Strand, London WC2A 2LL
B e f o r e :
|PETER SHALSON AND OTHERS||Claimants|
|- and -|
|JEAN-CLAUDE MIMRAN AND OTHERS||Part 20 Claimants|
|- and -|
|ONOFRIO RUSSO AND OTHERS||Defendants|
Mr Stephen Sm1th QC and Mr Graham Shipley (instructed by Withers) appeared for the Part 20 claimants (Jean-Claude Mimran and Oceanwave International Holdings Limited)
Mr Michael Pooles QC and Mr Francis Bacon (instructed by Vizards Wyeth) appeared for the second to fifth defendants (the Cantrust parties)
Crown Copyright ©
Mr Justice Rimer:
Westbond International Bank Limited ("WIB")
"In particular [WIB] statements for individual depositors detail credits which are not reflected in the PKB Account which, at least as far as the Liquidators are aware from the documentation retained by them, are not reflected in any [WIB] statements. The Liquidators do not, therefore, accept that the [WIB] bank statements accurately reflect what funds were, in fact, received and paid out on behalf of individual depositors."
In cross-examination, Mr Wood said that the extent of the false accounting at WIB was "endemic" and that its customer statements were thoroughly unreliable. All payment instructions with regard to the WIB accounts with PKB were given either by Mr Russo or by Dr Alberto Petronio, his associate, and Mr Russo had de facto control of WIB.
The Mimran parties' story
The Global Sim Spa deal
The January and July 1997 loans
The November 1997 loan
Westland Portfolio Limited: the proposal for a joint venture
Westland Portfolio Limited: the joint venture is implemented
Mr Mimran's payments to Westland
(b) The Leipzig deal: the US$1.5m
(c) The US$2.5m payment
The US$1.5m advance
(e) The US$lm
The true position
The Shalson story
(a) The Telecom Italia flotation
(b) The Rotch Italia deal
(c)The AMEC joint venture
The first trust deed
The first Westland agreement
Mr Shalson's £5 7m payment
The second trust deed
The second Westland agreement
Did Mr Jerne sign the two Westland agreements?
No instalments are paid
Mr Wolinsky visits Dr Petronio
The charge over the picture
The charge over the Hamilton share
The charge over the Edenton debt to Hamilton/Mr Russo
The Mosaique VAT scheme
(a) For what sum are the Mimran parties entitled to make a tracing claim?
(b) Tracing generally
"This is not, however, the occasion to explore these matters further, for the present is a straightforward case of a trustee who wrongfully misappropriated trust money, mixed it with his own, and used it to pay for an asset for the benefit of his children. Even on the traditional approach, the equitable rules are available to the plaintiffs."
Lord Millett therefore deliberately stopped short of deciding that the traditional precondition to tracing in equity should be regarded as overruled. Lord Hoffmann agreed with Lord Millett's speech, and cannot by that expression of view have been deciding any more on this point than did Lord Millett. Lord Browne-Wilkinson (at 108) also agreed with Lord Millett's speech, but he too (at 109D) expressly made clear that he did "not want to enter into the dispute whether the legal and equitable rules of tracing are the same or differ". Lord Hope of Craighead did not deal with the point. Lord Steyn may be regarded as having adopted a more positive stance. But, overall, my view is that it cannot be said that Foskett has swept away the long recognised difference between common law and equitable tracing.
(i) Constructive/resulting trust
"The stolen bag of coins
The argument for a resulting trust was said to be supported by the case of a thief who steals a bag of coins. At law those coins remain traceable only so long as they are kept separate: as soon as they are mixed with other coins or paid into a mixed bank account they cease to be traceable at law. Can it really be the case, it is asked, that in such circumstances the thief cannot be required to disgorge the property which, in equity, represents the stolen coins? Moneys can only be traced in equity if there has at some stage been a breach of fiduciary duty, ie if either before the theft there was an equitable proprietary interest (eg the coins were stolen trust moneys) or such interest arises under a resulting trust at the time of the theft or the mixing of the moneys. Therefore, it is said, a resulting trust must arise either at the time of the theft or when the moneys are subsequently mixed, Unless this is the law, there will be no right to recover the assets representing the stolen moneys once the moneys have become mixed.
I agree that the stolen moneys are traceable in equity. But the proprietary interest which equity is enforcing in such circumstances arises --under a constructive, not a resulting, trust. Although it is difficult to find clear authority for the proposition, when property is obtained by fraud equity imposes a constructive trust on the fraudulent recipient: the property is recoverable and traceable in equity. Thus, an infant who has obtained property by fraud is bound in equity to restore it: Stocks v Wilson  2 KB 235, 244; R Leslie Ltd v Sheill  3 KB 607. Moneys stolen from a bank account can be traced in equity: Bankers Trust Co v Shapira  1 WLR 1274, 1282C-E: see also McCormick v Grogan (1860) LR 4 HL 82, 97."
