COUNSEL:  Anthony Glass QC and Francis Barlow (instructed by Kingsley Napley) for the appellant Naylor.

Anthony Hacking QC and Geoffrey Vos QC (instructed by Burton Copeland, Manchester) for the appellant Clowes.

Alan Suckling QC, Robin Hollington and Mark Lucraft (instructed by the Serious Fraud Office) for the Crown.

 

JUDGES:  WATKINS LJ, SCOTT BAKER AND AULD JJ

 

DATES:  10, 11 JUNE, 8 JULY 1993

 

8 July 1993.

 

The following judgment of the court was delivered.

 

WATKINS LJ.  On 10 February 1992, following a trial which lasted for 112 days in the Central Criminal Court before Phillips J, Peter John Naylor, who is 37 years of age, and Peter John Clowes, who is 50 years of age, were convicted of a number of offences of dishonesty. The next day Naylor was sentenced to 18 months’ imprisonment for an offence of theft (count 11). Clowes was sentenced to an overall term of 10 years’ imprisonment for 8 offences of making a false statement to induce investment (counts 2 to 9) and 10 offences of theft (counts 10 and 12 to 20). Clowes was disqualified from being a company director for the next 15 years.

 

Both appellants were acquitted of conspiring to contravene s 13(1) of the Prevention of Fraud (Investments) Act 1958. Naylor was also acquitted of a further three offences of theft and a number of yet further counts of theft and of conspiracy to steal were ordered to lie on the file upon the usual terms. A number of other counts in the indictment affecting Clowes, alleging theft, conspiracy to steal, conspiracy to make use of false documents, conspiring to defraud and doing acts tending to pervert the course of public justice were also ordered to lie on the file upon the usual terms.

 

There were four co-accused. Three of them, Guy von Cramer, Christopher Frank Newman and David Campbell Mitchell, were acquitted of the charges against them, and the other, Haim Judah Michael Levy, was discharged when that part of the indictment affecting him was quashed.

 

Naylor appeals against conviction upon a point of law. He did not, therefore, require leave. Clowes appeals against conviction upon the counts of theft with the leave of Rattee J, and he renews his application for leave to appeal against sentence after refusal by that learned judge.  [*320]

 

In June 1988 the Barlow Clowes companies and partnership collapsed, and soon afterwards the Securities and Investment Board closed the UK Barlow Clowes company, Barlow Clowes Gilt Managers Ltd.

 

The Crown alleged that the indictment against the appellants was a mirror of an investment fraud of massive proportions. Between October 1983 and May 1988 companies operated by Clowes obtained millions of pounds from investors, the vast majority of whom were induced to invest by misrepresentation that their moneys would be securely invested in gilts. In fact, very little, if any, of that money was invested in gilts. Investors’ moneys were stolen and used to buy houses, farms, yachts, cars, antique furniture, a vineyard and shares in private and public companies.

 

At the end of 1987 the Department of Trade became alerted to the fact that a fraud on a grand scale lay within the facade of the Barlow Clowes group of companies.

 

There is no doubt that Clowes masterminded the activities of what became a very large organisation. He brought that into existence, operated the very involved ramifications of it and, in a most determined way, encouraged the receipt of moneys by one or more of his companies from many thousands of people who were led to believe that they would receive from their investments a return which was higher than could be expected from other investment sources in the United Kingdom. He soon gave the appearance of being a millionaire, if only because he lived like one.

 

Naylor joined Barlow Clowes and Partners in 1982. He very soon became Clowes’s right-hand man and second in command of the Barlow Clowes group. He played an active part in the management of companies within the group and was a signatory on the principal accounts of the businesses. The group spread its wings out of the United Kingdom into Jersey, Switzerland and Gibraltar.

 

Barlow Clowes marketed investment schemes. They were called portfolios and were said to be based on investment in gilts. Some of the portfolios were administered in the United Kingdom, whilst others were administered off-shore. The case presented to the jury concerned off-shore portfolios, in particular Portfolios 28 and 68, which were sold mainly in the United Kingdom through intermediaries, but sometimes directly by Barlow Clowes. Some, if not all, of the administration for these portfolios was conducted either in Geneva or in Gibraltar. Moneys received from investors were paid into designated clients accounts in Jersey and other off-shore places. It was represented that the portfolios offered security, seeing that investment of clients’ money was to be in gilts or cash with a high-guaranteed return which would be wholly or partly tax-free. Brochures were issued which contained the terms of the investments which gave the plain indication that each investor’s cheque was to be made payable to Barlow Clowes International Clients Account and that Barlow Clowes was to be authorised to buy and sell British government stock on the investors’ behalf on a fully discretionary basis. One of the terms, of very great importance, was “and to place any uninvested funds with any bank, local authority or other body on such terms and conditions as you see fit whether bearing interest or not”. The Crown acknowledged that this term permitted Barlow Clowes to invest in things other than gilts, but only upon a temporary basis pending re-investment in gilts. [*321]

 

A rate of return was declared each month. It was fixed by comparing rates of other investment bodies and it was paid by money put in by other investors and not from any gains on buying and selling gilts.

 

From July 1985 to March 1987 the bulk of investors’ funds were put into either Lloyds Bank or the Midland Bank in Jersey. From March 1987 onwards they were credited to BCI Clients Call Deposit Account and BCI Jersey Clients Call Account at Barclays Bank, Gibraltar, which were comprised wholly of clients’ funds. One of the arms of Barlow Clowes in the City of London received funds by way of transfer from other client accounts. In none of the various accounts kept in the United Kingdom and overseas were individual investors’ payments kept segregated. In fact, all investors’ moneys were mingled together.

 

Misappropriation of investors’ moneys from a large number of accounts took place over a considerable period of time before the responsible authorities began to realise that Barlow Clowes was operating a fraud largely for the benefit of the appellant Clowes. The convictions for theft demonstrate that at various times sums between in excess of £1m and £3·5m were being taken out of accounts supposedly holding investors’ moneys securely.

 

Clowes’ defence, generally speaking, was that neither the brochures nor the portfolios contained false representations and that he used techniques for encouraging investment which were generally well known and commonly practised. There was nothing dishonest, moreover, about transfers of money from clients accounts to other accounts for what was involved in that was payment of fees properly charged and other perfectly proper capital transfers.

