“APT involved the provision of funds on a short-term basis to enable transactions to take place. It worked as follows. VTFL would purchase at a discount (usually about 2.5% of the purchase price) goods that its clients (usually small manufacturers or distributors who could not afford to wait for payment) had already agreed to supply to the end-buyers, i.e. customers. VTFL would insure the goods for their full face value, sell them on to the customer for that value and the client would then deliver them to the customer. VTFL would invoice the customer and then, within seven days, pay the client 80% of the discounted purchase price, retaining the remaining 20% until the customer had paid it the full amount of the purchase price. The customer acquired title to the goods as and when it paid VTFL; and when VTFL had received the full price from the customer, it paid the client the remaining 20% of the discounted price less a daily interest charge calculated by reference to the time the customer had taken to pay the full price. VTFL’s profit was the amount by which the discount and the interest exceeded its costs of the operation.”
“As from March 1996, it was TPL that solicited funds from traders for the purpose of being applied in APT.”
“1. We [the trader] may direct you [TPL] as our agents to buy particular goods but in the absence of any specific direction from us you shall purchase goods of merchantable quality and goods which have been agreed for sale. 2. If any of the money provided by us is not currently used in the purchase of goods it shall be deposited by you in trust for us in a money bank account or such other account as we shall from time to time discuss . . . 5. Unless we direct otherwise you will account to us for the sale and purchase of all goods and the profit therein on a quarterly basis and will pay the net profit to us with quarterly reports if so requested and in the absence of any specific direction any profit will be deposited in accordance with Clause 2. 6. Upon request you will provide details of all goods purchased and sold and copies of any invoices relating thereto. 7(a) Any of the monies paid hereunder and accrued interest shall be repaid to us at not less than three months notice in writing expiring at the end of a quarter except for that relating to goods which have been sold but not paid for by the purchaser, in which event repayment in respect of that money shall be made when payment has been received by you for the sale of the goods. (b) You may terminate this agreement by giving us not less than three months notice in writing expiring at the end of a quarter. 8. You are permitted to purchase the goods as our agents . . ”
“TPL in fact never carried on any business that VTFL could claim to be managing. Investigations carried out by the Serious Fraud Office and the receivers revealed that TPL conducted at most only one legitimate trade in its own name and that made a loss. Whereas each trader’s advances to TPL should either have been used to finance specific APT transactions, or else kept on deposit at a bank upon trust for the trader, the advances to TPL were instead used to finance the bank transfers necessary to create the fiction that VTFL was carrying on a genuine, and increasingly profitable, trade and to finance the illusory profits that TPL paid to traders. The traders … were ignorant of the manner in which the funds they advanced were being misused.”
“… in the years since its establishment [VTFL] reported an uninterrupted increase in turnover and profit. Between 1992 and 1999 it published annual accounts in which the figures for turnover and debtors were stated to be significantly higher than they in fact were. This in turn resulted in a steady increase in VGP’s share price. VTFL’s turnover was inflated in the following manner: (i) the accounts showed money paid to and received from other companies controlled and managed by Mr Cushnie and Mr Clough (the so-called “cross-firing” companies) as if they were genuine trading payments and receipts, which they were not; and (ii) the nominal ledger contained entries which purported to be sales, purchases and trading receipts and payments which were not justified by any actual trading. The main cross-firing companies were Artagent Ltd, Discgift Ltd, Superhandy Ltd, but they also included Palmerston Ltd, Normandy, TPL and perhaps (if only to a smaller extent) Marrlist. Mr Cushnie held 99% of the issued shares of Artagent, Discgift and Superhandy and 50% of those of Palmerston. In broad terms, it worked as follows. VTFL had a Customer Service Division, which was a genuine trade generating funds. VTFL was financed by bank loans. It also received finance from, first, VTL and, from March 1996, TPL; and VTL and TPL were successively financed by the traders. The money so received by VTFL was then revolved around the cross-firing companies. The nature of this activity has been investigated by PwC and the receivers and counsel were agreed as to the relevant facts. There is no need to detail it beyond saying that between June 1993 and October 1999 hundreds of millions of pounds were transferred both ways between VTFL and various cross-firing companies. VTFL’s receipts were disguised in its cash books to make them appear as genuine sales to genuine customers, so falsely inflating its turnover.”
