Bank of Ireland v Pexxnet Ltd. Maxximmo AG & Ors

Money obtained by fraud is held by the fraudulent recipient on constructive trust and may be recovered and traced in equity. Where funds are transferred through successive recipients with knowledge of the fraud, the constructive trust continues to attach to the identifiable proceeds. The proper law of the trust may be English where the relevant payment and receipt occurred in England, even if the proceeds are later transferred abroad. A recipient who knowingly receives fraudulently obtained funds cannot retain them. The court may also grant restitutionary relief where the alternative applicable law provides an unjust-enrichment remedy.

The Bank credited €2,400,000 to Pexxnet’s account against three instruments deposited for collection. The instruments were forged. Pexxnet transferred €2,225,000 to Montres Lunesa’s Swiss bank account, while €116,000 was transferred to its principal. The defendants were debarred from defending after failing to comply with procedural orders.

The Bank claimed damages for conspiracy to defraud and proprietary relief based on constructive trust. The issues included whether the defendants had knowingly participated in a fraud, whether the money was held on constructive trust, which law governed Montres Lunesa’s receipt of the funds, and whether Swiss law provided an alternative restitutionary remedy.

1. Conspiracy and liability. The evidence established that all defendants were knowingly involved in a dishonest conspiracy to defraud the Bank by presenting forged instruments. The explanations concerning the scrap-metal transactions and the purported commission and silent-partnership agreements were false and commercially incredible. The defendants were therefore jointly and severally liable.
2. Constructive trust under English law. Applying the principles summarised in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 and Commerzbank v IMB Morgan [2004] EWHC 2771 (Ch), the money credited to Pexxnet was held on constructive trust for the Bank. Property obtained by fraud is recoverable and traceable in equity.
3. Successive receipt and conflict of laws. By parity with Trustor AB v Smallbone (No 3) [2000] EWCA Civ 150, English law governed the constructive trust arising from the payment and receipt in England. Montres Lunesa received the money with full knowledge of the fraud and held the transferred proceeds subject to the same trust. English tracing principles treated non-trust money as paid out first, leaving €2,138,550.96, plus interest, subject to the Bank’s proprietary claim.
4. Alternative Swiss-law analysis. Even if Swiss law governed Montres Lunesa’s position, the court was satisfied that restitution would be available under articles 62 and 31 of the Swiss Federal Code of Obligations. The funds were received without valid cause and remained identifiable.
5. Orders. Judgment was entered against all defendants for €2,400,000, with interest at 2% above the Euribor Euro rate from 21 September 2006 to judgment. Montres Lunesa was declared constructive trustee of the remaining funds and ordered to take the necessary steps to repay them. Recovery of those funds would reduce the damages payable.

The judgment is a first-instance decision. The judgment records that procedural applications by Montres Lunesa for relief from sanction and permission to appeal were refused before trial.