would have to produce accounts in a particular form ANA Inc would have to produce whatever accounts Pennsylvanian law required. But what if, for instance, Pennsylvanian law has no such requirement?  How is English law then to be applied? Mr Lyndon-Stanford's submissions leave that point unresolved and it is an Achilles’ heel in his argument.  We find it difficult to accept that if English law is to be applied as the lex causae it can be applied in a form adapted to the degree necessary on Mr. Lyndon-Stanford’s argument.  Either it applies to a Pennsylvanian company or it does not so apply.  The fact (if it be the case) that the provision which would have to be adapted does not apply in this particular instance would be immaterial since Part VIII is a composite set of rules. Moreover it seems to us to be inconsistent with the notion that English law is the lex causae that it should take account of Pennsylvanian law in this way.
67.	The starting point must be that not every English statute is to be applied to a transaction because a party has either chosen not to prove or failed to prove the law which is otherwise applicable.  On the face of it, Part VIII is inapplicable to a company not registered under the Companies Acts.  Thus the judge was correct to seek to satisfy himself that Part VIII did not represent some merely domestic rule of English law.  He did so by asking whether the requirements of Part VIII with which he was concerned represented a generally applicable rule of company law.  As we have said, Mr Lyndon-Stanford has made his submissions on the basis that this requirement has to be met and we are content also to accept that as the test in the circumstances of this case.  However if a rule of English statute law has to be adapted in the way explained above before it can apply, then, although it is not necessary to express a final view on this point on this appeal, it may well be that that factor alone is a sufficient indication that the case falls within the class of case where English statute law creates some special institution and thus cannot be applied simply because a party has failed to prove the relevant foreign law.
68.	We doubt if the question whether (as Mr. Lyndon-Stanford admitted was the position regarding the requirement for relevant accounts) it is realistic to expect a foreign law to contain a provision found in English law is a relevant consideration in deciding whether to apply English law as the lex causae in default of proof of foreign law.  If it were, our view is that it is probably unrealistic to expect the law of Pennsylvania, which is a common law jurisdiction, to have a provision derived from the civilian systems of the European Community, viz. that before a distribution is made the company must have accounts which show the requisite level of profit. There is no evidence to suggest that the provisions of Part VIII represent requirements of company law generally recognised outside the European Community, and Mr Lyndon-Stanford did not seek so to suggest.
69.	Mr Lyndon-Stanford's submission was that it was sufficient that the requirement for relevant accounts is recognised in the European Community.  We accept that in some  circumstances it may be appropriate to infer that a requirement of a harmonisation measure emanating from the European Community reflects some generally accepted rule of law so that it should be applied even if it is only to be found in a domestic statute which is not applicable to the transaction in question.  We will for the purposes of the argument assume that the Second Directive, within its field of operation, does show that there is a generally applicable principle of company law that a company should have accounts before it makes a distribution (though the fact that harmonisation was necessary suggests that it was not previously the universal rule).  However the measure in point here (the Second EC Company Law Directive) in effect applies only to public companies; it does not apply to private companies in the United Kingdom or their equivalent in other member states.  The judge did not assume and could not assume that ANA Inc. was a public company.  Should the court accept the Second EC Company Law Directive as sufficient to show that that principle of company law is generally applicable not just to public companies but also to private companies?  The law of other member states regarding private companies may be the same, but equally it could also be different, just as the common law was different (in relation to both public and private companies) in this country prior to 1980.  In our judgment, because of the particular context in which this issue arises, namely that the court is dealing with a preliminary issue only and the question is the application of the Prudential principle which if applicable would constitute an absolute bar in limine to Mr. Shaker’s claim, the court should not accept at this stage the Second Directive as showing that the requirement for relevant accounts is one which is generally applicable to private companies and thus should be applied to ANA Inc.  The distinction may be thought to be a fine one, but the safeguards which the law requires for members and creditors of private companies are often less than those required for members and creditors of public companies and it is common to recognise that private companies are often run with more informality than public companies.
