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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Sinclair Investment Holdings SA v Versailles Trade Finance Ltd & Ors [2005] EWCA Civ 70 (25 January 2005) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2005/70.html Cite as: [2005] EWCA Civ 70

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IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(MR NICHOLAS STRAUSS QC
(sitting as a deputy judge of the High Court))

		Royal Courts of Justice Strand London, WC2
		25th January 2005

1. LORD JUSTICE PETER GIBSON: This is a renewed application for permission to appeal from part of the order made on 24th September 2004 by Mr Nicholas Strauss QC sitting as a deputy judge of the High Court on an appeal by the claimant, Sinclair Investment Holdings SA ("Sinclair"), from the order made by Master Bowman on 12th March 2004. The defendants, Versailles Trade Finance Ltd ("VTFL"), and its administrative receivers, Mr Lomas and Mr Birchall ("the receivers"), applied to the Master to strike out and for summary judgment. Sinclair applied to amend. The Master refused the amendments and on 16th March 2004 delivered an addendum to his judgment striking out the claims of Sinclair.
2. On Sinclair's appeal to the judge he allowed the appeal in relation to what was called the Kensington claim, but dismissed the appeal in relation to what was called the cross-firing claim. The defendants sought permission to appeal from the judge's decision on the Kensington claim. There was no cross-appeal.
3. Arden LJ refused permission to appeal on paper. Mr Collings for the defendants renews the application before me. To succeed he must show that this second appeal raises an important point of principle or practice, or that there is some other compelling reason why this appeal should be heard. Arden LJ thought no such point arose in the present case.
4. The proceedings result from a fraud committed by Mr Cushnie and Mr Clough, directors of VTFL, in relation to a group of companies, the parent company in which, Versailles Group Plc ("Versailles"), had its shares quoted on the London Stock Exchange. The trading company of the group was VTFL. It carried on a factoring business of a kind known as accelerated payment trading, which was funded by persons called traders. They included Sinclair, which advanced £2.35 million between May 1996 and February 1997.
5. Much of VTFL's apparent business and turnover was fictitious. Many payments made to and received from associated companies of VTFL were disguised in VTFL's books to make them appear to be genuine sales to customers. This is called cross-firing. This part of VTFL's business was carried out by another company, Trading Partners Ltd ("TPL"), to which the traders made their payments. The terms of the payments made by a trader were evidenced by standard form letters recording that the trader's monies had been provided for the purpose of buying and selling goods for the trader, but that if any of the money provided was not currently used in the purchase of goods it would be deposited by TPL in trust for the trader. VTFL by agreement with TPL was entitled to operate bank accounts in TPL's name but not to use the monies advanced to TPL for its own purposes. Sinclair's monies were not used to purchase goods on behalf of Sinclair, but were paid to VTFL and used in cross-firing.
6. Payments were made by VTFL to associated companies, including Marrlist Ltd ("Marrlist"), a company wholly owned by Mr Cushnie. It held shares in Versailles. Marrlist made profits of over £28.9 million in November 1999 on selling shares in Versailles. The profits made were used to fund the purchase by Mr Cushnie of a house in Kensington. This property was subsequently sold for £8.6 million, and in February 2001 Mr Cushnie entered into a settlement agreement with the receivers to pay the proceeds to them. Sinclair claims those proceeds. That is the Kensington claim, which is the only live claim as matters now stand.
7. The draft amended pleadings included the following. By paragraph 10 it was alleged that TPL held Sinclair's monies on a Quistclose trust to be used for the purpose of buying and selling goods for Sinclair and subject to that on trust for Sinclair.
8. By paragraph 12 it was alleged that paragraph 12 that TPL in transferring funds to VTFL artificially to inflate VTFL's turnover committed a breach of trust, and that VTFL dishonestly assisted in breach of that trust and so became a constructive trustee of the monies.
9. In paragraph 13 it is alleged that Mr Cushnie owed TPL and VTFL fiduciary duties. In paragraphs 13A and 13B it is alleged that Mr Cushnie personally dealt with the representatives of Sinclair and that, as a result of the personal relationship which he developed with the principal adviser of Sinclair and the representations which he made about the use of the funds provided to TPL by Sinclair, Mr Cushnie owed fiduciary duties to Sinclair similar to those which he owed TPL and Versailles.
10. Paragraph 14 contains allegations of breaches of trust by TPL, dishonest assistance by VTFL, and breaches of fiduciary duties by Mr Cushnie to TPL, VTFL and Sinclair.
11. In paragraph 15 it is alleged that Mr Cushnie, in breach of his fiduciary duties to TPL, VTFL and Sinclair, made secret profits through Marrlist selling shares in Versailles.
12. In paragraph 15A it is alleged in the alternative that Mr Cushnie made the secret profits as a result of TPL's and VTFL's fraudulent use of the monies paid by Sinclair to bring about the artificial increase in the turnover and consequently the share price of Versailles, and that Mr Cushnie is a constructive trustee of the profits for Sinclair.
13. In paragraph 15B it is alleged that part of the profits totalling over £28.9 million was used by Mr Cushnie to provide funds for the purchase of the Kensington house.
14. In paragraph 16 the receipt by the receivers of £8.6 million is pleaded.
15. In paragraph 17 it is averred that the £8.6 million is held subject to a constructive trust for Sinclair alone.
16. In paragraph 17A it is said that Sinclair claims to be entitled to trace the £8.6 million received by the receivers from Mr Cushnie in equity into the hands of VTFL and/or the receivers.
17. On the application to the Master, the Master said in his judgment that the pleaded personal relationship of Mr Cushnie with Sinclair's principal adviser was not indicative of a fiduciary relationship, nor did the pleaded representations make Mr Cushnie a fiduciary. The Master also found overwhelming difficulty in tracing or following Sinclair's money into the proceeds of sale from the Kensington house.
18. On the appeal to the judge, Sinclair put in a document headed "Sinclair's potential recoveries". Sinclair gave a recovery figure of £210,000, although that has not been put into the amended pleadings. On giving judgment, the judge noted Sinclair's contention that Mr Cushnie was a constructive trustee of the profits made by Marrlist on two alternative bases: (1) there was a breach of fiduciary duties owed to Sinclair to ensure its funds were properly dealt with; (2) the profits were made as a result of the fraudulent use of Sinclair's funds in which Mr Cushnie participated. The judge saw force in Sinclair's submission that this is a developing area of the law and that the court should not dismiss a claim as unarguable merely because there is no precedent for it directly in point. The judge said that Mr Cushnie might have a fiduciary duty to ensure the proper use of Sinclair's funds.
19. After considering several authorities, the judge said of the Master's remarks (to which I have referred) that he did not think the position was so clear and that much might depend upon how the evidence turned out. He said that whilst in some cases it was possible to proceed on assumed facts, in the present case the issue might not be so much what Mr Cushnie said but whether in the context of the relevant conversations he undertook personal responsibilities. The judge said that the issue whether Mr Cushnie owed a fiduciary duty should be resolved at trial.
20. On the second way Sinclair had put its case, the judge noted Sinclair's reliance on what Lord Browne-Wilkinson had said in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 676, at 716:

"... when property is obtained by fraud equity imposes a constructive trust on the fraudulent recipient: ..."

21. The judge accepted that there could be no tracing of or following Sinclair's claim into the proceeds of sale of the Kensington house, but he thought it arguable that, in circumstances in which the defendant has been party to a fraudulent misuse of the claimant's funds enabling him to make a profit, it would be unconscionable for him to retain the profit and the law should impose a trust. He thought it inappropriate to determine summarily this issue or whether there were other prior or competing claims.
22. On this application Mr Collings submits that an important point of principle does arise in relation to the first issue. He accepts that in special circumstances a director of a company may be held to have assumed a personal liability in tort to a person with whom the company was dealing. But he points out that there appears to be no case of a director being held to have assumed such liability as a fiduciary to such a person, and he points to the difficulties that would arise because of competing loyalties and equities. The question is whether there can be such a case in the circumstances pleaded in the present case. Mr Collings submits that the judge should have decided whether the pleadings disclosed a sustainable case that Mr Cushnie was such a fiduciary in relation to Sinclair.
23. Whilst I accept that on an appeal this court may take the judge's view that the facts should be found first before deciding this point, I am persuaded that there is an important point of principle which would be raised by this appeal and, moreover, that the defendants have a real prospect of success on it.
24. On the second issue, Mr Collings again submits that an important point of principle does arise. He submits that what Lord Browne-Wilkinson said has been misunderstood and misapplied, and that the remarks were limited to a case where a person receives the money of another and misapplies it. That is not the present case.
25. Mr Collings relies on the decision of this court in Halifax Building Society v Thomas [1996] Ch 217, where this court did not accept that the profits made by a fraudster would be held for the mortgagee against whom the fraud had been perpetrated when the mortgagee had affirmed the mortgage and received full satisfaction thereto. Mr Collings emphasises that Sinclair is not claiming its own property. The question is whether there is a universal principle that where there is personal fraud equity will require the fraudster to hold for the defrauded person profits made by the fraudster subsequent to the fraud using the monies of the defrauded person.
26. Again I accept that on appeal this court may agree with the judge that the facts should be found first, but again I am persuaded that this issue also raises an important point of principle on which it cannot be said that the defendants have only a fanciful prospect of success.
27. Finally, Mr Collings submits that the judge should not have allowed the amendment introducing the tracing claim in paragraph 17A of the amended particulars of claim. I doubt if this claim raises an important point of principle or practice in view of the authoritative statement of the law on tracing by the House of Lords in Foskett v McKeown [2001] 1 AC 102. However, having given permission to appeal on the first two points, it would make no sense not to give permission to appeal in relation to this point too.
28. Accordingly, for these reasons I give the permission to appeal which has been sought.

ORDER: Application for permission to appeal granted; appeal to be heard by three Lords Justices, of which one may be a High Court judge, but to include at least one judge with Chancery experience; time estimate for appeal of one and a half days.

(Order not part of approved judgment) ______________________________