Polly Peck International Plc v Asil Nadir (and others)

A Mareva injunction preserves a claimant’s chance of enforcing a future judgment. It does not provide security or prevent ordinary business, payment of debts or professional costs. Against a bank, an order threatening normal banking operations or depositor confidence is especially difficult to justify. Knowing receipt requires knowledge that trust money was received and misapplied. Wilful and reckless failure to make appropriate inquiries may suffice, but whether mere facts putting an honest and reasonable person on inquiry are enough was left open. For an identified fund claimed as proprietary, the American Cyanamid approach applies: arguable case, balance of convenience and, if evenly balanced, relative strength of the case.

Polly Peck International plc, acting through its administrators, claimed that funds had been diverted through IBK to the Central Bank of the Turkish Republic of Northern Cyprus. It alleged constructive trust liability and, later, an equitable tracing claim concerning approximately £8.9 million said to remain in the Central Bank’s hands.

Millett J continued a Mareva injunction after finding an arguable case and a real risk that assets would be removed from the jurisdiction. The Central Bank appealed. The Court of Appeal considered the strength of the constructive trust and tracing claims, the effect of the injunction on the Central Bank’s ordinary banking business and liquidity, and whether a narrower order should preserve the identified fund pending trial.

1. Disposition. Lord Justice Scott delivered the principal judgment. The Master of the Rolls agreed with it, and Lord Justice Stocker agreed with the conclusions and reasons. The appeal was allowed to the extent indicated. The Mareva injunction was discharged, but limited proprietary preservation relief was continued in respect of the £8.9 million fund.
2. Constructive trust claims. Scott LJ distinguished knowing assistance from knowing receipt. Knowing assistance requires something amounting to dishonesty or want of probity by the assister, with knowledge of the fraudulent design capable of being imputed. Knowing receipt does not require a fraudulent misapplication, but requires knowledge that the funds were trust funds and were being misapplied. Actual knowledge suffices. Wilful and reckless failure to make inquiries that an honest and reasonable person would make also suffices. The court left open whether knowledge of facts putting such a person on inquiry, without more, is enough. The mental-state categories discussed in the Baden Delvaux case were not rigid and could merge.
3. On the evidence then available, the Central Bank could have known that the funds were group or Nadir money, but there was no sufficient basis for inferring knowledge that they were specifically PPI’s funds or suspicion of impropriety. The scale of the transfers, the Central Bank’s regulatory role and the subsequent withdrawals did not establish more than a speculative case. The appeal was not a trial of the action.
4. Tracing. For money received in a foreign-currency transaction, PPI had to establish actual or constructive knowledge of its equitable interest. Notice and constructive notice were distinct from knowledge and constructive knowledge. The court endorsed the reluctance to extend constructive notice doctrines to ordinary commercial transactions involving money.
5. Interlocutory relief. A Mareva injunction prevents dissipation or concealment intended to frustrate enforcement of a future judgment. It is not security for the claim and should not interfere with ordinary business, payment of debts or professional costs. The Master of the Rolls emphasised that a de facto central bank could not properly perform its functions under an injunction controlling the way it transacted business, save in unusual circumstances. The [1975] AC 396 approach did not govern Mareva relief.
6. For an identified fund claimed as proprietary relief under Rules of the Supreme Court Order 29, rule 2, the [1975] AC 396 approach did apply. PPI had to show an arguable case, followed by consideration of the balance of convenience and, if evenly balanced, the relative strength of its case. The court declined to restrain all use of the fund, but required it to be earmarked, restricted dealings to the ordinary course of business where no other funds in England were available, and required advance notice and disclosure of relevant reserves. The appellants received their costs here and below on the standard basis.

• Court of Appeal (Civil Division): In [1992] EWCA Civ 3, the appeal was allowed to the extent indicated. The Mareva injunction was discharged, subject to limited proprietary preservation relief.
• High Court: Millett J, on 7 November 1991, continued the Mareva injunction after finding an arguable constructive trust claim and a real risk of removal of assets from the jurisdiction.