 

Naylor took £19,000 from one of the client accounts, namely JER 54, and covered his tracks by using in computer records the name of a fictitious investor called Dr Patel. It is unnecessary to recount the machinations of Naylor in that respect. Suffice to say that the jury were persuaded that, although not in the same class as Clowes as a fraudsman, he was no mean deceiver. That £19,000 was paid into Naylor’s own account and then transferred to his wife’s account.

 

Naylor’s defence was simply that the moneys he was accused of stealing he removed from the appropriate account because Clowes had agreed to pay him a bonus of £25,000, of which the £19,000 was part. Furthermore, his use of the name Dr Patel was a matter known to Clowes, who had done some such thing as that himself. Clowes denied Naylor’s account of this matter.

 

From time to time legal argument was addressed to the trial judge who was, therefore, called upon to give rulings. Some of these have been criticised and are reflected in the grounds of appeal relied upon by Clowes. Those grounds of appeal are that the judge wrongly construed the meaning of the relevant clause in the brochures or Portfolios 28 and 68; he should have held that there was a contractual relationship between each investor and Barlow Clowes, the relationship between investor and Barlow Clowes was not consistent with the existence of a trust; if the judge had decided that the relationship was contractual the theft counts were without foundation. The judge wrongly ruled that the authorities only permitted investment in gilts or the placing of money on deposit whilst waiting to invest in gilts, he should have held that the terms of the brochures meant that Barlow Clowes had an absolute discretion to invest with any corporation they thought fit, if he had done so there would have been no case to go to the jury that the property belonging to the investors had been stolen. Alternatively, having made the ruling, he was wrong to tell  [*322]  the jury what his ruling was; he ought to have said that the question of investment powers was very difficult in law, one that a layman would not necessarily be expected to have correctly decided and one that it was not necessary for them to know the answer to in order to decide the questions before them; by telling them of his ruling he removed the meaning of the relevant clause as an issue between the Crown and the defence; thus, the jury may have been prejudiced in considering the defence by knowing that, as a matter of law, Clowes had no justification for having made the transfers. The judge should have made it clear to the jury that there was room for genuine doubt as to the proper construction of the material documents. Finally, he wrongly ruled as inadmissible answers to a questionnaire of Clyde & Co which was, or may have been, very helpful to the defence.

 

Naylor’s ground of appeal is that the judge wrongly ruled that the Crown had established an equitable charge in favour of investors sufficient to satisfy the requirements of s 5(1) of the Theft Act 1968. We shall examine Clowes’s ground of appeal first.

 

Section 1(1) of the 1968 Act defines theft as follows:

 

“A person is guilty of theft if he dishonestly appropriates property belonging to another with the intention of permanently depriving the other of it …”

 

Section 5(1), (2) and (3) of the 1968 Act, so far as material, provides:

 

“(1) Property shall be regarded as belonging to any person … having in it any proprietary right or interest …

 

(2) Where property is subject to a trust, the persons to whom it belongs shall be regarded as including any person having a right to enforce the trust, and an intention to defeat the trust shall be regarded accordingly as an intention to deprive of the property any person having that right.

 

(3) Where a person receives property from or on account of another, and is under an obligation to the other to retain and deal with that property or its proceeds in a particular way, the property or proceeds shall be regarded (as against him) as belonging to the other.”

 

The first and main issue arising from Clowes’s appeal against conviction of the charges of theft is whether in each case he appropriated the property of another. It is admitted for the purpose of this appeal that if he did so, the other ingredients of the offence, in particular dishonesty, are present. If Barlow Clowes was a trustee of funds invested with it under its Portfolios 28 and 68 investment schemes, the funds remained the investors’ property by virtue of s 5(1), (2) and (3) and Clowes, in diverting the funds to his own use, appropriated property belonging to another and is guilty in each case of theft. If, on the other hand, Barlow Clowes was not a trustee of those funds but beneficially entitled to them, and subject only to a contractual obligation to pay the guaranteed rate of return and to pay back on demand equivalent sums to those invested, he, as the authorised agent of Barlow Clowes, did not appropriate property belonging to another and is, therefore, not guilty of any of the charges of theft. The outstanding question in this appeal is, therefore, whether Barlow Clowes was a trustee of funds invested with it under its Portfolio 28 and Portfolio 68 investment schemes.  [*323]

 

The answer to it is one of law and is to be determined as a matter of construction of the contract to be found in the brochure, including the application form, for each investment scheme.

 

At the close of the Crown’s case counsel for Clowes, Mr Hacking QC, and counsel for Mr Naylor, Mr Glass QC, submitted to the judge that the charges of theft should be withdrawn from the jury. They argued that on a proper construction of the brochure the relationship between Barlow Clowes and each investor was not that of a trustee and beneficiary but simply of a creditor and debtor and that, therefore, there had been no appropriation of property. Their principal argument on the question of construction was that the investment clause in the application form in each brochure did not limit Barlow Clowes to investing funds in British government stock, but also authorised it to invest the funds in, inter alia, the purchase of shares of any public or private company or by lending it to any body or person in the discretion of Barlow Clowes without restriction as to the terms of the loan and with or without security.

 

The judge rejected that submission, ruling that the pre- and post-April 1986 brochure created a relationship of trustee and beneficiary between Barlow Clowes and its investors and that any authority to place moneys other than in British government stock was merely for purposes ancillary to investment in such stock. He said:

 