70.	However, on the assumption that at trial there is an issue as to the legality of a distribution made by Mr. Bedrawi, if at trial Mr. Shaker fails to prove the applicable foreign law, and the court is not satisfied that the requirement for relevant accounts in Part VIII is some special institution of English law so far as private companies are concerned, then the Prudential principle will apply. That conclusion is not however one which was open to the judge on this preliminary issue on the material which is before the court.
71.	If in those circumstances Mr. Shaker fails to prove foreign law, and Part VIII is inapplicable, the court will still be able to apply the common law rule that a dividend must be paid out of profits. This rule remains part of English law even in relation to companies to which Part VIII applies: see section 281 of the 1985 Act.  There would not seem to be any doubt but that it is a generally recognised principle of company law that a distribution to members must be made out of profits. However if, in this case, the proceeds of sale are written back into the last available management accounts, there would clearly have been sufficient distributable profits, on the basis of the figures in these accounts, to make a distribution of $6 million. The judge states later in his judgment (in para. 143) that the evidence suggested that judgment creditors were unpaid.  There are, however, no findings on this nor as to the amount of any such creditors. On the evidence available it is not possible to reach the conclusion that the amount of such creditors would inevitably eliminate any question of profit.
72.	Further, as Mr. Steinfeld submitted, it is possible that there are two other ways in which at least part of the $6 million might have been lawfully extracted from ANA Inc., that is to say as a repayment of a debt and as remuneration.  That possibility cannot be dismissed as fanciful.  We do not accept Mr. Roberts’ submission that the judge made a clear finding that there were unsatisfied creditors of ANA Inc.  What the judge said (in para. 143) was that the evidence suggested that ANA Inc. was in a poor financial condition prior to the sale and that thereafter there were unsatisfied judgment creditors.  But he went on to say that these would have been matters which would have required investigation if, as did not happen, the point had been pleaded and pursued.  It is in our view plain that the judge made no finding on the point.  These are matters of fact and law which may have to be gone into at trial if this appeal is allowed.
Applicability of the Prudential principle
73.	The question which therefore arises is whether the Prudential principle also applies in circumstances where a beneficiary with an equitable interest in a company’s shares which are held in trust by a trustee sues the trustee for an account of the profit taken by the trustee, that profit being monies in respect of which the company may have a prior claim against the trustee in his capacity as a director of the company for breach of fiduciary duty.  Or to put it the other way round, does the Prudential principle debar the beneficiary’s claim when the possibility cannot be excluded that the claim may extend to monies lawfully extracted in respect of which the company can have no claim against the trustee director?
74.	The broadest way in which Mr. Steinfeld puts his case is that a claim by a beneficiary against his trustee, holding shares in a company on trust, to account for a profit, being a claim different in nature from any claim which the company could properly bring against the trustee, is not caught by the Prudential principle.  Mr. Steinfeld relied on two cases.
75.	The first was Re Lucking’s Will Trusts [1968] 1 WLR 866.  In that case the majority shareholding in a private company was held by the trustees of a will.  One of the trustees, Mr. Lucking, was a director of the company.  He was aware that the managing director was making substantial withdrawals from the company but failed to supervise those drawings, none of which the company was able to recover.  A beneficiary brought an action against the trustees for breach of trust.  Although the company would appear to have had a cause of action against Mr. Lucking for breach of fiduciary duty to the company, Cross J. did not regard that as any bar to an action by the beneficiary against the trustees.  Cross J. said at p. 873:
“The claim is for breach of trusts alleged to have been committed by both trustees as holders of 70 per cent of the shares in the company, not a claim against Mr. Lucking for breach of his duty to the company as one of its directors.”
And at p. 875:
“He was in the position he was partly as a representative of the trust and if and so far as he failed in his duty to the company he also failed in his duty to the trust.  To hold this is not, as I see it, inconsistent with [Salomon v Salomon [1897] AC 22].”
