LS Systems & Ors v Scott & Anor

A fiduciary who controls a principal’s money must account for dealings with it and establish that those dealings were proper and justified. A senior employee may owe fiduciary duties in relation to financial affairs where the responsibilities entrusted to that employee justify them; employment alone is insufficient. Summary judgment is appropriate where the evidence shows that the defendant has no realistic prospect of defending the claim. Unauthorised distribution of misappropriated funds as off-the-record bonuses does not justify their use. Traceable misappropriated funds may support proprietary relief, including a constructive trust over benefits acquired with them, subject to the interests of bona fide purchasers and existing mortgages.

The claimants sought summary judgment against a former financial controller and managing director. They alleged that he had misappropriated company and partnership funds, made secret profits, used the funds to pay for work on his own property, and diverted proceeds from an eBay account.

The defendant relied principally on alleged authorisation, commission arrangements and staff bonus payments. The court also considered whether a partnership should be added as a claimant and whether the claimants had established proprietary claims over three mortgaged properties purchased or improved with misappropriated funds.

1. Fiduciary duties. The defendant’s admitted responsibilities as financial controller, including authority over payments, were sufficient to establish fiduciary duties in relation to the claimants’ financial affairs and money. The mere fact of employment would not have been sufficient. His admitted directorship supplied a further basis for duties owed to the first claimant, extending in the circumstances to misappropriation of funds belonging to related entities.
2. Burden and summary judgment. Once the fiduciary duties were established, the defendant bore the onus of showing that his dealings with the claimants’ money were proper and justified. The documentary evidence showed systematic concealment, falsified records and unexplained transfers. The alleged commission arrangement was unsupported by contemporaneous documents, commercially implausible and inconsistent with the timing and amounts of the payments. The defendant therefore had no realistic prospect of defending the claims, and summary judgment was granted in respect of all three categories.
3. Use of funds and proprietary relief. Even if money taken from the claimants had been distributed as untaxed staff bonuses, that did not justify the fiduciary’s use of the funds. Where a fiduciary obtains a benefit by misappropriating or misapplying the principal’s property, the benefit may be held on constructive trust. Traceable proceeds mixed with the fiduciary’s own money may also be claimed proprietarily, subject to the rights of a bona fide purchaser for value without notice. The claimants established such claims over the three properties, subject to the mortgages.
4. Permission was granted to join the partnership claimant and correct the identity of the entity that had made particular payments.