“The wording of the brochure is only consistent with an agreement on the part of Barlow Clowes to hold investors’ funds in trust and to manage their funds by investment in gilt edged securities. The most significant clause is that which states: ‘All moneys received are held in a designated clients account and the clients are the beneficial owners of all securities purchased on their behalf.’ This wording is unequivocal and wholly incompatible with the defendants’ case that the investors retained no proprietary interest in their money or the securities purchased with it. Also of particular significance is the investment clause in the application form itself. This has to be construed having regard to its context. It does not give Barlow Clowes a mandate to invest clients’ funds in alternative investments to gilts. It authorises Barlow Clowes to buy and sell gilts on the investors’ behalf—a further indication that the gilts belong beneficially to the investors. The clause goes on to deal with what Barlow Clowes are entitled to do with the investors’ funds pending investment in gilts—‘invested funds’. The authority to place funds with the specified bodies ‘whether bearing interest or not’ cannot be read as giving a power to make such placements by way of alternative investment to gilt edged securities. The authority is only given to make such placements as action ancillary to using the funds to buy and sell gilts. There is scope for debate as to the precise nature of the bodies with whom funds could be placed pending investment in gilts, but that question is not of relevance in the present context. What is relevant is that the wording of the investment clause and, in particular, the provision limiting Barlow Clowes’s authority to buying and selling gilts on behalf of the investors, and incidental placement of the funds, reinforces the conclusion that the agreements made provision for the management by Barlow Clowes of investments in which investors would retain a beneficial proprietary interest. This conclusion is further reinforced by reference elsewhere in the brochure to  [*324] Barlow Clowes being specialists in and providing the service of management of gilts to investors making capital investment and to investors’ returns being paid in the form of realised capital gains.”

 

As to the pre-May 1986 brochure and application form (for investment in Portfolio 28), the judge held that the indications of a trust were even stronger in that the application form contained an authority from the investor only “to purchase British government stock on my behalf and thereafter manage the said stock on a fully discretionary basis”; and the brochure assured absolute security because “your portfolio will always be a British government stock or cash”.

 

Mr Hacking, assisted in this court on Chancery aspects by Mr Vos QC, challenged that ruling here, arguing that on a proper construction of the brochure the relationship between Barlow Clowes and its investors was more akin to that of a bank and depositor or creditor and debtor, than to that of trustee and beneficiary. Such relationships are not mutually exclusive: see Barclays Bank Ltd v Quistclose Investments Ltd [1968] 3 All ER 651, [1970] AC 567, but where the bank is not a trustee the relevance of the distinction is that money deposited with a bank becomes the property of the bank, and the depositor has a personal, not a proprietary, remedy against the bank in respect of any failure to repay an equivalent sum to that deposited: see for example Lord Cottenham LC in Foley v Hill (1848) 2 HL Cas 28 at 35-37, [1843-60] All ER Rep 16 at 18-19; and Lord Templeman at Ross v Lord Advocate [1986] 3 All ER 79 at 85, [1986] 1 WLR 1077 at 1084.

 

Counsel for Clowes argued that the terms of the contract between Barlow Clowes and each investor were to be found only in the application form at the end of the brochure, not in the brochure as a whole. They submitted that the remainder of the brochure contained, at most, non-contractual representations to the potential investor, which could not be used as aids to construction of the contract. They contended that the application form in the post-April 1986 brochures, read on its own, contained wide powers of investment which should not be regarded as having been cut down by more restrictive passages in the remaining part of the brochure. They relied in particular upon the words immediately following the initial authorisation to Barlow Clowes to buy and sell British government stock on the investor’s behalf, namely:

 

“and to place any uninvested funds with any bank, local authority, corporation or other body on such terms and conditions as you see fit whether bearing interest or not.”

 

However, and somewhat inconsistently, they sought to rely on the brochure as a whole as an aid to construction of the terms of the application form for the purpose of showing that there was an inherent inconsistency in the nature of the scheme as represented with one that restricted Barlow Clowes to investment of funds placed with it in British government stock. They argued that the representation that Barlow Clowes provided an investment service offering capital gains from the management of British government stock was inconsistent and made impossible by the undertakings of a guaranteed rate of monthly return with a higher expected rate. A feature of British government stock is that its value before maturity fluctuates and that its return, measured against its par value, does not fluctuate, and it is not payable monthly. Counsel submitted, therefore, that it was plain to the reader of the brochure that these  [*325]  investment schemes could only work if Barlow Clowes was not limited to investment of funds in British government stocks or at least was able to mingle the individual investors’ funds to ensure the return to any investor, at the expense of others, of his invested capital and to meet the individual guaranteed returns of interest.

 

Mr Suckling QC for the Crown argued that whether the terms of the contract are to be found in the brochure as a whole or are confined to the application form at the end of it, their effect was to make Barlow Clowes a trustee of the moneys placed with it for investment. He submitted that in fact the contract was to be found in the brochure as a whole.

 

On the question of the approach that the court should take in the construction of the contractual documents here, counsel for Barlow Clowes argued first that the authorities indicate an unwillingness by the courts to construe a relationship of trust in commercial transactions, and, second, that it is unusual for there to be a trust of funds where the transaction in question does not require segregation of such funds. The starting point for both of these propositions is the following passage from the judgment of Channell J in Henry v Hammond [1913] 2 KB 515 at 521:

 

“It is clear that if the terms upon which the person receives the money are that he is bound to keep it separate, either in a bank or elsewhere, and to hand that money so kept as a separate fund to the person entitled to it, then he is a trustee of that money and must hand it over to the person who is his cestui que trust. If on the other hand he is not bound to keep the money separate, but is entitled to mix it with his own money and deal with it as he pleases, and when called upon to hand over an equivalent sum of money, then, in my opinion, he is not a trustee of the money, but merely a debtor. All the authorities seem to me to be consistent with that statement of the law. I agree with the observation of Bramwell L.J. in New Zealand and Australian Land Co. v. Watson ((1881) 7 QBD 1053) when he said that he would be very sorry to see the intricacies and doctrines connected with trusts introduced into commercial transactions.”

 

Those propositions of Channell J have stood the test of time. As to commercial transactions, Bingham J applied them in Neste Oy v Lloyds Bank plc [1983] 2 Lloyd’s Rep 658, where the issue was whether a shipowner’s agent was a trustee of moneys remitted to it by the shipowner for the discharge of harbour expenses. In the course of ruling that the agent was not a trustee, he said (at 665):

 

“I start from a general disinclination, shared with Lord Justice Bramwell and Mr. Justice Channell, to see the intricacies and doctrines connected with trusts introduced into everyday commercial transactions. Sometimes, of course, those principles clearly apply to the commercial transactions in question.”

 

As to segregation of funds, the effect of the authorities seems to be that a requirement to keep moneys separate is normally an indicator that they are impressed with a trust, and that the absence of such a requirement, if there are no other indicators of a trust, normally negatives it. The fact that a transaction contemplates the mingling of funds is, therefore, not necessarily fatal to a trust.

