Shalson & Ors v Russo & Ors

A contract induced by fraud is ordinarily voidable, not void. The recipient owns money paid under it unless and until the representee rescinds. Rescission may revest an equitable proprietary interest sufficient to support tracing, subject to intervening rights acquired by a good-faith purchaser for value without notice.

A stated purpose for a loan does not itself create a Quistclose trust. Nor does a joint venturer owe personal fiduciary duties concerning money which, by agreement, became the property of the corporate vehicle. Tracing cannot proceed through an overdrawn bank account, and separate deposit accounts cannot be artificially consolidated to create a traceable asset.

A settlement is not a sham merely because a settlor intended to retain control. The necessary common intention must be shared by the trustee.

Mr Mimran claimed to trace US$7.5 million advanced to Westland Portfolio Ltd, a joint-venture company operated in practice by Mr Russo, into the motor yacht Mosaique, the Edenton loans, or an Edenton share. The advances had been procured by Mr Russo’s fraud and paid through Westbond International Bank Ltd (WIB) into its account with PKB.

Mr Mimran also sought personal relief against Mr Russo and WIB, challenged securities granted by Mr Russo to Mr Shalson, and alleged that the Brookscastle settlement administered by Cantrust was a sham. The court had to determine whether rescission gave Mr Mimran a proprietary base for tracing, whether any traceable asset remained, and whether the trustee shared an intention that the settlement should operate differently from its terms.

1. The tracing claim failed. Fraudulently induced loan contracts were voidable, not void. Westland therefore received legal and beneficial ownership of the advances when made. The Part 20 claim nevertheless amounted to an implied rescission. It revested in Mr Mimran an equitable interest sufficient, in principle, to support tracing.

2. No immediate constructive trust arose merely from Mr Russo’s fraud. Nor was there a Quistclose trust: the evidence showed an expectation that Westland would make property investments, not an agreement that the advances were segregated or held on trust. Any fiduciary duties concerning Westland’s money were owed to Westland, not personally to Mr Mimran.

3. WIB was fixed with Mr Russo’s knowledge of the fraud and its false account entries. Mr Mimran could therefore, in principle, trace into WIB’s PKB account. But its current account could not be consolidated with separate deposit accounts. Save for US$899,702 created by the first payment, the advances merely reduced an overdraft. An overdrawn account is a liability, not an asset into which money can be traced.

4. Any interest potentially traceable into the Hamilton loans to Edenton was defeated because Mr Shalson took his charge as a good-faith purchaser for value without notice. The funds did not give Mr Mimran a proprietary interest in the Mosaique or the Hamilton share. The claim under section 423 of the Insolvency Act 1986 also failed: granting security for an existing debt did not deplete Mr Russo’s assets or constitute a transaction at an undervalue.

5. The Brookscastle settlement was not a sham. Applying Snook v London and West Riding Investments Ltd [1967] 2 QB 786, a sham requires a common intention between the relevant parties. Cantrust honestly intended to create and administer a genuine settlement and did not share any contrary intention of Mr Russo.

6. Mr Mimran obtained judgment against Mr Russo for US$8.5 million plus interest, US$2.5 million plus interest, and US$7.5 million damages plus interest. He also obtained judgment against WIB for US$7.5 million damages plus interest. Oceanwave’s claim against WIB, the tracing and section 423 claims, and the claim against Cantrust were dismissed.

not stated in the judgment.