Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd & Ors

A fiduciary’s unauthorised profit does not automatically become trust property. The decisive question is whether the fiduciary had pre-existing fiduciary duties concerning the specific property in issue. If so, the claimant may have a proprietary remedy. If the duty arises only from the transaction being impugned, the claim is ordinarily personal.

Where an equitable proprietary interest is asserted against a purchaser, the relevant defence is absence of notice, not unconscionability. Notice may be actual or constructive and includes notice of the relevant facts and the applicable law. In a commercial context, constructive notice requires circumstances making it obvious that the transaction was probably improper.

The claimant, as assignee of Trading Partners Ltd, sought to recover assets arising from the collapse of the Versailles Group. It claimed that funds advanced by traders had been misapplied by Versailles Trade Finance Ltd and that the proceeds of a share sale by Mr Cushnie were held on constructive trust for Trading Partners Ltd.

The claimant also sought to trace traders’ money into a mixed fund and subsequent recoveries held by the administrative receivers or distributed to the defendant banks. The central issues were whether the share-sale proceeds were subject to a proprietary claim, whether the mixed-fund claim succeeded, and whether the banks were purchasers for value without notice.

1. Share-sale proceeds. The claim to the profit realised by Mr Cushnie on selling shares in Versailles Group plc was personal only. He had acquired the shares before Trading Partners Ltd existed and had no pre-existing trustee-like duties concerning those shares. The case therefore fell within the second class of constructive-trust cases, where the liability arises from the impugned transaction and is a liability to account in equity. The proceeds could not be traced as trust property.
2. Two classes of case. A true trust exists where the defendant assumed pre-existing fiduciary duties concerning the specific property. The claimant may then enforce proprietary rights. Where the fiduciary obligation concerning the property arises only from the transaction complained of, the constructive-trust terminology merely expresses a personal equitable liability.
3. Notice. The defence of purchaser for value without notice concerns notice of an equitable right, not merely notice of a claim. It includes actual and constructive notice of the facts and the applicable law. The proper steps required to avoid constructive notice depend on context. In commercial dealings, the facts must make it obvious that the transaction was probably improper.
4. Mixed fund. The management agreement made Versailles Trade Finance Ltd a fiduciary in relation to Trading Partners Ltd’s money. Its use of that money in the cross-firing fraud breached fiduciary duty. Trading Partners Ltd was entitled in principle to trace the mixed fund into book debts, tax repayments and recoveries from Mr Clough and related companies. The evidential burden lay on the receivers to show that a receipt could not represent the mixed fund or an identifiable substitute.
5. The banks’ lending relationship did not make them beneficial contributors to the mixed fund. They were secured creditors, not beneficiaries. Trading Partners Ltd’s proprietary claim was therefore not rateably reduced by the banks’ claims.
6. The proprietary claim to the share-sale proceeds failed. The mixed-fund claim succeeded only for distributions made on or after 26 September 2001, to the extent that the distributions derived from the mixed fund or its substitutes, and subject to Trading Partners Ltd’s net loss. Further directions were required for quantification.

First-instance decision. The judge indicated that permission to appeal would be considered if sought.