Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd

A fiduciary’s unauthorised gain is subject to a proprietary claim only where the gain derives from property beneficially owned by the claimant or from an opportunity or right properly belonging to the claimant. Other gains obtained through the fiduciary position attract a personal equitable account.

Where a fiduciary mixes trust money with its own money, the fiduciary bears the burden of identifying what belongs to it. Constructive notice depends on the facts actually or constructively known and the legal consequences which the recipient knew or reasonably ought to have appreciated. Knowledge of facts or of a claim does not automatically amount to notice of a proprietary right.

Sinclair Investments (UK) Ltd, as assignee of claims belonging to Trading Partners Ltd and its investors, claimed proprietary interests arising from a fraudulent cross-firing scheme operated through Versailles Trade Finance Ltd. It claimed the proceeds of shares sold by a defaulting fiduciary and money entrusted to Versailles Trade Finance Ltd which had been mixed with that company’s funds.

Lewison J, in [2010] EWHC 1614 (Ch), rejected the claim to the share-sale proceeds but upheld the mixed-fund claim to a limited extent. Sinclair appealed and the respondents cross-appealed. The principal issues concerned the distinction between proprietary and personal remedies for fiduciary gains, constructive notice, tracing through an inextricably mixed fund, tax repayments and the calculation of the recoverable capital.

1. The appeal and cross-appeal were dismissed. A beneficiary has no proprietary interest in an unauthorised gain received by a fiduciary merely because the gain resulted from a breach of fiduciary duty. A proprietary interest arises where the asset was beneficially the claimant’s property, derived from such property, or resulted from an opportunity or right properly belonging to the claimant. Otherwise the remedy is a personal equitable account. The proceeds of the shares therefore did not belong beneficially to Trading Partners Ltd and could not be traced into the Kensington property.

2. The court followed the domestic line represented by Metropolitan Bank v Heiron, Lister & Co v Stubbs and later Court of Appeal decisions. It declined to follow the contrary Privy Council approach in Attorney-General for Hong Kong v Reid. A Privy Council decision does not ordinarily permit the Court of Appeal to disregard its own binding decisions unless it is effectively certain that the Supreme Court would adopt the Privy Council’s approach.

3. Constructive notice requires consideration of the facts known to the recipient, the inquiries or advice reasonably required of a person with the recipient’s attributes, and whether the transaction or proprietary right was or should have been recognised as probably improper. Knowledge of facts does not automatically impute knowledge of their legal consequences. Nor is notice of a claim necessarily notice of a proprietary right. On the assumed existence of a proprietary claim to the share proceeds, the banks and Versailles Trade Finance Ltd nevertheless received the relevant payments as purchasers for value without notice.

4. Trading Partners Ltd retained a proprietary interest in money entrusted to Versailles Trade Finance Ltd. Inextricable mixing by a defaulting fiduciary did not destroy that interest. Once trust money was shown to have entered the mixed fund, Versailles Trade Finance Ltd bore the burden, on the balance of probabilities, of identifying money which was its own. The banks lacked notice during the earlier distributions but had sufficient notice of the mixed-fund claim by 10 July 2001.

5. The proprietary interest extended to repayments of overpaid VAT and corporation tax. Payment of corporation tax carried a contingent right to make a claim under section 10(3) of the Income and Corporation Taxes Act 1988. Finally, purported profit distributions from a business which made no profits, and the later £1.75 million payment, were properly treated as repayments of capital.

1. Court of Appeal (Civil Division): The appeal and cross-appeal were dismissed unanimously: [2011] EWCA Civ 347.

2. High Court, Chancery Division: Lewison J rejected the proprietary claim to the share-sale proceeds but upheld, to a limited extent, the proprietary claim to the mixed fund: [2010] EWHC 1614 (Ch).