 

Thus, in Burdick v Garrick (1870) LR 5 Ch App 233 an agent, who was entrusted by his principal with funds for the purchase of land or stock, was held  [*326]  to be a trustee of the funds and required to keep them separate from his own money: see also Re Nanwa Gold Mines Ltd [1955] 3 All ER 219, [1955] 1 WLR 1080 where a company which invited subscriptions for an issue of capital on terms that moneys subscribed would be held in a separate account pending issue of stock or refunding, was held to be a trustee of such moneys.

 

Neste Oy v Lloyds Bank is an example of a case which, on its facts, was on the other side of the line. Bingham J cited Henry v Hammond and a number of authorities as establishing the proposition that—

 

“where money was with the consent of the principal paid by agents into a general account containing their own funds the proper inference was that the relationship was one of debtor and creditor, not trustee and beneficiary.” (See [1993] 2 Lloyd’s Rep 658 at 664.)

 

He went on to hold, on the facts of the case, that there was no indication of a trust, whether by way of a requirement on the agent to keep funds separate or otherwise.

 

However, there are other cases which demonstrate that the essential question is to determine, in all the circumstances of the transaction in question, not just the express arrangements as to how money is to be held, but whether it is held on trust: see for example Re Kayford Ltd [1975] 1 All ER 604, [1975] 1 WLR 279, and Hunter v Moss [1993] 1 WLR 934.

 

On the question of the claimed inconsistency of the scheme as offered and represented in the brochure with a restriction of Barlow Clowes’s investment authority to British government stocks, we recognise that the discerning reader should have been alerted by it. However, it does not seem to us that the proper construction of the document is affected by what were in effect false representations as to constancy in value of investors’ capital and of high-guaranteed returns, or by the fact that Barlow Clowes might have had difficulty in honouring those representations. Moreover, as Mr Suckling observed in argument, the inconsistencies relied upon disappear or lose their sharpness if the trust was to hold government stock for investors in a common fund rather than to hold particular stock on trust for each investor. In support of this observation he relied upon the decision of the Court of Appeal in Barlow Clowes International Ltd (in liq) v Vaughan [1992] 4 All ER 22, where the court held that the “first in, first out” rule did not apply to Barlow Clowes investors claiming return of their respective funds since they were to be presumed in the circumstances to have intended to participate in a collective investment scheme by which their money would be mixed together and invested through a common fund. That authority has, we think, to be approached with some caution in these criminal proceedings since it was assumed for the purpose of those civil proceedings that Barlow Clowes held the invested funds on trust. In addition, Dillon LJ and Woolf LJ expressly stated that their decision had no relevance to the criminal proceedings against Clowes and others (see [1992] 4 All ER 22 at 26, 34). However the court’s disclaimer was essentially with regard to the facts giving rise to the criminal proceedings. It examined with some care and was impressed by the inconsistencies of the investment schemes, if regarded as imposing an obligation to return fixed capital and to guarantee a high return to each individual investor in respect of his own individual investment. Its conclusion that what was intended was a common fund held under trust is at least highly persuasive in these proceedings, notwithstanding that it was based on an assumption or concession between  [*327]  the parties that Barlow Clowes was a trustee of investors’ funds. Dillon LJ put his conclusion in this way ([1992] 4 All ER 22 at 30-31):

 

“I find the wording of the documents issued by or on behalf of BCI ambiguous in relation to the nature of the arrangements envisaged under the labels Portfolio 28 and 68. It matters not for present purposes whether the ambiguity was intentional, as a result of a fraudulent desire to confuse investors, or was merely the result of muddleheadedness and confusion in the mind of the draftsman. My conclusion is, however, that what was envisaged was some form of common fund in which all investors would in some way participate. I attach particular importance to the factor of the ‘expected’ as well as the ‘guaranteed’ rate of interest …”

 

Woolf LJ expressed a similar view ([1992] 4 All ER 22 at 41):

 

“With some hesitation I have come to the conclusion that, while it is difficult on the documentation to decide whether the investments were to be made subject to a collective scheme or not, the better view is that they were.”

 

See also per Leggatt LJ (at 44-46).

 

It should be noted that the Court of Appeal, in reaching its conclusion that there was a common trust fund, construed the brochures as a whole, not just the application form. We respectfully agree with that approach. For example, para 5 of the brochure, which provides the means by which the investor may receive his income or capital growth, and para 6 of it, which provides for him to receive monthly statements of the performance of his investment, are plainly contractual terms. In our judgment, the judge was correct to regard the whole brochure in the case of each portfolio investment as a contractual document. However, we agree with Mr Suckling that even if the contract were confined to the application form alone it constituted Barlow Clowes a trustee of moneys invested pursuant to it.

 

As to the application form itself, we regard the following features of it as clear indicators that Barlow Clowes received investment funds on trust to invest them in British government stocks and was authorised to place any such moneys elsewhere only temporarily and pending such investment or re-investment or return to the investors. (1) It required the investor’s cheque to be made payable to an account designated as a “Client Account” of Barlow Clowes. (2) It authorised Barlow Clowes to buy and sell British government stock “on my [ie the investor’s] behalf” on a fully discretionary basis. (3) It did not expressly include in that authorisation the buying and selling of any other form of investment. (4) The ensuing words “and to place any uninvested funds with any bank, local authority, corporation or other body on such terms and conditions as you see fit whether bearing interest or not” are distinguishable from the opening part of the authority as to buying and selling British government stock in the use of the terms “to place” and “uninvested funds”.

 

In our view, the use of these terms makes plain that the purpose of this provision was, as the judge ruled, only to authorise Barlow Clowes “to make such placements as action ancillary to using the funds to buy and sell gilts”. The connecting word “and” at the beginning does not, in our view, act conjunctively to add a second and almost unlimited category of investment to that of buying and selling British government stocks on the investor’s behalf.  [*328] 

 

In particular, it did not authorise the lending of investors’ funds to Clowes personally as a “mini-merchant bank” to treat as his own. Apart from the broader question of construction, neither Barlow Clowes, which was a partnership, nor Clowes, was a corporate body for the purpose of the provision.