“[30] Mr Cushnie and Mr Clough were charged with criminal offences. On8 July 2003 Mr Clough pleaded guilty to count 1 (which alleged the carrying on of Normandy’s business with intent to defraud creditors). That count was not pursued against Mr Cushnie and the trial judge (Jackson J) made an order that it should lie on the file. Count 2 (“the Versailles fraud”, which became known as count 1 at the trial) was conspiracy to defraud. The particulars were that between30 June 1991 and21 January 2000 Mr Cushnie, Mr Clough and Ms Lorraine Marcia Jones conspired together to defraud (i) trade creditors of VTFL, (ii) banks and other lenders to VGP and/or VTFL, (iii) the London Stock Exchange and (iv) shareholders in VGP by dishonestly (a) falsely overstating the trading turnover of VGP and/or VTFL, (b) falsely overstating the assets of VGP and/or VTFL, (c) falsifying accounts, records or documents made or required for accounting purposes and (d) concealing accounts, records or documents made or required for accounting purposes. Count 3 (“the traders fraud”, which became count 2 at the trial) was also conspiracy to defraud. The particulars were that, between1 March 1992 and21 January 2000 , Mr Cushnie, Mr Clough and Ms Jones conspired to defraud the traders (people who might provide moneys to VTL and/or TPL) by dishonestly (a) falsely representing that those moneys would be used for the purpose of specific and genuine trading transactions by or on behalf of VTL and/or TPL and (b) transferring those moneys directly and indirectly between bank accounts held by VTL and/or TPL and bank accounts held by VTFL for the purposes of falsely inflating the turnover and assets of all three companies. [31] Mr Clough pleaded guilty on counts 2 and 3. The prosecution did not pursue either charge against Ms Jones, in respect of whom the jury was directed to return not guilty verdicts. Mr Cushnie pleaded not guilty on counts 2 and 3. The jury’s task was to decide whether he had conspired with Mr Clough to defraud in the manner specified in those counts. The trial occupied four months in 2004. Mr Clough gave evidence for the prosecution, which included admissions that he had perpetrated frauds of the nature alleged under both counts. Mr Cushnie did not give evidence. [32] On25 May 2004 the jury found Mr Cushnie not guilty on count 2 (the Versailles fraud) but guilty on count 3 (the traders fraud). On8 June 2004 the court sentenced Mr Clough to a total prison sentence of six years (reduced on appeal to five) and Mr Cushnie to a sentence of six years. The court made disqualification orders under theCompany Directors Disqualification Act 1986 against Mr Clough and Mr Cushnie for 15 and 10 years respectively. Questions of confiscation and compensation were adjourned. [33] On29 June 2005 Jackson J made findings as to the benefit Mr Cushnie had derived from the traders fraud. A related finding was that Mr Clough had stolen£4,350,309 from what Jackson J called “the traders’ company”, a reference to both VTL and TPL. … Jackson J made a confiscation order against Mr Cushnie unders 71 of the Criminal Justice Act 1988 in the sum of£10,140,732 . Payment was to be made by22 April 2007 with, in default, a three-year term of imprisonment. The judge made a further order unders 130 of the Powers of Criminal Courts (Sentencing) Act 2000 requiring compensation to be paid to the traders from the confiscated sum in specified amounts, that due to Sinclair being£1,115,185 . The payment in fact made to Sinclair, on23 November 2006 , was£1,054,062 ·75.”
“that a trustee in breach of trust must restore or pay to the trust estate either the assets which have been lost to the estate by reason of the breach or compensation for such loss. Courts of Equity did not award damages but, acting in personam, ordered the defaulting trustee to restore the trust estate. If specific restitution of the trust property is not possible, then the liability of the trustee is to pay sufficient compensation to the trust estate to put it back to what it would have been had the breach not been committed.”
“A beneficiary’s claim against a trustee for breach of trust is a personal claim. It does not entitle him to priority over the trustee’s general creditors unless he can trace the trust property into its product and establish a proprietary interest in the proceeds.”
“The first is that which appropriates for the benefit of the person to whom the fiduciary duty is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or a significant possibility of such conflict: the objective is to preclude the fiduciary from being swayed by considerations of personal interest. The second is that which requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of his fiduciary position or of opportunity or knowledge resulting from it: the objective is to preclude the fiduciary from actually misusing his position for his personal advantage. Notwithstanding authoritative statements to the effect that the “use of fiduciary position” doctrine is but an illustration or part of a wider “conflict of interest and duty” doctrine … the two themes, while overlapping, are distinct. Neither theme fully comprehends the other and a formulation of the principle by reference to one only of them will be incomplete. Stated comprehensively in terms of the liability to account, the principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or (ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it. Any such benefit or gain is held by the fiduciary as constructive trustee…”
“It has been further asked that the sum of£75 may be treated as a part of the trust fund, and as such may be directed to be paid by Horsfield to the trustee for the benefit of the cestui que trusts under the will. It is a well-settled principle that, if a trustee make a profit of his trusteeship, it shall enure to the benefit of his cestui que trusts. Though there is some peculiarity in the case, there does not seem to be any difference in principle whether the trustee derived the profit by means of the trust property, or from the office itself. I shall therefore direct that the£75 be repaid by Horsfield and dealt with as a part of the assets…”
“This case is of importance because it disposes succinctly of the argument which appears in later cases and which was put forward by counsel in the present case that there is a distinction between a profit which a trustee takes out of a trust and a profit such as a bribe which a trustee receives from a third party.”
