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UK investors fail to establish trust rights over sole-trader inventor's assets

Monday, 12 February, 2018

An inventor working as a sole trader did not create a trust in favour of investors who supported him in his work, the England and Wales Court of Appeal has decided.

John North was an innovative engineer who invented, among other things, a kind of drill that could be used in the manufacture of domestic appliances. This invention was eventually commercialised by Electrolux, although North had to sue the company to realise the more than USD17 million he was owed for it.

His work in developing this device had been largely funded by nine investors, who all claimed that they had backed him with significant sums, in return for undertakings that they would each receive back six times their initial investment (the 'uplift'), plus a percentage equity position in his business. However, though North did pay them their uplift, he did not pay them anything in respect of their claimed equity positions.

In court the investors produced letters written to them by John North, which they claim create trusts in their favour and entitle them to a share of his assets. Their claim was at first granted in the England and Wales High Court in 2016, where Pelling HHJ held 'with some hesitation' that North had validly created trusts in favour of the claimants, and granted them a default judgment against North for GBP2 million, which he failed to pay. He sought and obtained leave to appeal this decision. He has since died, and his two sons conducted the appeal.

The Appeal Court reversed the previous High Court decision. It noted that no-one had been able to find any previous court case addressing a trust created by a sole trader of a share of his business. Nor has any discussion of such a trust been found in any textbook or precedents book. Even if such a trust is possible, said Richards LJ, it would raises significant issues, which one would expect to be addressed by anyone proposing to create such a trust – for example, whether the investors were to be entitled to shares of the gross assets without taking into account liabilities; or how the business was to be managed and by whom; or the shareholders' rights to withdraw their shares.

'The language of the [Agreement] is simply inapposite to create a trust, all the more so in the light of the considerations rehearsed above', commented Richards. He duly decided that North's letters to his investors did not address the issues raised by such a trust and did not contain any relevant wording (North v Wilkinson, 2018 EWCA Civ 161). He duly allowed North's sons', appeal and overturned the High Court's award to the claimants.