"What the Court of Equity has done in cases of this kind is to prevent the infant from retaining the benefit of what he has obtained by reason of his fraud. It has done no more than this, and this is a very different thing from making him liable to pay damages or compensation for the loss of the other party's bargain. If the infant has obtained property by fraud he can be compelled to restore it; if he has obtained money he can be compelled to refund it. If he has not obtained either, but has only purported to bind himself by an obligation to transfer property or to pay money, neither in a Court of law nor a Court of Equity can he be compelled to make good his promise or to make satisfaction for its breach . . .
The equitable liability depends, not on the validity of the contract, but on the fact that the defendant while an infant obtained goods from the plaintiff by a false and fraudulent representation."
"I think it plain that Lush J conceived himself to be merely applying the equitable principle of restitution. The form of the claim was that, by way of equitable relief, the infant should be ordered to pay the reasonable value of the goods, which he could not restore because he had sold them. The argument was that equity would not allow him to keep the goods and not pay for them, that if he kept the property he must discharge the burthen, and that he could not better his position by having put it out of his power to give up the property. ... The judge thought that the fundamental principle in In re King, Ex parte Unity Joint Stock Mutual Banking Association 3 De GJ & J 63 was a liability to account for the money obtained by the fraudulent representation, and that in the case before him there must be a similar liability to account for the proceeds of the sale of the goods obtained by his fraud. If this be the ratio decidendi, though I have difficulty in seeing what liability to account there can be (and certainly none is named in [In re King]), the decision in Stocks v Wilson is distinguishable from the present case and is independent of the above dictum, and I need express no opinion on it. In the present case there is clearly no accounting. There is no fiduciary relation: the money was paid over in order to be used as the defendant's own and he has so used it and, I suppose, spent it. There is no question of tracing it, no possibility of restoring the very thing got by fraud, nothing but compulsion through a personal judgment to pay an equivalent sum out of his present or future resources, in a word nothing but a judgment in debt to repay the loan. I think this would be nothing but enforcing a void contract. So far as I can find, the Court of Chancery never would have enforced any liability under circumstances like the present, any more than a court of law would have done so, and I think that no ground can be found in the present judgment, which would be an answer to the Infants' Relief Act."
must be read in the context in which it was made, namely the jurisdiction where a secret trust is alleged. It cannot be elevated into a universal principle that wherever there is personal fraud the fraudster will become a trustee for the party injured by the fraud."
Judgment in Halifax was delivered on 29 June 1995. The argument in Westdeutsche in the House of Lords concluded on 13 July 1995, judgment was given on 22 May 1996 and Halifax was not mentioned by Lord Browne-Wilkinson in his speech. I respectfully prefer the Court of Appeal's more cautious approach as to the weight to be attached to McCormick. So did Ferris J in Box, Brown and Jacobs v Barclays Bank  Lloyd's Law Reports Banking 185, at 200, when he too was asked to treat McCormick as establishing the wide principle that Lord Browne-Wilkinson derived from it. Ferris J concluded his consideration of the authorities by saying that he did not think that Lord Browne-Wilkinson could be taken to have been laying down a principle applicable to all cases of fraud (see 201).
"It should only be done when there is good ground for thinking the money in the bank is the plaintiff's money as, for instance, when the customer has got the money by fraud or other wrongdoing and paid it into his account at the bank. The plaintiff who has been defrauded has a right in equity to follow the money."
"I will assume therefore that this is a case not of a void but of a voidable transaction by which Hambrouck obtained a title to the money until the plaintiffs elected to avoid his title, which they did when they made their claim in this action. The title would then revest in the plaintiffs subject to any title acquired in the meantime by any transferee for value without notice of the fraud."
Bankes LJ also assumed that Hambrouck obtained a voidable title to the money (see 325). The Court of Appeal held that the bank was entitled to trace the money into an account in the name of Hambrouck's mistress and to recover it in Lonrho Plc Fayed (No 2)  1 WLR 1, at 12, Millett J said that:
"It may well be that if the representee elects to avoid the contract and set aside a transfer of property made pursuant to it the beneficial interest in the property will be treated as having remained vested in him throughout, at least to the extent necessary to support any tracing claim."
Millett J said much the same, this time with more confidence, in El Ajou v Dollar Land Holdings plc and another  3 All ER 717, at 734:
"But if the other victims of the fraud can trace their money in equity it must be because, having been induced to purchase the shares by false and fraudulent misrepresentations, they are entitled to rescind the transaction and revest the equitable title to the purchase money in themselves, at least to the extent necessary to support an equitable tracing claim: see Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371 at 387-390 per Brennan J. There is thus no distinction between their case and the plaintiff's. They can rescind the purchases for fraud, and he for the bribery of his agent; and each can then invoke the assistance of equity to follow property of which he is the equitable owner. But, if this- is correct, as I- think it is, then the trust which is operating in these cases is not some new model remedial constructive trust, but an old-fashioned institutional resulting trust."
