Relfo Ltd v Varsani

Equitable tracing follows the value inherent in misappropriated property through causally and transactionally linked substitutions. The court may infer a chain of substitutions from the whole evidence although every transaction and account cannot be identified. Intention alone cannot establish substitution, but it may support that inference.

Substitutions need not occur chronologically. A payment made in reliance on an arrangement for later reimbursement can represent trust money subsequently received.

An indirect recipient may also be liable in unjust enrichment where the claimant’s loss and the recipient’s gain are sufficiently closely connected. Substance prevails over form. An orchestrated chain whose sole purpose is to confer the claimant’s value on the recipient may be equivalent to a direct payment.

Relfo Ltd’s director dishonestly transferred £500,000 to Mirren Ltd, leaving Relfo insolvent. On the same day, Intertrade Group LLC initiated payment of the corresponding dollar value, less 1.3%, to Mr Varsani. The precise transactions between Mirren and Intertrade could not be reconstructed, but the judge found that the payments formed an arrangement intended to divert Relfo’s money to Mr Varsani through entities and accounts which concealed its source.

Sales J held in [2012] EWHC 2168 (Ch) that the liquidator could recover $878,479.35 for knowing receipt because the Intertrade payment was substitute property for Relfo’s money. He alternatively upheld a claim in unjust enrichment.

The appeal asked whether the missing transactional steps prevented tracing and whether an indirect payment could constitute enrichment at Relfo’s expense.

1. Appeal dismissed unanimously. Arden LJ delivered the principal judgment. Gloster and Floyd LJJ agreed that the tracing claim succeeded for the reasons given by Arden LJ.

2. The trial judge was entitled to infer that Relfo’s money was the source of the Intertrade payment. The similarity in amount and timing, the 1.3% deduction, the absence of consideration or another explanation, the purpose of the arrangement, the parties’ previous dealings and the use of entities capable of obscuring payments provided ample evidence. The inference could be drawn although the court could not map every transaction or account. The principle applied in El Ajou was equally applicable.

3. Intention could not by itself turn the Intertrade payment into substitute property. It was nevertheless a relevant evidential factor when considered with the other circumstances. Once the substitution was inferred, the Mirren and Intertrade payments were necessarily causally and transactionally linked.

4. Tracing through the banking system concerns exchanges of the value inherent in the claimant’s property. It does not depend upon following a physical asset. A payment can constitute substitute property where it was made on the faith of an arrangement for later reimbursement out of the trust funds. Relying on Agip and Foskett v McKeown, the court held that substitutions need not occur in chronological order and that this principle is not confined to correspondent banking. There is no theoretical limit upon the number of accounts or substitutions, although a lengthy or non-chronological chain may make proof more difficult.

5. The unjust-enrichment claim also succeeded. All three judges concluded that the elaborate intermediate arrangements were, in substance or economic reality, equivalent to a direct payment. They existed only to transfer Relfo’s value to Mr Varsani while concealing its source. No independent exercise of free will broke the causal connection.

   Arden LJ considered the law to be moving towards a general principle based on a sufficient link between the relevant transactions. Gloster and Floyd LJJ preferred not to formulate a general rule concerning indirect enrichment. The narrower common basis was that these exceptional facts established the necessary causal connection under any approach short of an inflexible direct-transfers-only rule.

6. Relfo was free to choose which defendant to sue, subject to established doctrines such as election. It could not recover more than its loss and would have to give credit for any recovery from another party. No order was made on Relfo’s cross-appeal.

1. Court of Appeal (Civil Division): By [2014] EWCA Civ 360, unanimously dismissed Mr Varsani’s appeal and upheld recovery on both tracing and unjust-enrichment grounds.
2. High Court, Chancery Division: Sales J held in [2012] EWHC 2168 (Ch) that Relfo’s liquidator was entitled to recover $878,479.35 for knowing receipt and, alternatively, unjust enrichment.