“That being the position of Sir Edwin Pearson, can he be allowed to say in a Court of Equity that he, having received a present of part of the purchase-money, and being knowingly in the position of agent and trustee for the purchasers, can retain that present as against the actual purchasers? It appears to me that, upon the plainest principles of equity and good conscience, he cannot. Whether the purchase was or was not an advantageous one for the company, whether the property which they purchased at this large profit was or was not worth the increased price that they paid for it, is a question wholly immaterial for us to consider; he cannot, in the fiduciary position he occupied, retain for himself any benefit or advantage that he obtained under such circumstances. He must be deemed to have obtained it under circumstances which made him liable, at the option of the cestuis que trust, to account either for the value at the time of the present he was receiving, or to account for the thing itself and its proceeds if it had increased in value. The company elect on the present occasion to ask to charge him with the value of the twenty-five share warrants at the time of their delivery.”
“Then comes the question, as between Lister & Co. and Stubbs, whether Stubbs can keep the money he has received without accounting for it? Obviously not. I apprehend that he is liable to account for it the moment that he gets it. It is an obligation to pay and account to Messrs. Lister & Co, with or without interest, as the case may be. I say nothing at all about that. But the relation between them is that of debtor and creditor; it is not that of trustee and cestui que trust. We are asked to hold that it is—which would involve consequences which, I confess, startle me. One consequence, of course, would be that, if Stubbs were to become bankrupt, this property acquired by him with the money paid to him by Messrs. Varley would be withdrawn from the mass of his creditors and be handed over bodily to Lister & Co. Can that be right? Another consequence would be that, if the Appellants are right, Lister & Co. could compel Stubbs to account to them, not only for the money with interest, but for all the profits which he might have made by embarking in trade with it. Can that be right? It appears to me that those consequences shew that there is some flaw in the argument.”
“Property shall be regarded as belonging to any person having possession or control of it, or having in it any proprietary right or interest (not being an equitable interest arising only from an agreement to transfer or grant an interest).”
“There is a clear and important difference between on the one hand a person misappropriating specific property with which he has been entrusted, and on the other hand a person in a fiduciary position who uses that position to make a secret profit for which he will be held accountable. Whether the former is within section 5, we do not have to decide. As to the latter we are firmly of the view that he is not, because he is not a trustee.”
“On March 25, 1964, Wilberforce J. held, that the first and second defendants, Boardman and Tom Phipps, were accountable for the proportionate profit on the 21,986 shares in the company and that an inquiry should be held as to the allowances to which they were entitled in respect of their work and skill in obtaining the shares and the profits.”
“By the judgment it was declared that the defendants hold 5/18ths of 21,986 ordinary shares of£1 each in Lester & Harris Ltd. (“the company”) as constructive trustees for the plaintiff, and it was ordered that an account be taken of the profits come to the hands of the defendants and each of them from the said shares…”
“The question at issue in this appeal was whether the appellants were accountable to the respondent as constructive trustees of certain shares of Lester & Harris Ltd., which were purchased by them in the years 1957 to 1959.”
“… an agent is, in my opinion, liable to account for profits he makes out of trust property if there is a possibility of conflict between his interest and his duty to his principal. ”
“The proposition of law involved in this case is that no person standing in a fiduciary position, when a demand is made upon him by the person to whom he stands in the fiduciary relationship to account for profits acquired by him by reason of his fiduciary position and by reason of the opportunity and the knowledge, or either, resulting from it, is entitled to defeat the claim upon any ground save that he made profits with the knowledge and assent of the other person.”
“Applying these principles to the present case I have no hesitation in coming to the conclusion that the appellants hold the Lester & Harris shares as constructive trustees and are bound to account to the respondent.”
“When a bribe is offered and accepted in money or in kind, the money or property constituting the bribe belongs in law to the recipient. Money paid to the false fiduciary belongs to him. The legal estate in freehold property conveyed to the false fiduciary by way of bribe vests in him. Equity, however, which acts in personam, insists that it is unconscionable for a fiduciary to obtain and retain a benefit in breach of duty. The provider of a bribe cannot recover it because he committed a criminal offence when he paid the bribe. The false fiduciary who received the bribe in breach of duty must pay and account for the bribe to the person to whom that duty was owed. In the present case, as soon as the first respondent received a bribe in breach of the duties he owed to the Government of Hong Kong, he became a debtor in equity to the Crown for the amount of that bribe. So much is admitted. But if the bribe consists of property which increases in value or if a cash bribe is invested advantageously, the false fiduciary will receive a benefit from his breach of duty unless he is accountable not only for the original amount or value of the bribe but also for the increased value of the property representing the bribe. As soon as the bribe was received it should have been paid or transferred instanter to the person who suffered from the breach of duty. Equity considers as done that which ought to have been done. As soon as the bribe was received, whether in cash or in kind, the false fiduciary held the bribe on a constructive trust for the person injured. Two objections have been raised to this analysis. First it is said that if the fiduciary is in equity a debtor to the person injured, he cannot also be a trustee of the bribe. But there is no reason why equity should not provide two remedies, so long as they do not result in double recovery. If the property representing the bribe exceeds the original bribe in value, the fiduciary cannot retain the benefit of the increase in value which he obtained solely as a result of his breach of duty. Secondly, it is said that if the false fiduciary holds property representing the bribe in trust for the person injured, and if the false fiduciary is or becomes insolvent, the unsecured creditors of the false fiduciary will be deprived of their right to share in the proceeds of that property. But the unsecured creditors cannot be in a better position than their debtor. The authorities show that property acquired by a trustee innocently but in breach of trust and the property from time to time representing the same belong in equity to the cestui que trust and not to the trustee personally whether he is solvent or insolvent. Property acquired by a trustee as a result of a criminal breach of trust and the property from time to time representing the same must also belong in equity to his cestui que trust and not to the trustee whether he is solvent or insolvent.”
