Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd

The Court of Appeal considered whether a claimant (treated here as TPL/Sinclair) could assert a proprietary interest in (a) the proceeds of sale of shares sold by a director who had breached fiduciary duties and (b) monies originally entrusted to a trading subsidiary (VTFL) and subsequently mixed with VTFL’s funds. The court confirmed key principles: directors and those in fiduciary positions owe duties of loyalty and must account for unauthorised profits; whether a claimant has a proprietary right is a matter of property law; equitable remedies against a defaulting fiduciary may be personal (equitable account/equitable compensation) rather than proprietary; and successful tracing or following depends on a clear link to the claimant’s property and can be defeated by a bona fide purchaser for value without notice.

Applying those principles, the court held that TPL was not entitled to a proprietary interest in the proceeds of the sale of the VGP shares (that claim gave rise only to a personal equitable remedy) but that TPL did have a limited proprietary claim in respect of monies it had entrusted to VTFL which could be traced into later recoveries from VTFL subject to notice and mixing issues. The Judge’s factual findings on notice and the extent of tracing were upheld.

Background and parties:

• Sinclair Investments (UK) Ltd (having taken assignments of TPL/traders' claims) appealed against part of Lewison J’s judgment in which he rejected a proprietary claim to the proceeds of the sale of certain VGP shares but upheld to a limited extent a proprietary claim to monies originally advanced to VTFL.
• The Versailles group operated what the courts described as a fraudulent Ponzi-like scheme involving 'cross-firing' of funds. Funds came from traders (through TPL) and banks; Mr Cushnie (as controller) and Mr Clough were central figures.

Nature of the claim / relief sought:

• Two principal proprietary claims: (i) that proceeds of sale of shares realised by Mr Cushnie were held on constructive trust for TPL because the profits were the product of breaches of fiduciary duty; and (ii) that monies advanced by TPL to VTFL were held on trust and TPL could trace into VTFL’s mixed funds and into payments made to banks.

Procedural posture:

• Appeal from the Chancery Division (Lewison J, [2010] EWHC 1614 (Ch)). The Court of Appeal heard the appeal and cross-appeal.

Issues framed and reasoning:

• Whether a fiduciary’s unauthorised profit arising from misuse of trust monies (here the inflated market value of VGP and the share-sale proceeds) gives rise to a proprietary interest for the beneficiary or only to a personal equitable remedy. The court examined the distinction between institutional constructive trusts and equitable remedies in cases of fraud or secret profit, and surveyed authority including historical and more recent decisions (e.g. Lister, Heiron, Reid, Foskett).
• Whether the banks and VTFL could defeat any proprietary claim by establishing that they were bona fide purchasers for value without notice; the standard for constructive notice was considered (actual vs constructive notice, what facts would put a reasonable recipient on inquiry).
• Whether tracing into VTFL’s mixed accounts was possible given extensive mixing (the 'maelstrom' or 'black hole') and, if tracing was possible, the extent of recoverable sums including tax recoveries.

Decision:

• The Court of Appeal upheld Lewison J’s primary conclusions: (i) the claim to the proceeds of the share sale was a personal equitable claim, not a proprietary right; (ii) TPL did have a proprietary interest in the monies entrusted to VTFL and could trace into recoveries from VTFL but only to a limited extent because of notice, mixing and prior distributions; and (iii) the banks and administrative receivers were bona fide purchasers for value without notice for payments received up to a point specified by the judge (banks were taken to be on notice by July 2001 for the mixed fund).

The judgment emphasised that adjustments to the law to deprive fiduciaries of all benefit from breach should, if appropriate, be made by developing equitable compensation rather than by extending proprietary doctrines.

Appeal dismissed. The Court of Appeal affirmed Lewison J: no proprietary interest in the proceeds of sale of the Shares (the claimant’s remedy there was a personal equitable account), but a limited proprietary claim to monies originally held by VTFL could be established and traced into later recoveries subject to mixing, notice and the factual findings below. The court preferred existing domestic authority holding that unauthorised profits of the kind here give rise to a personal remedy unless the asset was itself the claimant's or the fiduciary took an opportunity properly belonging to the claimant.

Appeal and cross-appeal from the High Court of Justice, Chancery Division (Lewison J) [2010] EWHC 1614 (Ch); earlier related proceedings before Rimer J in Sinclair Investment Holdings SA v Versailles Trade Finance Ltd [2007] EWHC 915 (Ch). Claim No HC07C03030 in the Chancery Division.