The Serious Fraud Office & Anor v Hotel Portfolio II UK Ltd

On a summary judgment application, the court must assess whether the claim has a real, rather than fanciful, prospect of success, taking account of evidence reasonably expected to be available at trial. Equity generally does not permit tracing into assets acquired before the misappropriation. Narrow exceptions may arise where chronological sequence results from banking processes, coordinated transactions, anticipatory substitution or a conventional exchange with delayed performance.

The broad proposition that repayment of a loan with trust money permits tracing into assets acquired with the loan is not part of English law. A beneficiary’s choice between tracing into a substitute asset and pursuing the original asset is not ordinarily final until judgment. Tracing through a loan into assets acquired by the borrower may remain arguable where the borrower was not a bona fide purchaser for value without notice.

The Settlement Parties applied for summary judgment dismissing Hotel Portfolio II UK Ltd’s proprietary tracing claims to property and unallocated assets. The claims arose from alleged profits made by Mr Ruhan through the sale and development of the Hyde Park Hotels, which HPII assumed were held on constructive trust for it.

HPII advanced multiple tracing stages through loans, Qatar development projects, payments, the Isle of Man settlement, companies and properties. The application required the court to determine whether those routes were arguable, whether HPII had elected between inconsistent tracing routes, and whether the evidential gap described as the missing middle prevented the claims from proceeding.

The application was determined by applying the summary judgment standard. The court considered the evidence already available and the evidence that could reasonably be expected at trial. A claim could proceed if it had a real prospect of success, but the court could reject fanciful, incoherent or insufficiently particularised cases.

1. Nature of tracing. Tracing identifies a new asset as the substitute for the old and traces value rather than physical property. A claimant may elect whether to pursue the original asset or a substitute, but tracing does not extend to every asset acquired by exploiting the apparent value or creditworthiness of an earlier asset.
2. Backwards tracing. The general rule remains that trust property cannot be traced into assets acquired before the relevant misappropriation. The recognised exceptions include banking transactions in which credits precede debits; coordinated transactions intended to achieve one outcome; anticipatory substitution; and conventional bilateral exchanges in which performance is not simultaneous. The broad theory that repayment of a loan with trust money permits tracing into assets acquired with the borrowing was rejected. The narrower claim based on a close causal and transactional nexus was arguable in principle but failed at Stage 3A because the transactions were not sufficiently coordinated and the relevant breach was the repayment of the loan.
3. Election. The choice between inconsistent tracing routes is final and binding once made. Mere assertion of a claim to one asset does not necessarily amount to election. HPII was not required to elect before judgment.
4. Loans and reflective tracing. It was strongly arguable that a claimant may trace through a loan into property acquired by the borrower where the borrower was not a bona fide purchaser for value without notice. Tracing through the value of assets owned by a company into an increase in the value of its shares was not arguable.
5. Disposition. HPII had arguable claims concerning the Bridgehouse Marine proceeds, Payment 11 and certain other payment routes. It had no tracing claim into the shares of the Non-Arena Companies. Any claim through the IOM Settlement Cash was defeated by the bona fide purchaser for value defence, and no claim could be traced into the Jersey Properties. HPII was required to produce a draft amendment.