01 June 2007

Fraud and trust litigation news - summer: Dishonest assistance in a breach of trust


Sinclair Investment Holdings SA v Versailles Trade Finance Limited and Others [2007] EWHC 915 (Ch), (Rimer J)

In the last issue of this briefing note, we covered the Barlow Clowes decision and the Privy Council's reconsideration of the test for dishonesty.

In Barlow Clowes, the court disagreed with Rimer J's view (in Brinks v Abu Saleh) that a person could not be liable for dishonest assistance in a breach of trust if he did not know of the existence of the trust or the facts that gave rise to the trust. 

Rimer J had an opportunity to again revisit dishonest assistance in this case.

Facts of the case

Sinclair Investments Holdings (“Sinclair”) alleged breaches of fiduciary duties and dishonest assistance in a breach of trust.  The fraudsters, Messrs Cushnie and Clough, persuaded Sinclair to advance £2.35m to an offshore company called Trading Partners Ltd (‘TP').  Cushnie and Clough falsely represented that TP was to use the money in trading transactions, but instead the money was used to falsely inflate the turnover, assets and profits of a listed company, the Versailles Group.  Cushnie subsequently sold the shares he beneficially owned in Versailles for just under £29m.

Cushnie also owned the beneficial interest in a large Kensington property and he used £9.6m of his Versailles share sale proceeds to discharge the mortgage on the property.

Eventually the banks caught up with Versailles and appointed administrative receivers, who entered into agreements with Cushnie and sold the Kensington property, receiving part of the sale proceeds (£5.2m). 

Sinclair sought a declaration that Versailles held the £5.2m on constructive trust for Cushnie's victims, including Sinclair.  As a result, Sinclair sought an account of the sums due to it, claiming that the proceeds represented property in which it had a beneficial interest.  Its reasoning was:

  • The mortgage on the Kensington house had been redeemed with money improperly made by Cushnie as a result of his fraudulently persuading Sinclair to advance money to TP, in breach of the fiduciary duty he owed Sinclair, which in turn allowed him to make a healthy profit on his Versailles shares; and
  • TP held Sinclair's money on trust and Cushnie had dishonestly assisted TP in its breach of trust towards Sinclair by using the money to inflate the value of Versailles.

The decision

Although Mr Cushnie was not a director in TP, he assured Sinclair that, in fact, he controlled the company and that he would be, in effect, personally responsible for TP's success.  The judge did not dispute these personal assurances, but concluded that these were not enough to establish a collateral, personal fiduciary relationship between Sinclair and Cushnie.  All that Cushnie had done was to persuade Sinclair to enter into a relationship with TP, which he said he controlled and that was true.  However, there was no declaration of personal loyalty and fidelity from Cushnie and it was clear to the judge, on the facts, that there was no fiduciary relationship.  There was thus no trust, so that inevitably the claim for dishonest assistance in a breach of trust failed.

The usual remedy for dishonest assistance is compensation or an account of profits, but Sinclair asserted that it had a proprietary claim in the profits Cushnie made as a result of the dishonest assistance he gave, although Cushnie had not received any of the trust property (his money was received from the sale of his shares in TP).  Sinclair asserted that Cushnie had assisted with ‘knowledge in a dishonest and fraudulent design on the part of the trustees'; i.e. TP.

In deciding this point, Rimer J turned to the relatively recent decision of Royal Brunei Airlines [1995], a decision which focused solely on the accessory liability of a dishonest assistant (as opposed to a dishonest recipient): ‘Recipient liability is restitution-based; accessory liability is not'. 

Rimer J accepted that Cushnie was personally liable to account for any profits he had made as a result of his accessory liability, but it was not possible to demonstrate that Sinclair had any proprietary claim in the profits made by Cushnie, £5.2m of which was received by Versailles.

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