“In my view, the court should not be too ready to extend the circumstances in which proprietary or other equitable claims can be made in insolvent situations, bearing in mind the consequences to unsecured creditors. To raise those in the commercial world, it must sometimes seem almost a matter of happenstance as to whether or not a particular creditor, with no formal security, has a proprietary or equitable claim. However, that fact is that every time such a claim is held to exist in the case of an insolvent debtor, the consequence is that one commercial creditor gets paid in full to the detriment of all the other commercial creditors, who also have no formal security, but are found to have no proprietary claim.”
“Attorney General for Hong Kong v Reid has been preferred at first instance to Lister & Co v Stubbs by Laddie J in Ocular Sciences Ltd v Aspect Vision Care Ltd[1997] RPC 289 , 412-413 (a breach of confidence case) and by Toulson J (obiter) in Fyffes Group Ltd v Templeman[2000] 2 Lloyd's Rep 643 . But Sir Richard Scott V-C in Attorney General v Blake[1997] Ch 84 , 96 and the Court of Appeal in Halifax Building Society v Thomas[1996] Ch 217 , 229 treated Lister & Co v Stubbs as still binding, although neither of those cases was a case involving bribery of an agent.”
“(1) No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action— (a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or (b) to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee, or previously received by the trustee and converted to his use. (3) Subject to the preceding provisions of this section, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this Act, shall not be brought after the expiration of six years from the date on which the right of action accrued.”
“'The ground of this suit is concealed fraud. If a man receives money by way of a bribe for misconduct against a company or cestui que trust, or any person or body towards whom he stands in a fiduciary position, he is liable to have that money taken from him by his principal or cestui que trust. But it must be borne in mind that that liability is a debt only differing from ordinary debts in the fact that it is merely equitable, and in dealing with equitable debts of such a nature Courts of Equity have always followed by analogy the provisions of the Statute of Limitations, in cases in which there is the same reason for making the length of time a bar as in the case of ordinary legal demands.”
“It seems to me that the only action which could be maintained by the company or by the liquidator of the company against this defendant would be an action in equity founded upon the alleged fraud of the defendant. Neither at law nor in equity could this sum of£250 be treated as the money of the company, until the court, in an action by the company, had decreed it to belong to them on the ground that it had been received fraudulently as against them by the defendant.”
“This is a puzzling passage which appears to mean that a proprietary interest in the bribe arises as soon as a court has found that a bribe has been accepted.”
“Here the money sought to be recovered was in no sense the money of the company, unless it was made so by a decree founded on the act by which the trustee got the money into his hands. It is a suit founded on breach of duty or fraud by a person who was in the position of trustee, his position making the receipt of the money a breach of duty or fraud. It is very different from the case of a cestui que trust seeking to recover money which was his own before any act wrongfully done by the trustee.”
“This observation does draw a distinction between moneys which are held on trust and are taken out by the trustee and moneys which are not held on trust but which the trustee receives in circumstances which oblige him to pay the money into the trust. The distinction appears to be inconsistent with Keech v Sandford, Sel.Cas.Ch. 61, and with those authorities which make the recipient of the bribe liable for any increase in value.”
“Mr. Justice Stirling, in the course of his judgment, referred to my decision in the case of Metropolitan Bank v Heiron. I think that I took a correct view in my judgment in that case; and in my opinion this is not the money of the Plaintiffs, so as to make the Defendant a trustee of it for them, but it is money acquired in such a way that, according to all rules applicable to such a case, the Plaintiffs, when they bring the action to a hearing, can get an order against the Defendant for the payment of that money to them. That is to say, there is a debt due from the Defendant to the Plaintiffs in consequence of the corrupt bargain which he entered into; but the money which he has received under that bargain cannot, in the view which I take, be treated as being money of the Plaintiffs…”
“The possession of an express trustee was treated by the Courts as the possession of his cestuis que trustent, and accordingly time did not run in his favour against them. This disability applied, not only to a trustee named as such in the instrument of trust, but to a person who, though not so named, had assumed the position of a trustee for others or had taken possession or control of property on their behalf …”
“The expressions “trust property” and “retained by the trustee” properly apply, not to a case where a person having taken possession of property on his own behalf, is liable to be declared a trustee by the Court; but rather to a case where he originally took possession upon trust for or on behalf of others. In other words, they refer to cases where a trust arose before the occurrence of the transaction impeached and not to cases where it arises only by reason of that transaction.”