 

As to the remainder of the brochure, the following passages, in highlighting the nature of the investment scheme as one for investment in and the management of British government securities for the purpose of capital gain, underline the role of Barlow Clowes as a trustee of funds invested with it for that purpose and for that purpose only. Again, no other form of investment is mentioned:

 

“Portfolio 68 has been created by Barlow Clowes one of the leading specialists in the management of British government securities for private investors. This portfolio provides investors with a high secure income tax efficiency and access to capital at all times.

 

1. A High Return—Portfolio 68 is an investment service offering capital gains from the management of British government securities …

 

2. Security—Security and quality of service are hallmarks of Barlow Clowes. The Group … has become a recognised leader in the development of investment programmes based on British government stock …”

 

The following passage in para 2 of the brochure, also under the heading “Security”, goes to the heart of the relationship proposed, expressly committing Barlow Clowes to placing investors’ funds in a separate, “designated”, account and to treating the investors as beneficial owners, and hence Barlow Clowes as trustees, of such funds:

 

“All moneys received are held in a designated clients account and clients are the beneficial owners of all securities purchased on their behalf …”

 

The following provision as to tax efficiency and tax-free capital gains would be of no effect unless investors’ moneys were invested in British government stocks. Investment in other stocks did not attract such tax benefit:

 

“3. A Tax Efficient Investment—The actual return will be paid in the form of realised capital gains, without the deduction of any tax … UK residents enjoy a personal exemption and, from 2nd July 1986, gains on gilt edged securities are free of capital gains tax.”

 

See also the various references in paras 4, 5 and 6 of the brochure to “your investment”, “your capital investment”, “capital gains” and “our management fee”.

 

In our judgment, the brochure as a whole, not just that part of it containing the application form, constituted the contract.

 

Even if the brochure as a whole were not a contractual document, the contract as contained in the application form fell to be construed by reference to it: see per Lord Wilberforce in Prenn v Simmonds [1971] 3 All ER 237 at 239-242, [1971] 1 WLR 1381 at 1383-1386.

 

The pre-May brochure and application form were, as the judge ruled, even more restrictive in form and, a fortiori, constituted Barlow Clowes a trustee for investors who invested funds before that date in the purchase and management of British government stock.  [*329]

 

The ground of appeal involving the scope of the investment authority relates only to the post-April 1986 brochures and to counts 12 to 16 and 19 to 20 where Clowes’s defence was that his use of investors’ funds was within his investment authority. In the case of counts 10, 17 and 18 his defence was that he was entitled to the moneys as commission or fees. The contention is that if the judge was right to hold that Barlow Clowes was a trustee of the invested moneys, its investment authority was nevertheless not confined to the purchase of British government stocks. Counsel on behalf of Clowes have submitted that the judge was wrong so to construe the contract. They maintained that the judge has incorrectly treated the term “uninvested funds” in the application form as meaning that Barlow Clowes could only place such funds elsewhere temporarily while waiting to invest in British government stocks. They submitted that when the two parts of the authority in the application form are read together it is clear that it gave Barlow Clowes authority to invest in British government stocks or in any body on such terms as it saw fit. In formulating the argument in that way, counsel have themselves misstated the effect of the authority. As we have already pointed out, its scheme is to authorise Barlow Clowes “to buy and sell”, ie invest in, British government stocks on behalf of the investor and “to place”, not to invest, “any uninvested funds’ elsewhere.

 

An important part in our reasoning thus far is that Barlow Clowes received investment funds for the specific purpose of purchasing British government stock and that the judge was correct in construing the authority as entitling the placement of funds elsewhere only temporarily and as incidental or ancillary to investment in such stock.

 

However, counsel for Clowes pointed for the liberal interpretation now given to trustees’ powers of investment. They have referred us to a passage to that effect in Snell’s Principles of Equity (29th edn, 1990) p 225, and have cited as examples of that approach Re Harari’s Settlement Trusts [1949] 1 All ER 430 per Jenkins J, Re Douglas’ Will Trusts [1959] 3 All ER 785, [1959] 1 WLR 744 per Vaisey J, Re Kolb’s Will Trusts [1961] 3 All ER 811, [1962] 1 Ch 531 per Cross J and ss 1(3) and 3(1) of the Trustee Investments Act 1961, which widened the investment powers of trustees.

 

In support of their contention for a broader interpretation than that of limiting the investment authority to British government stocks, counsel for Clowes focused on the words “corporation or any other body” in the second part of the authority in the application “and to place any uninvested funds with any bank, local authority, corporation or other body on such terms and conditions as you see fit …” including those companies in which Barlow Clowes used the moneys to buy shares (as in the transactions the subjects of counts 13 to 16), and any unincorporated body such as the partnership of Barlow Clowes itself.

 

In so submitting, they also relied upon an indication of Buckley J in Re Stanley [1905] 1 Ch 131, in construing an investment clause referring to “any corporation or company”, that the two terms were indistinguishable. They also referred to definitions of the word “corporation” in Words and Phrases Legally Defined (3rd edn, 1988) vol 1, pp 353-354.

 

In our view, the words “corporation or other body” in the second part of the post-April 1986 authority cannot be construed under a spotlight in this way. They have to be considered in the context of the whole authority which, as we  [*329]  have said, makes plain that its sole purpose was for the investment of funds in British government stocks with authority, as ancillary to that purpose to place any uninvested funds temporarily elsewhere. The purchase of shares in companies fits neither the nature of investment authorised nor the ancillary function of temporary placement of uninvested funds. In our judgment, this ground of appeal also fails.

 

We now turn to the issue of dishonesty. It was said that the judge should not have directed the jury as a matter of law that Barlow Clowes held the invested moneys on trust, but should have left it to the jury to determine whether a reasonable and honest person could reasonably have thought that there was no trust. We are told that counsel for Clowes did not suggest to the judge that he should not so direct the jury in the course of his summing up. We are also told that the judge, before doing so, submitted the passages of his proposed direction to all counsel for comment, and that counsel for the appellants did not object.

