HCS (North East) Limited v Mehmet Tahir

A person entrusted with a company’s money as its agent owes fiduciary duties in handling it. Once receipt of the company’s money is established, the fiduciary bears the burden of accounting for it and showing that payments were proper. Where company money is mixed with the fiduciary’s money, payments used to improve or furnish an asset are treated as having been made from the company money unless the fiduciary proves otherwise. Fraudulent breaches of fiduciary duty involving trust property are not subject to the ordinary six-year limitation period under the Limitation Act 1980. A claim against a person who neither received the money nor owned the improved property fails.

The claimant sought recovery of money allegedly misappropriated by its former bookkeeper and financial director, the first defendant. It also sought relief against his wife in connection with improvements to the family property, Ray Mill. The court considered whether the first defendant was a fiduciary, who bore the burden of accounting, the effect of mixed funds used for improvements, whether the money was trust property, limitation, and whether any claim against the second defendant was established.

1. Fiduciary capacity. The first defendant was the company’s agent for dealing with its money and accounts. He had an unrestricted mandate to make payments for company purposes and was entrusted with substantial financial control. That relationship gave rise to fiduciary duties of loyalty.
2. Accounting burden. Once the claimant proved that the first defendant had received just over £3.5 million, the burden was on him to account for what happened to it and to show that payments were proper. The court accepted the claimant’s documentary analysis and found that £1,774,461.13 was unaccounted for, including VAT wrongly charged.
3. Mixed funds and Ray Mill. Under Re Hallett’s Estate [1830] 13 Ch D 696, a fiduciary is presumed to spend his own money first. Under Re Oatway [1903] 2 Ch 356, an asset acquired from mixed funds is treated as acquired with the claimant’s money where necessary to resolve evidential uncertainty. The court found that £758,009.17 spent on Ray Mill was trust money for which the first defendant had to account.
4. Trust and limitation. It was unnecessary to decide whether a thief automatically becomes a constructive trustee. The first defendant was already a fiduciary and quasi-trustee accountable for misapplied money. Sections 21(1)(a) and (b) of the Limitation Act 1980 therefore applied, so there was no limitation defence. Section 32 provided an alternative basis for postponing time.
5. Disposition. Judgment was entered against the first defendant for £1,774,416.13. The pleaded claim against the second defendant was dismissed because there was no evidence that she received the claimant’s money and she did not own Ray Mill.

First-instance judgment. No earlier decision is stated in the judgment.