“A constructive trust arises by operation of law whenever the circumstances are such that it would be unconscionable for the owner of property (usually but not necessarily the legal estate) to assert his own beneficial interest in the property and deny the beneficial interest of another. In the first class of case, however, the constructive trustee really is a trustee. He does not receive the trust property in his own right but by a transaction by which both parties intend to create a trust from the outset and which is not impugned by the plaintiff. His possession of the property is coloured from the first by the trust and confidence by means of which he obtained it, and his subsequent appropriation of the property to his own use is a breach of that trust. … In these cases the plaintiff does not impugn the transaction by which the defendant obtained control of the property. He alleges that the circumstances in which the defendant obtained control make it unconscionable for him thereafter to assert a beneficial interest in the property. The second class of case is different. It arises when the defendant is implicated in a fraud. Equity has always given relief against fraud by making any person sufficiently implicated in the fraud accountable in equity. In such a case he is traditionally though I think unfortunately described as a constructive trustee and said to be “liable to account as constructive trustee”
“In this second class of case the expressions “constructive trust” and “constructive trustee” create a trap. As the court recently observed in Coulthard v Disco Mix Club Ltd[2000] 1 WLR 707 , 731 this “type of constructive trust is merely the creation by the court ... to meet the wrongdoing alleged: there is no real trust and usually no chance of a proprietary remedy”
“It follows from the principle that directors who dispose of the company’s property in breach of their fiduciary duties are treated as having committed a breach of trust that a person who receives that property with knowledge of the breach of duty is treated as holding it upon trust for the company. He is said to be a constructive trustee of the property.”
“It follows, also, from the principle that directors who dispose of the company’s property in breach of their fiduciary duties are treated as having committed a breach of trust that, a director who is, himself, the recipient of the property holds it upon a trust for the company. He, also, is described as a constructive trustee. But, as Millett LJ explained in Paragon Finance plc v D B Thakerar & Co[1999] 1 All ER 400 at 408–409, his trusteeship is different in character from that of the stranger. He falls into the category of persons who, in the words of Millett LJ ([1999] 1 All ER 400 at 408) ... “though not strictly trustees, were in an analogous position and who abused the trust and confidence reposed in them to obtain their principal's property for themselves.””
“There is no doubt that Millett LJ regarded it as beyond dispute that a director who obtained the company’s property for himself by misuse of the powers with which he had been entrusted as a director was a constructive trustee within the first category. … The true analysis is that his obligations as a trustee in relation to that property predate the transaction by which it was conveyed to him. The conveyance of the property to himself by the exercise of his powers in breach of trust does not release him from those obligations. He is trustee of the property because it has become vested in him; but his obligations to deal with the property as a trustee arise out of his pre-existing duties as a director; not out of the circumstances in which the property was conveyed.” (Emphasis in original)
“Mr Koshy’s personal liability to account to GVDC for profits made by him from his fiduciary position as a director is not dependent on establishing that he has received any money or other property belonging to GVDC as a result of the misapplication of GVDC’s assets, whether in the form of payments made by GVDC directly to him, or in the form of payments made, via Lasco, indirectly to him. GVDC’s causes of action against Mr Koshy were based on the equitable disabilities or the fiduciary duties to which he was subject as a director of GVDC. As such, he was under a personal liability in equity to account to GVDC for unauthorised profits: either because he was disabled in equity from making an unauthorised personal profit out of the position occupied by him and/or because he acted in dishonest breach of fiduciary duty by deliberately and secretly doing so. The profits made by him are treated as taken for and on behalf of GVDC, as the person to whom he owed the duty to account. As between him and GVDC, equity prevents Mr Koshy from asserting, in answer to the claim for an account, that he is entitled to retain the profits (if any) made by him for his own benefit.”
“If that is the correct analysis, then it is clear in our view that any trust imposed on Mr Koshy is a class 2 trust, within Millett LJ’s classification. We agree with the judge that liability to account for unauthorised profits may arise within a wide spectrum of factual situations. However, that does not alter the analysis under s 21(1)(a) and (b), each of which must be applied in accordance with its own terms. We disagree, respectfully, with the judge in treating dishonesty as a factor taking the case from class 2 to class 1, for the purposes of para (b). Nor do we think that is the effect of the passage from Chadwick LJ’s judgment in Harrison’s case quoted by the judge ([2002] 1 BCLC 478 at [295]). As the judge recognised, in that case the director transferred to himself property which had previously belonged to the company, and in relation to which he had “trustee-like responsibilities” before the transaction in question. By contrast, Mr Koshy’s liability to account for undisclosed profits, and any constructive trust imposed on those profits, do not depend on any pre-existing responsibility for any property of the company. They arose directly out of the transaction which gave rise to those profits, and the circumstances in which it was made. The fact that Mr Koshy was in a pre-existing fiduciary relationship with the company was not enough, by itself, to bring the case within class 1, any more than it was in Taylor v Davies.”