 

Counsel for Clowes, in argument, elaborated upon this complaint in the following way. They said that Clowes’s belief in his entitlement to use the invested moneys in a variety of ways was fundamental to his defence and that the judge prejudiced that defence by directing the jury that he was not, in law, entitled to use the moneys in that way.

 

In our judgment, this submission is unsound. It was a question of law, not a question of fact, what legal relationship was created between Barlow Clowes and its investors when they invested moneys with it under its Portfolios 28 and 68 investment schemes: see for example Stephens v R (1978) 139 CLR 315, a decision of the High Court of Australia, in particular the judgment of Barwick CJ (at 322), cited with approval by Watkins LJ, giving the judgment of the court, in R v Spens [1991] 4 All ER 421, [1991] 1 WLR 624 at 632, a criminal case concerning the construction of the City Code on Take-Overs and Mergers. In R v Spens the Court of Appeal held that the construction of a contractual document is a matter of law for the judge, not a question of fact for the jury, to decide. Watkins LJ said ([1991] 4 All ER 421 at 428, [1991] 1 WLR 624 at 632):

 

“… the construction of documents in the general sense is a matter of fact for determination by the jury. From that generality there must of course be excluded binding agreements between one party and another and all forms of parliamentary and local government legislation, in respect of which the process of construction by the judge is indispensable.”

 

Here, the answer to the question of law whether Barlow Clowes was a trustee of the invested funds depended on one, but only one, of the constituents of each charge of theft against Clowes, namely whether he had appropriated property belonging to another. The central question of fact for the jury was whether, in dealing with funds in such a way that in law amounted to appropriating investors’ funds, he acted dishonestly.

 

Now in one sense it might be argued that whether he was dishonest depended upon whether he knew that in law he was a trustee of the investors’ funds and had appropriated their funds. Where, as here, the question of law was open to argument among lawyers it could have been very difficult, if not impossible, to make a jury sure that Clowes, a layman, had reached such a conclusion of law.

 

However, dishonesty is an ingredient of many offences and does not necessarily depend upon a correct understanding by an accused of all the legal  [*331]  implications of the particular offence with which he is charged. The test is that laid down by this court in R v Ghosh [1982] 2 All ER 689, [1982] QB 1053, namely whether the accused was acting dishonestly by the standards of ordinary and decent people and, if so, whether he himself must have realised that what he was doing was, by those standards, dishonest.

 

In the recent case of R v Lightfoot (1992) Times, 3 November this court emphasised the clear distinction between an accused’s knowledge of the law and his appreciation that he was doing something which, by the ordinary standards of reasonable and honest people, would be regarded as dishonest. The fact that he did not know what was criminal and what was not or that he did not understand the relevant principles of the civil law could not save him from conviction if what he did, coupled with his state of mind, satisfied the elements of the crime of which he was accused.

 

In the Australian case of Stephens v R, a case of criminal conversion, the issue for the jury was very similar to that before the jury here, namely whether there had been an “entrusting” of money to the appellant. Jacobs J distinguished between the judicial task of deciding the legal effect of the transaction and the factual task for the jury in deciding fraud or dishonesty. He said (1978) 139 CLR 315 at 336-337):

 

“… once it was established that the moneys the subject of the charge were paid pursuant to the terms of the written contract the question whether or not there was an ‘entrusting’ depended upon the construction of that written contract. This was a question of law for the presiding judge. However, this does not mean that guilt or innocence turned substantially upon the construction of an obscurely worded instrument. The real question for the jury was whether the applicant had fraudulently converted the money. For him to be guilty of fraud knowledge that he was not entitled to treat the money as his own was a necessary element. The jury clearly found that he had the knowledge and belief. He would not have been guilty of fraudulent conversion if he had not had that knowledge and belief but once it is held that in law he was entrusted with the moneys and it having been found that in fact he knew and believed that this was so the offence was duly proved to have been committed.”

 

Counsel for Clowes sought to distinguish R v Spens [1991] 4 All ER 421, [1991] 1 WLR 624. They submitted, in reliance on R v Adams (1993) Times, 28 January, a decision of this court, that where the meaning of a contractual document is central to the question of guilt or innocence it is a matter for construction by the jury. This line of argument is misconceived for two reasons: first because R v Adams concerned an alleged false representation in an application to hire a car, not, as here, the meaning and legal consequence of a contractual document; and second, because the construction of the contractual document here, though critical to establishing one of the ingredients of theft, was not central to the issue which the judge left to the jury, namely whether Clowes had been dishonest. The two issues were quite distinct and, as will appear, the judge kept them distinct.

 

It was for the judge to direct the jury as a matter of law, as he did, that Clowes’s conduct amounted to the appropriation of the property of the investors, and for the jury to determine as a question of fact whether, whatever his own legal interpretation of the relationship between Barlow Clowes and its investors, he was acting dishonestly.  [*332]

 

The judge first referred to the issue of dishonesty towards the beginning of his summing up in his directions on the law as to the constituents of the various charges of theft in the indictment. He gave them the classic Ghosh direction in the following passage:

 

“… The first hurdle that the prosecution have to cross in proving that a defendant was dishonest is to satisfy you that the defendant knew that the funds he was helping to transfer were in whole or in part investors’ funds. That is funds sent in to Barlow Clowes by investors in P28 or P68. If the prosecution get over that hurdle, they then have to satisfy you that the defendant knew that the investors’ funds were being transferred in a way that according to the ordinary standards of reasonable and honest people was dishonest and that the defendant was aware of this. If the prosecution satisfy you of both those matters, then it will [be] open to you to conclude that the defendant was acting dishonestly. Let me just illustrate how that works in the case of the defendants. Mr Clowes has told you that he knew about and authorised most of the transfers. He has told you that he knew that the funds had come from investors in P28 and P68. So, in his case the prosecution have no difficulty in getting over their first hurdle.”