	Cross J. held Mr. Lucking liable for breach of trust.
76.	The second authority was the decision of this court in Walker v Stones [2000] 4 All ER 412.  The facts assumed to be true in that case were that two trustees, Mr. Stones and one other, held all the shares in a holding company, which in turn held a controlling interest in another company, Jasaro.  Jasaro owned the equity in two further companies, Holt and SHL.  Mr. Stones on behalf of the trustees guaranteed a bank loan to Jasaro, charging the trust’s shares in Jasaro to the bank.  Jasaro became insolvent, the guarantee was called in and the bank took control of the holding company.  The beneficiaries under the trust sued the trustees for breach of trust in causing or allowing the value of the shares in the holding company to be diminished by causing or allowing the assets of the holding company and of subsidiaries of the holding company to be dissipated by improper diversions or use of assets.  The trustees applied to strike out the claim and the beneficiaries applied to amend their pleading to allege that Mr. Stones had been guilty of dishonest breaches of trust and had dishonestly acquiesced in and assisted in concealing the wrongful diversion of funds from Jasaro and its subsidiaries.  Rattee J. held that the Prudential principle applied to prevent the beneficiaries’ bringing claims in respect of the diverted funds.  This court allowed the beneficiaries’ appeal on that point.  Sir Christopher Slade (with whom Nourse and Mantell L.JJ. agreed) reviewed the authorities and expressed his views on the conditions to be satisfied if the Prudential principle was not to apply (at 438):
“the Prudential .... principle will not operate to deprive a claimant of an otherwise good cause of action in a case where (a) the claimant can establish that the defendant’s conduct has constituted a breach of some legal duty owed to him personally (whether under the law of contract, torts, trusts or any other branch of the law) and (b) on its assessment of the facts, the court is satisfied that such breach of duty has caused him personal loss, separate and distinct from any loss that may have been occasioned to any corporate body in which he may be financially interested.”
That statement was quoted with approval by Lord Hutton in the Johnson case (at p. 110) when subsequently it reached the House of Lords.
77.	Sir Christopher Slade found that on the assumed facts both conditions were satisfied.  He said that the beneficiaries suffered loss quite separate and distinct from any loss which may have been suffered by Jasaro, Holt and SHL because (1) the causes of action against the trustees were quite different in nature and would be based on different types of misconduct from those on which any of the three companies would rely in seeking to recover their lost assets, (2) the principal defendants in any claim by the companies could not be the trustees who could be open to attack, if at all, only as accessories, and (3) while there would be some overlap between the amounts potentially recoverable by the beneficiaries and those recoverable by each company, those amounts would not necessarily be the same, having regard to the very different nature and origins of the claims.  More generally, Sir Christopher Slade expressed the view that policy considerations pointed against the Prudential principle  always affording a defence to a trustee guilty of a breach of his duty to supervise trust investments including a controlling interest in a company, when the company has a claim against a director or manager who has mismanaged its corporate affairs.  He followed the decision in the Lucking case in holding that the Prudential principle did not bar the beneficiaries’ claims against the trustees.  We have been told that the House of Lords has granted the trustees permission to appeal on this and other points.
78.	However the House of Lords did not grant such permission on another point on which this court refused the beneficiaries’ application to amend.  The beneficiaries applied to join a Mr. Hemingway as a defendant.  He was not a trustee of the trust, nor a director of any company in which directly or indirectly the trustees had an interest.  The beneficiaries sought to allege that he had participated in the breaches of trust on the part of the trustees in dishonestly assisting the wrongful diversion of Jasaro’s moneys and that he had thereby become a constructive trustee.  Rattee J. held that the Prudential principle applied to bar the claims against him, and this court agreed.  Sir Christopher Slade said that on the assumption that Mr. Hemingway dishonestly assisted Mr. Stones in dishonest breaches of trust which were at least a partial cause of the losses of the three companies, those companies would themselves have a cause of action against Mr. Hemingway for dishonestly assisting Mr. Stones’ conduct which caused the losses, thereby exposing himself to liability as a constructive trustee.  The causes of action of the beneficiaries would be the same as those of the companies, being based on the same facts, and the proper claimants would be the companies.  The claims for recoverable loss would entirely overlap.