“The difference between the two cases, in short, was that while in the former the director had a pre-existing “trustee-like responsibility” in relation to the particular property which was the subject of the action, in the latter he did not.” (Emphasis added)
“For the exception to apply there must be a trust (or trustee-like responsibility) for specific existing property, not merely for the means to obtain it in the future.”
“24 To overcome this problem Mr Steinfeld sought to draw an analogy with the old case of Keech v Sandford (1726) Sel.Cas Ch. 61. In that case the trustee of a lease applied for a renewal of the lease for an infant beneficiary, and, on this being refused, obtained a renewal for himself; it was held that he held the lease on trust for the infant. Mr Steinfeld suggests that in such a case the trust of the renewed lease would be a Class 1 trust, even though it arose from the impugned transaction, and the earlier lease was no more than the means to obtain it. He noted that in the leading case of Regal (Hastings) v Gulliver[1967] 2 AC 134 , 138, Keech v Sandford was treated as an example of the general rule of equity that a person in a fiduciary position cannot enter into engagements in which his interests may conflict with the interests of those he is bound to protect (p 137–8). 25 Neither of those cases was concerned with the limitation rules. The rule (exemplified by Regal), which prohibits a fiduciary from making a secret profit is not in itself an accurate guide to the scope of class 1. That much is evident from Paragon. Keech v Sandford might arguably be brought within class 1, but, if so, only because of the special nature of the property involved. As was explained in Biss v Biss[1903] 2 Ch 40 , 56 per Collins MR, the renewal is treated as “an accretion to or graft upon the original term arising out of the goodwill or quasi-tenant right annexed thereto”
“What then, in the context of knowing receipt, is the purpose to be served by a categorisation of knowledge? It can only be to enable the court to determine whether, in the words of Buckley LJ in Belmont Finance Corpn Ltd v Williams Furniture Ltd (No 2)[1980] 1 All ER 393 , 405, the recipient can “conscientiously retain [the] funds against the company” or, in the words of Sir Robert Megarry V-C in In re Montagu’s Settlement Trusts[1987] Ch 264 , 273, “[the recipient’s] conscience is sufficiently affected for it to be right to bind him by the obligations of a constructive trustee”
“The former [i.e. notice] is concerned with the question whether a person takes property subject to or free from some equity. The latter [i.e. liability as constructive trustee] is concerned with whether or not a person is to have imposed upon him the personal burdens and obligations of trusteeship. I do not see why one of the touchstones for determining the burdens on property should be the same as that for deciding whether to impose a personal obligation on a [person]. The cold calculus of constructive and imputed notice does not seem to me to be an appropriate instrument for deciding whether a [person’s] conscience is sufficiently affected for it to be right to bind him by the obligations of a constructive trustee.” “(1) The equitable doctrine of tracing and the imposition of a constructive trust by reason of the knowing receipt of trust property are governed by different rules and must be kept distinct. Tracing is primarily a means of determining the rights of property, whereas the imposition of a constructive trust creates personal obligations that go beyond mere property rights. (2) In considering whether a constructive trust has arisen in a case of the knowing receipt of trust property, the basic question is whether the conscience of the recipient is sufficiently affected to justify the imposition of such a trust. (3) Whether a constructive trust arises in such a case primarily depends on the knowledge of the recipient, and not on notice to him; and for clarity it is desirable to use the word “knowledge” and avoid the word “notice” in such cases.”
“The plaintiff brings the claim in order to recover his own property and must succeed, if at all, by virtue of his own title. In the latter class of case his claim arises from a breach of fiduciary or other obligation on the part of the defendant. The distinction is that drawn by equity between the claim of an equitable owner to recover his property, or compensation for the failure to restore it, from a person into whose hands it has come and a claim by a plaintiff in respect of a breach of fiduciary obligation owed to him. In the former case he relies upon his continuing equitable interest in the property under an express or resulting trust; in the latter upon an equity between the parties which may in appropriate circumstances give rise to a constructive trust. The distinction, which is crucial, may have been lost sight of in the language of some of the more recent decisions on knowing receipt.” (Emphasis added)
“A beneficiary of a trust is entitled to a continuing beneficial interest not merely in the trust property but in its traceable proceeds also, and his interest binds every one who takes the property or its traceable proceeds except a bona fide purchaser for value without notice.”
“The doctrine of notice lies at the heart of equity. Given that there are two innocent parties, each enjoying rights, the earlier right prevails against the later right if the acquirer of the later right knows of the earlier right (actual notice) or would have discovered it had he taken proper steps (constructive notice). In particular, if the party asserting that he takes free of the earlier rights of another knows of certain facts which put him on inquiry as to the possible existence of the rights of that other and he fails to make such inquiry or take such other steps as are reasonable to verify whether such earlier right does or does not exist, he will have constructive notice of the earlier right and take subject to it.”