 

It is plain that, in his reference in this passage to “investors’ funds’ and in his description of them as “funds sent in to Barlow Clowes by investors in P28 and P68”, the judge was not inviting the jury to approach the question of dishonesty by first forming a view as to Clowes’s state of knowledge as to the beneficial ownership of the funds. That is also plain from the way in which the judge continued with his illustration:

 

“But Mr Clowes has told you that he believed that each transfer that he authorised was a proper transfer. He has told you that he believed that the contracts authorised him to take over the funds as a mini merchant bank and invest them as he pleased. In some cases he has told you that he believed he was personally entitled to the funds transferred as commission. If Mr Clowes genuinely held these beliefs, he was not dishonest in authorising the transfers and he was not guilty of theft. You are not guilty of theft if you take someone else’s property in the mistaken belief that he has authorised you to do so. It is not for Mr Clowes to satisfy you that he believed he was entitled to make transfers. It is for the prosecution to satisfy you that he had no such belief.”

 

The judge first referred to his ruling on the issue of appropriation while dealing with the allegations in counts 1 to 9 that the brochures were misleading so as to contravene s 13(1) of the Prevention of Fraud (Investments) Act 1958. He said:

 

“Mr Clowes told you that he believed that [the post-April 1986] investment clause entitled him to use investor’s money in the way that he did. I have ruled that, as a matter of law, it did not. But what that clause did or did not permit as a matter of law is not the question that you have to consider when looking at counts 2 to 9.”

 

He returned to the matter again at the start of his treatment of the respective cases of the Crown and the defence on the counts of theft, though he did so  [*333]  only shortly and in the course of his direction on the issue of dishonesty. He said:

 

“The important question you are going to have to consider so far as Mr Clowes is concerned in relation to each count is: did he act dishonestly in procuring the transfer in question? … You can only convict Mr Clowes of theft if you are sure he knew very well he could not use investors’ funds in the way that he did. How do you decide that question? How do you decide what Mr Clowes believed he was entitled to do? Well, the starting point, I suggest, is to consider precisely what it was that Mr Clowes said he thought he was entitled to do and why and ask yourselves how likely is it that any reasonable intelligent businessman could hold such a belief. The second stage is to examine how Mr Clowes behaved—what he said and did—and see whether that is the behaviour of a man who honestly held the belief that Mr Clowes says he did. What was it that Mr Clowes said he was entitled to do with investors’ money? He recognised, did he not, that what he was entitled to do with the money depended upon the legal effect of the brochures, depended on the legal contracts spelt out in the brochures? I have told you what the legal effect was—the contracts required Barlow Clowes to use investors’ money to buy and sell gilts. The investors would own the gilts and the investors would be entitled to any gains made by buying and selling the gilts. In between selling and buying the gilts, Barlow Clowes could hold the investors’ funds on deposit but only as an incidental step to dealing in gilts. What was it Mr Clowes said he thought the contracts entitled Barlow Clowes to do? He said they entitled Barlow Clowes to take a policy decision not to buy any gilts at all, but to place the investors’ money permanently on deposit … His evidence was, I think, that [the post-April 1986 wider investment clause] was put in to remove any possible doubt as to the right of Barlow Clowes to lend investors’ money and to lend it to himself. I have told you that as a matter of law that wider investment clause did not confer on Barlow Clowes any such right. The question you have to consider is whether it is possible that Mr Clowes honestly believed that this clause entitled him to use investors’ money for the purpose of his investment policy.” (Our emphasis.)

 

In our judgment, the judge, in these passages kept quite separate the matter of appropriation, upon which he had directed them as a matter of law, and the question of dishonesty which he left for them to decide in accordance with his direction based on Ghosh. The jury can have been in no doubt that the central question for it on the counts of theft was one of dishonesty and that the answer to that question did not depend upon who was the beneficial owner of the invested funds or the ambit of the investment authority or on the judge’s ruling on those matters in the trial.

 

Counsel for Clowes suggested that even if the judge was entitled to direct the jury as to the effect in law of the brochures, he did so in such a way as to undermine Clowes’s case as to his understanding of what they entitled him to do with the invested moneys. In our view, it is plain from the passages from the judge’s summing up that we have set out that there is no substance in this complaint. As we have already said, he kept the two issues distinct and did not suggest that they should decide the question of dishonesty against Clowes on the basis of his, the judge’s, interpretation of the contracts. He properly and accurately directed the jury how they should approach the question of  [*334]  dishonesty. As to the subjective part of the test, he directed them carefully to consider Clowes’s own state of mind as to what he could do with the invested funds and the legal advice that he had received which was relevant to that belief.

 

We must now deal with the Clyde & Co questionnaire. The judge’s refusal to permit to be put in evidence before the jury the response to a questionnaire sent by Clyde & Co, solicitors for the Department of Trade acting on their behalf in civil proceedings against Barlow Clowes, is the subject of complaint. Question 42 of that questionnaire read:

 

“What advice, if any, did your financial advisor provide as to the extent of Barlow Clowes’s discretion to invest your money? [In some portfolios, Barlow Clowes had a discretion to place money in any body they chose and not simply in government gilt-edged stocks.]”

 

Counsel for Clowes submitted to the judge that the fact that Clyde & Co, as solicitors, had expressed in that question the view that Barlow Clowes had not been confined to investing funds in government stocks was relevant to the objective part of the Ghosh test for the jury’s decision, namely whether a reasonable person could have held that belief. The judge refused to admit the evidence, saying that the issue of the legal effect of the documents was a matter of law for him and that the opinion of another lawyer on that issue was not, therefore, admissible as a matter of evidence.

 

Counsel for Clowes now argue that, in the light of the objective part of the Ghosh direction that the judge later gave to the jury in his summing-up, for example, whether “any reasonable intelligent businessman” could have believed that he was contractually entitled to act as he did, his refusal to admit that evidence was wrong.

 

In our view, that submission is misconceived. As counsel for the Crown observed in their skeleton argument, the issue for the jury was the state of mind of Clowes at the time of the alleged thefts. The evidence of a lawyer of his understanding of the investment powers of Barlow Clowes would have been relevant and admissible, albeit not in the form of a questionnaire, if he had so advised Clowes at the time of the transactions in question. However, the understanding of a lawyer drafting a questionnaire after the events, which may or may not have been a considered or reasonable view of the matter, could not assist the jury, and certainly not in the form of the questionnaire. In any event, the understanding of the draftsman of the questionnaire as to Clowes’s investment powers clearly did not extend to his lending investors’ funds to himself. Further, regardless of Clowes’s exact views as to his investment powers, there was overwhelming evidence before the jury that he did not honestly believe that he was entitled to make the transfers, the subjects of the charges of theft. Accordingly, we also reject this ground of appeal. The appeal of Clowes against conviction therefore fails.

