Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd

The Court of Appeal held that where a fiduciary makes a profit by reason of a breach of duty, that profit does not automatically give rise to a proprietary right in favour of the principal unless the asset was beneficially the principal’s or derived from an opportunity properly belonging to the principal; instead the principal ordinarily has a personal equitable remedy (an account) and tracing into substitutes is limited by established principles. By contrast, where a claimant’s monies were entrusted and subsequently mixed by the recipient, the claimant may sustain a proprietary tracing claim into the mixed fund unless the recipient proves otherwise.

The appeal and cross-appeal arose from Lewison J’s decision in the Chancery Division concerning two proprietary claims by TPL (treated in these proceedings as brought by Sinclair): (1) a claim that profits realised by a director on sale of shares were held on constructive trust for TPL; and (2) a claim to funds entrusted to VTFL and subsequently mixed with VTFL’s monies. The court reviewed the factual background of extensive cross-firing fraud within the Versailles Group, the payments made to banks and receivers, and the prior findings below at [2010] EWHC 1614 (Ch) and earlier proceedings at [2007] EWHC 915 (Ch). The central issues were (a) when, if at all, a fiduciary’s unauthorised gain gives rise to proprietary ownership rather than a personal equitable claim; (b) whether tracing and following of trust monies into share-sale proceeds or into mixed VTFL funds was available; and (c) whether recipients (the administrative receivers, VTFL and the banks) had notice so as to take subject to any proprietary claim. The court principally addressed the legal test separating proprietary remedies from personal equitable remedies and determined factual questions on notice and quantum.

1. Disposition: The Court of Appeal dismissed the appeal and cross-appeal and upheld Lewison J’s principal conclusions: (a) TPL had no proprietary interest in the proceeds of sale of the VGP shares; (b) TPL had a limited proprietary claim in respect of sums of its money mixed in VTFL's accounts and could trace into certain recoveries and later payments; and (c) the banks (and VTFL acting through the administrative receivers) were bona fide purchasers for value without notice in respect of earlier payments, such that certain payments could not be impugned.
2. Proprietary v personal remedy: The court reaffirmed that whether a proprietary interest exists is a matter of property law and that where a fiduciary obtains an unauthorised profit which was not the beneficiary's asset nor derived from an opportunity properly belonging to the beneficiary, the appropriate remedy is ordinarily an equitable account/compensation (a personal remedy) rather than a proprietary constructive trust (paras 37–41, 88–91). The court declined to treat all unauthorised gains as automatically proprietary, preferring to respect the established domestic line of authority.
3. Precedent and precedent choice: The Master of the Rolls explained the court’s duty to follow prior Court of Appeal authority unless clearly per incuriam, and declined to follow the Privy Council’s approach in [1994] 1 AC 324 (Reid) in preference to domestic Court of Appeal authorities which point to a personal remedy in many bribe/secret-profit cases (paras 72–83, 88).
4. Tracing into mixed funds: The court held that a claimant whose money has been paid into a mixed fund may trace into the mixed fund and that where mixing has occurred the burden lies on the fiduciary/recipient to distinguish his own monies; if he cannot do so the mixed fund is treated as impressed by the trust to the extent of the claimant’s interest (paras 135–141). The court rejected the defendants’ contention that a ‘‘maelstrom’’ of transactions necessarily defeats tracing as a matter of law.
5. Notice and bona fide purchaser defence: The Court upheld Lewison J’s factual conclusions on notice. The administrative receivers and the banks did not have actual or constructive notice of a proprietary claim to the share-sale proceeds at the dates of the early payments (February 2000, January 2001 and 26 February 2001) (paras 93–116). The court explained the correct test for constructive notice: whether known facts made it imperative to inquire because otherwise the transaction was probably improper (paras 97–101, 108–110). It was open to the judge to find that formal assertion of a proprietary claim and later documents put the banks on notice by July 2001 (paras 142–148).
6. VTFL’s position: VTFL, controlled by the administrative receivers at the material times, could claim to be a bona fide recipient without notice because the receivers did not have notice; a company’s change of management can defeat imputing prior knowledge to the successor management (paras 123–128, 125).
7. Tax recoveries and tracing: The court held that repayments of overpaid VAT under section 80 of the Value Added Tax Act 1994 and repayments of corporation tax under the statutory claim procedure (Income and Corporation Taxes Act 1988, s.10(3)) could be the subject of tracing where the original tax payment derived from monies into which the claimant’s proprietary claim properly traced (paras 149–154). The court rejected a narrow technical objection that corporation tax repayments were too remote.
8. Quantum/extent: The court accepted Lewison J’s approach to characterising earlier payments to traders as capital repayments (not periodic lawful profit distributions) and his assessment of the net amount available for successful tracing claims, rejecting submissions that the judge had materially underestimated the claimant’s equitable remedy (paras 155–160).
9. Practical guidance: If equitable compensation is judged to be inadequate to strip a fiduciary of profits made by breach, the preferable course is to adapt equitable compensation rules rather than to extend proprietary remedies in a manner that would unsettle established property rights and impair other creditors.
10. Orders: Both the appeal and cross-appeal were dismissed (final disposition) (para 161). The court’s reasoning and factual conclusions as attributed above stand.

• Court of Appeal (Civil Division): Appeal and cross-appeal heard; judgment handed down 29 March 2011 dismissing both appeal and cross-appeal and upholding Lewison J’s conclusions in substantial respects.
• High Court (Chancery Division): Judgment below: Lewison J, reported at [2010] EWHC 1614 (Ch), which found no proprietary interest in the share-sale proceeds but a limited proprietary claim in sums remaining in VTFL's mixed fund; this decision was the subject of the present appeals.