“In English law notice in the present context includes not only actual notice (including “wilful blindness” or “contrived ignorance,” where the purchaser deliberately abstains from an inquiry in order to avoid learning the truth) but also constructive notice, that is to say notice of such facts as he would have discovered if he had taken proper measures to investigate them. The doctrine of constructive notice has developed in relation to land, where there is a recognised procedure for investigating the title of the transferor. There is no room for the doctrine of notice in the strict conveyancing sense in a situation in which it is not the custom and practice to investigate the transferor's title. But in the wider sense it is not so limited…. It is true that many distinguished judges in the past have warned against the extension of the equitable doctrine of constructive notice to commercial transactions (see Manchester Trust v. Furness [1895] 2 Q.B. 539, 545–546, per Lindley LJ), but they were obviously referring to the doctrine in its strict conveyancing sense with its many refinements and its insistence on a proper investigation of title in every case. The relevance of constructive notice in its wider meaning cannot depend on whether the transaction is “commercial:” the provision of secured overdraft facilities to a corporate customer is equally “commercial” whether the security consists of the managing director’s house or his private investments. The difference is that in one case there is, and in the other there is not, a recognised procedure for investigating the mortgagor’s title which the creditor ignores at his peril.”
“… Macmillan attempted to establish constructive notice on the part of each of the defendants by a meticulous and detailed examination of every document, letter, record or minute to see whether it threw any light on the true ownership of the Berlitz shares which a careful reader — with instant recall of the whole of the contents of his files — ought to have detected. That is not the proper approach. Account officers are not detectives. Unless and until they are alerted to the possibility of wrongdoing, they proceed, and are entitled to proceed, on the assumption that they are dealing with honest men. In order to establish constructive notice it is necessary to prove that the facts known to the defendant made it imperative for him to seek an explanation, because in the absence of an explanation it was obvious that the transaction was probably improper.”
“… it is right to say, that trust, not distrust, is also the basis of a bank’s dealings with its customers. And full weight must be given to this consideration before one is entitled, in a given case, to conclude that the banker had reasonable grounds for thinking that the order was part of a fraudulent scheme.”
“It cannot, I think, be questioned that under ordinary circumstances a person, be he banker or other, who takes money from his debtor in discharge of a debt is not bound to inquire into the manner in which the person so paying the debt acquired the money with which he pays it. However that money may have been acquired by the person making the payment, the person taking that payment is entitled to retain it in discharge of the debt which is due to him.”
“In my view, knowledge of a claim being made against the solicitor’s client by the other party is not sufficient to amount to notice of a trust or notice of misapplication of the moneys. In the present case, which involves unsolved questions of fact, and difficult questions of German and English law, I have no doubt that knowledge of the plaintiffs’ claim is not notice of the trusts alleged by the plaintiffs.” (Emphasis added)
“What the defendant solicitors knew was that the moneys came from the West German foundation and they knew of the allegations contained in the proceedings brought against that foundation by the plaintiffs in which they were instructed to act as solicitors for the West German foundation. They knew that claims were being made against the West German foundation that all their property and assets belonged to the plaintiffs or were held on trust for them. But claims are not the same thing as facts. Mr. Harman contended that for the purposes of the present issue all the allegations contained in the statements of claim in both the actions must be taken as true. That will not do. What we have to deal with is the state of the defendant solicitors’ knowledge (actual or imputed) at the date when they received payments of their costs and disbursements. At that date they cannot have had more than knowledge of the claims above mentioned. It was not possible for them to know whether they were well-founded or not. The claims depended upon most complicated facts still to be proved or disproved, and very difficult questions of German and English law. It is not a case where the West German foundation were holding property upon any express trust. They were denying the existence of any trust or any right of property in the assets claimed by the plaintiffs.” (Emphasis added)
“Firstly, and to my mind decisively, whatever be the nature of the knowledge or notice required, cognisance of what has been termed “a doubtful equity” is not enough. This phrase is to be found in Lewin on Trusts, 16th ed (1964), p. 658, and Underhill’s Law Relating to Trusts and Trustees 11th ed (1959) p. 606: it appears first to have been used by Lord Grant M.R. in Parker v. Brooke (1804) 9 Ves 583, 588. The rule, as I understand it, is that no stranger can become a constructive trustee merely because he is made aware of a disputed claim the validity of which he cannot properly assess. Here it has been rightly conceded that no one can foretell the result of the litigation even if the plaintiffs were to prove all the facts they allege.” (Emphasis added)
“On the assumption that this is the right test (a point to which I will return) it is to be noticed that in many cases, and in particular in the present case, knowledge of the existence of a trust depends on knowledge first of the relevant facts and next of the law applicable to that set of facts.” (Emphasis added)
“Apparently there is a “club” arrangement which is also in the structure somewhere or at least appears to be party to some transactions. KPMG thought this club might be lending c.£15m to VTF but could not be sure at this stage.”