 

We now proceed to examine the appeal of Naylor. Put precisely, the accusation against him, count 11, was that on 17 April 1985 he stole a chose in action, namely a debt constituted by a credit in the sum of £19,000 held upon an account in the name of Barlow Clowes and Partners Funding Clients Premium Deposit Account at the Midland Bank, Threadneedle Street belonging to the clients of Peter Clowes trading as Barlow Clowes and Partners.  [*335]

 

For the purposes of this appeal, Mr Glass, who was assisted upon Chancery aspects in this court by Mr Barlow, did not dispute that Naylor had acted dishonestly.

 

JER 54 was a mixed account, consisting in part of money contributed by clients of Barlow Clowes (the investors’ funds) and in part of money coming from other sources (the non-investors’ funds). It was common ground at the trial that the non-investors’ funds were funds belonging to Barlow Clowes. The distinction between count 11 and other counts was that at the time Naylor withdrew the £19,000 from JER 54 the non-investors’ funds exceeded £19,000. It was submitted on behalf of Naylor that the £19,000 withdrawn by him was not, in the circumstances, property belonging to clients of Barlow Clowes but to Barlow Clowes itself and that Naylor could not, therefore, be guilty of the offence with which he was charged.

 

In the course of his ruling the judge referred to Chitty on Contracts (26th edn, 1990) para 2093, p 1370 where it is stated:

 

“Identifying property in equity. Equity may trace property beyond ‘the verge of actual identification’ [Sinclair v Brougham [1914] AC 398 at 459, [1914-1915] All ER Rep 622 at 652] into any specific asset purchased with it, or into a bank account even when it is mixed with other moneys; ‘… equity regarded the amalgam as capable, in proper circumstances, of being resolved into its component parts.’ [See Re Diplock’s Estate, Diplock v Wintle [1948] 2 All ER 318 at 346, [1948] Ch 465 at 520, CA.] Accordingly, if the trustee mixes his own money with the trust money, the beneficiary can claim a first charge on the mixed fund, or on any asset purchased with the mixed fund. If the trustee mixes the trust funds of two separate trusts, there is an equal equity in each beneficiary, so that the separate beneficiaries can trace and share pari passu, or enjoy pari passu any equitable lien or charge on an asset purchased with the mixed fund. (Any equitable charge may be enforced ultimately by sale of the assets.) If the trust money is received by a volunteer who then mixes it with his own money, the beneficiary may again trace the property, claiming a declaration of charge if necessary, but he must share the fund (or any asset purchased therewith) pari passu with the volunteer.”

 

Having referred to the principal authorities in support of that passage he then continued:

 

“It follows on the application of these principles, that investors had equitable interests in both the accounts and the withdrawals made from those accounts. Those interests, in my judgment, constituted proprietary rights or interests within s 5(1) of the Theft Act 1968. Difficult problems arise in practice in identifying which investors had interests in which accounts, and the extent of their interests, but those are problems for the civil court, not the criminal court. The prosecution have to prove simply that investors had an interest in the relevant funds. They do not have to identify those investors. I was at one time concerned with whether the complex rules of equity as to tracing might, on the evidence adduced by the prosecution, leave open the possibility that the withdrawal alleged to have been made by Dr Naylor, which forms the subject matter of count 11, could be deemed to be withdrawal exclusively of non-investors’ funds in which investors had no equitable interest. I am satisfied, however, having  [*336]  particular regard to the case of Re Oatway [1903] 2 Ch 356, that if the prosecution establishes that Dr Naylor dishonestly made the withdrawal in question the withdrawal will have been subject to an equitable charge in favour of investors which constituted a sufficient interest on their part to satisfy s 5(1) of the Theft Act 1968.”

 

On the 68th day of the trial counsel for the Crown, foreseeing an argument that if the £19,000 belonged to Barlow Clowes rather than the investors, Naylor would not be guilty of the offence as charged, applied for leave to amend count 11 to allege ownership in the alternative. Mr Glass opposed the amendment and the judge refused to allow it. His reason was that the whole thrust of the Crown’s case had throughout been that Naylor and Clowes were acting in unison in stealing investors’ money.

 

We can see why the judge took this view but he might well have allowed the amendment which would have caused no prejudice to Naylor, and thereby avoided the issue that has arisen on this count.

 

Mr Glass advanced an interesting argument based on the decision in Re Hallett’s Estates (1880) 13 Ch D 696, [1874-80] All ER Rep 793 contending that where, as here, a trustee adds his own money to an account containing trust money and makes a withdrawal from that account for his own purposes he is deemed to draw out his own money first leaving the trust money intact. This authority, he contended, rather than Oatway, which was relied on by the judge, was to be followed in the present case.

 

In our view, however, there is much force in Mr Suckling’s response that Hallett and Oatway and similar cases are concerned with tracing assets and the enforcement of beneficiaries and interests. They illustrate that equity assists a beneficiary against a defaulting trustee. As Ungoed-Thomas J pointed out in Re Tilley’s Will Trusts [1967] 2 All ER 303 at 306, [1967] 1 Ch 1179 at 1183C, if a trustee mixes trust assets with his own, the onus is on the trustee to distinguish the separate assets, and to the extent that he fails to do so they belong to the trust. In the present case the court is concerned not with tracing assets and the enforcement of beneficial interests but with the meaning of s 5(1) of the 1968 Act.

 

Where a trustee mixes trust money with his own, as was the case with the money in account JER 54, the beneficiaries are entitled to a first charge on the mixed fund: see Snell’s Principles of Equity (29th edn, 1990) p 303 and the passage from Chitty on Contracts that was cited by the judge in his ruling. Thus at the moment Naylor removed the £19,000 he was taking something in which the investors had an equitable interest. What was taken falls in our view four square within the definition of property belonging to another under s 5(1) of the 1968 Act. The judge’s ruling at the close of the Crown case was correct and, because Naylor took the money dishonestly, he was guilty of theft. His appeal also against conviction fails.

 

Appeals dismissed.