79.	Mr. Steinfeld submitted that Mr. Shaker’s claim in the present case was a fortiori that of the beneficiaries in the Walker case claiming against the trustees.  In the Walker case there were stronger grounds for saying that the loss claimed by the beneficiaries was reflective of loss suffered by the companies in which the trust had an interest.  In the present case, he argued, in seeking an account of a profit taken by the trustee, Mr. Bedrawi, Mr. Shaker had a good claim even if there was no breach of any duty owed by Mr. Bedrawi to ANA Inc.  He further submitted that that part of the decision in the Walker case which related to Mr. Hemingway was of no assistance because Mr. Hemingway was not a trustee.
80.	Mr. Steinfeld argues from these cases that where a beneficiary has a proprietary claim against the trustee director to monies for which an account is sought, the Prudential principle can have no application, and that instead the court should recognise that the potential claim of the company against the director to those monies gives rise to competing claims to a single fund, and that to the extent that the company’s claim does not succeed the beneficiary’s claim should prevail.  Otherwise, he submits, the delinquent trustee would succeed in profiting from his trust.
81.	Mr. Lyndon-Stanford points to the fact that the Lucking and Walker cases were decided prior to the decision of the House of Lords in Johnson, and to the view of the judge in the present case (see paras. 37 – 39 of the judgment) that at least part of the reasoning in the Walker case cannot stand with Johnson.  We agree with Mr. Lyndon-Stanford that if the claim by Mr. Shaker for an account is in substance a claim to monies to which ANA Inc. has a claim against Mr. Bedrawi, then consistently with the reasoning in Johnson the Prudential principle would bar Mr. Shaker’s claim for what in effect reflects part of the loss suffered by ANA Inc., and it matters not that the causes of action of Mr. Shaker and ANA Inc. are different.  Nor does it matter that ANA Inc. has not yet brought proceedings against Mr. Bedrawi:  the Prudential principle still bars a claim reflective of the company’s loss (see the Johnson case at p. 35 per Lord Bingham and at p. 66 per Lord Millett).
82.	Mr. Lyndon-Stanford relies on that part of the decision of this court in Walker which pertained to Mr. Hemingway, particularly in view of the refusal by the House of Lords of permission to appeal on that aspect.  But whilst we can see how an analogy can be drawn between Steggles Palmer dishonestly, as it is alleged, assisting Mr. Bedrawi in a breach of duty causing loss to ANA Inc.  and Mr. Hemingway dishonestly assisting Mr. Stones as trustee in breaches of duty which caused loss to Jasaro, Holt and the holding company, this does not throw any light on what seems to us to be the crucial point in the present case, viz. whether Mr. Shaker has a sustainable claim to monies to which ANA Inc. is not entitled because they were properly extracted from ANA Inc. by Mr. Bedrawi.
83.	In our judgment the Prudential principle does not preclude an action brought by a claimant not as a shareholder but as a beneficiary under a trust against his trustee for a profit unless it can be shown by the defendants that the whole of the claimed profit reflects what the company has lost and which it has a cause of action to recover.  As the Prudential principle is an exclusionary rule denying a claimant what otherwise would be his right to sue, the onus must be on the defendants to establish its applicability.  Further, it would not be right to bar the claimant’s action unless the defendants can establish not merely that the company has a claim to recover a loss reflected by the profit, but that such claim is available on the facts.  If in the present case it could be shown that the $6 million was misappropriated from ANA Inc. or unlawfully distributed so that ANA Inc. was entitled to the whole of the $6 million, we would accept that the Prudential principle applied to bar Mr. Shaker’s action.