“It appears at this stage that funds invested via [TPL] may not have been utilised in actual transactions with third party clients and customers although we have not by any means completed our investigations in this regard. … It now appears likely that these monies were utilised by [VTFL] over the course of the preceding years. If this were to be the case, it would appear that [TPL] would have the basis of a claim against [VTFL] albeit that this would be an unsecured claim due to the insolvency of the company.”
“Whilst we are confident that we have a sound and readily provable case it is highly likely that other parties (shareholders, Versailles Traders) who have also suffered will look to join in any claim thereby reducing our eventual recoveries from [Mr Cushnie].”
“The original idea was that the traders’ money should be available to finance certain specific [VTFL] trades. The funds were meant to be linked to specific deals. However [Mr Greaves] said that this clearly never happened.”
“.. we are most interested in the cash. We are interested in a tracing process that leads somewhere to ultimate cash. Our problem is that our money probably went into PwC’s black hole and, therefore, we and PwC are potentially looking to the same people to repay us that money.”
“No new skeletons have come out of the cupboard. Denton Wilde Sapte and the Receivers still believe that it would be a challenge to mount a case against Cushnie for fraud from the evidence to hand. The allegations from David James made in May, in particular regarding the share ramping, remain difficult to trace back specifically to Cushnie.”
“It is a well-established doctrine in this court, that if a trustee or agent mixes and confuses the property which he holds in a fiduciary character with his own property, so as that they cannot be separated with perfect accuracy, he is liable for the whole.”
“The words in that passage “so as that they cannot be separated with perfect accuracy” are an essential part of the Vice-Chancellor’s proposition, and indeed of the principle of Lupton v. White. If a trustee mixes trust assets with his own, the onus is on the trustee to distinguish the separate assets, and to the extent that he fails to do so they belong to the trust.”
“Trust money may be followed into land or any other property in which it has been invested; and when a trustee has, in making any purchase or investment, applied trust money together with his own, the cestuis que trust are entitled to a charge on the property purchased for the amount of the trust money laid out in the purchase or investment. Similarly, if money held by any person in a fiduciary capacity be paid into his own banking account, it may be followed by the equitable owner, who, as against the trustee, will have a charge for what belongs to him upon the balance to the credit of the account. If, then, the trustee pays in further sums, and from time to time draws out money by cheques, but leaves a balance to the credit of the account, it is settled that he is not entitled to have the rule in Clayton’s Case applied so as to maintain that the sums which have been drawn out and paid away so as to be incapable of being recovered represented pro tanto the trust money, and that the balance remaining is not trust money, but represents only his own moneys paid into the account. … It is, in my opinion, equally clear that when any of the money drawn out has been invested, and the investment remains in the name or under the control of the trustee, the rest of the balance having been afterwards dissipated by him, he cannot maintain that the investment which remains represents his own money alone, and that what has been spent and can no longer be traced and recovered was the money belonging to the trust.”
“… the beneficiary is entitled to ask what has been done with the sums taken out of those accounts [i.e. mixed accounts]. If they have been used to acquire an asset he is entitled to a charge upon that asset. If that asset should subsequently be sold and the proceeds of sale repaid into one of the fiduciary’s bank accounts, the beneficiary is entitled to follow those proceeds of sale.”
“The beneficiary’s proprietary claims to the trust property or its traceable proceeds can be maintained against the wrongdoer and anyone who derives title from him except a bona fide purchaser for value without notice of the breach of trust. The same rules apply even where there have been numerous successive transactions, so long as the tracing exercise is successful and no bona fide purchaser for value without notice has intervened.”
“It is the case that where misappropriated trust assets are thereafter applied in the acquisition of other property the beneficiary is entitled at his option either (a) to assert, via a constructive trust, beneficial ownership of the proceeds (or a commensurate part of them) or (b) to make a personal claim against the defaulting trustee, if need be enforcing an equitable charge or lien over the proceeds in question to secure restoration by the defaulting trustee of the misappropriated assets. These are true alternatives. In the first kind of claim, the beneficiary is in effect saying: “Those proceeds (or part of them) belong to me.”
“the beneficiary’s right to claim a lien is available only against a wrongdoer and those deriving title under him otherwise than for value. It is not available against competing contributors who are innocent of any wrongdoing.”
“On the basis that the money of TPL may have been mixed with VTFL funds, TPL may also be able to recover assets from Frederick Clough and from companies associated with him or companies which have received transfers from TPL or VTFL…. I believe therefore that TPL may have an interest in any assets recovered or which may be recovered by the JARs as a result of their legal action.”
“In Daly v. Sydney Stock Exchange Ltd(1986) 160 CLR 371 , 379 Gibbs CJ refused to accept that money lent by an investor to a firm in a fiduciary relationship with him should be treated as subject to a constructive trust. He said that the reasons of Lindley LJ in the Lister case, 45 Ch D 1 appeared to him to be “impeccable when applied to the case in which the person claiming the money has simply made an outright loan to the defendant.”