84.	However, for the reasons already given, that has not been, and cannot without a trial be, shown.  It is possible that at least part of the $6 million was lawfully taken by Mr. Bedrawi.  Accordingly we respectfully disagree with the conclusion of the judge that the Prudential principle applies to prevent Mr. Shaker proceeding against Mr. Bedrawi in relation to the proceeds of sale. 
85.	Similar considerations apply in relation to the main part of the claim against Steggles Palmer, that of dishonestly assisting in Mr. Bedrawi’s breach of trust.  The applicability of the Prudential principle to the knowing receipt claim, which is restricted to the small extent to which Steggles Palmer’s fees were paid from the $6 million, also turns on whether the monies were lawfully extracted.  As for the deceit claim, only Mr. Shaker had a cause of action in deceit and we do not agree with the judge’s view (in para. 150) that the relevant alleged conduct would have amounted to dishonest concealment, for which ANA Inc. would have had a cause of action.  However, as the complaint is that Mr. Shaker was deceived by Steggles Palmer into not taking action to preserve that part of the $6 million which was still capable of being preserved in Steggles Palmer’s or Qube’s hands, the applicability of the Prudential principle to this claim again turns on the question of the lawful or unlawful extraction from ANA Inc. of the $6 million.  In our judgment for the reasons already given, the Prudential principle does not bar the proceedings against Steggles Palmer.
86.	We confess that we are the happier to reach this conclusion in view of the improbability that ANA Inc. would now bring an action against Mr. Bedrawi when it has not done so for over 8 years since the payment of the $6 million to Qube.  In circumstances where the Prudential principle applies to bar a viable claim on the footing of the company’s cause of action which it does not assert, the application of the principle can work hardship.  Moreover in this case the application of the principle might serve to leave the trustee holding a profit without being accountable for it to his beneficiary, and that may run counter to a basic equitable principle.
Application for new evidence
87.	These conclusions, reached without the new evidence which Mr. Shaker sought to adduce, would have rendered it strictly unnecessary to consider the application referred to in para. 42 above.  But we indicated in the course of the hearing that we refused that application for reasons which we would give in the judgment, and we give those reasons briefly now.
88.	Under CPR 52.11(2)(b) evidence not before the lower court is not to be admitted on an appeal unless the court otherwise orders.  The rule does not use the language found in the Rules of the Supreme Court which only allowed the admission of new evidence if there were special circumstances present, and the decision of this court in Ladd v Marshall [1954] 1 WLR 1489 laid down the three familiar conditions that needed to be satisfied for such special circumstances to be present.  However, since the introduction of the CPR this court has repeatedly stated that the conditions of Ladd v Marshall continue to be relevant in deciding whether it is appropriate to order that the new evidence be admitted, though this discretion, like every discretion under the rules, must be exercised having regard to the overriding objective (see, for example, Hertfordshire Investments Ltd. v Bubb [2000] 1 WLR 2318).  It will be a rare case where the Ladd v Marshall conditions are not satisfied but the court will nevertheless admit new evidence on the appeal.
89.	In our judgment this application fails on the first of the Ladd v Marshall conditions, that the evidence could not have been obtained with reasonable diligence for use at the trial.  Contrary to normal practice, no evidence has been led to explain why it would not have been possible to obtain the new evidence for use at the trial by the exercise of reasonable diligence. Mr. Shaker was put on notice that the Defendants were taking the Prudential principle  point by way of defence as long ago as 9 February 2000 and yet it appears that he did nothing to obtain evidence for the trial to prove that under Pennsylvania law there would be no such defence.  To refuse to admit such evidence now entirely accords with the overriding objective.  It would not have been fair on the Defendants to have to meet this new evidence adduced so shortly before the appeal hearing.  For these reasons the application was refused.