Tuckey J recognised the same principle in Bank Tejerat v Hong Kong and Shanghai Banking Corp (CI) Ltd  1 Lloyd's Reports 239, at 248; and Millett LJ reverted to it in Bristol and West Building Society v Mothew  Ch 1, at 23, when he referred to his earlier quoted observations in El Ajou and said that, in making the suggestion he did, he was:
concerned to circumvent the supposed rule that there must be a fiduciary relationship or retained beneficial interest before resort may be had to the equitable tracing rules. Until the equitable tracing rules are made available in support of the ordinary common law claim for money had and received some problems will remain incapable of sensible resolution."
"Upon payment by the customers the purchase money became, and rescission or no rescission remained, the unencumbered property of the company. What the customers would recover on rescission would not be 'their' money, but an equivalent sum. Leaving aside for the moment the creation by the court of a new remedial proprietary right, to which totally different considerations would apply, the claimants would have to contend that in every case where a purchaser is misled into buying goods he is automatically entitled upon rescinding the contract to a proprietary right superior to those of all the vendor's other creditors, exercisable against the whole of the vendor's assets. It is not surprising that no authority could be cited for such an extreme proposition. The only possible exception is In re Eastgate, Ex parte Ward  1 KB 465. Their Lordships doubt whether, correctly understood, the case so decides, but if it does they decline to follow it."
(ii) Is Mr Mimran entitled to the benefit of a Quistclose trust?
"73 A Quistclose trust does not necessarily arise merely because money is paid for a particular purpose. A lender will often inquire into the purpose for which a loan is sought in order to decide whether he would be justified in making it. He may be said to lend the money for the purpose in question, but this is not enough to create a trust, once lent the money is at the free disposal of the borrower. Similarly payments in advance for goods or services are paid for a particular purpose, but such payments do not ordinarily create a trust. The money is intended to be at the free disposal of the supplier and may be used as part of his cashflow. Commercial life would be impossible if this were not the case."
Those observations are directly in point. I hold that no Quistclose trust was created in the present case, and that this-line of argument does not enable Mr Mimran to set up a proprietary interest in the money he paid to the credit of Westland's account with WIB, let alone to any money in WIB's account with PKB.
(iii) Did Mr Russo owe Mr Mimran fiduciary duties in respect of the moneys advanced to Westland?
(c) Is Mr Mimran entitled to trace his payments into WIB's PKB account?
(d) Was the WIB/PKB current account overdrawn?
(e) The nature of the suggested tracing claim
"In the premises, on any basis, the Mimran defendants cannot trace into any of Mr Shalson's assets. Further and alternatively, if the Mimran defendants succeed in showing that they can trace their monies, [the Shalson parties] will seek to set off, in diminution or extinction of the Mimran defendants' tracing claim, their better right to trace into the payments to or for the benefit of Mr Mimran from [WIB] and the assets representing the same."
(f) Is Mr Mimran entitled to trace into (i) the Mosaique, (ii) the Hamilton/Russo loans to Edenton, or (iii) the Hamilton share in Edenton?
(i) The Mosaique
"The general principle is, beyond all question, that work and labour done or money expended by one man to preserve or benefit the property of another do not according to English law create any lien upon the property saved or benefited, nor, even if standing alone, create any obligation to repay the expenditure. Liabilities are not to be forced upon people behind their backs any more than you can confer a benefit upon a man against his will."
The unwitting contributor would have a claim against Mr Russo for misapplying his money, and I would not exclude the possibility that he might have a personal restitutionary claim against Edenton. But he would not have a proprietary interest in the Mosaique. I reject Mr Mimran's claim to trace into the Mosaique.
(ii) The Hamilton/Russo loans to Edenton
(iii) The Hamilton share in Edenton
(g) Is a defence of a "good faith purchaser for value without notice" open to Mr Shalson?
"If such a security is given, it may of course be given upon some express agreement to give time for the payment of the debt, or to give consideration for the security in some other way, or, if there be no express agreement, the law may very readily imply an agreement to give time. It may not be a definite time, but to forbear for some indefinite time in consideration of the security being given. And further than that, if there is no express agreement, and no agreement can be implied at the time and under the circumstances at and under which the indenture giving the further security is executed, yet if that security be communicated to a person who could otherwise sue on the debt, and on the strength of that security he does in fact forbear to sue on the debt, he does give that time with the object of securing which the security is presumably given, and then I think it appears on the cases that there is sufficient consideration, though in a sense it is an ex post facto consideration, for the security which is given."
(h) The Mimran tracing claims generally
(i) The claim for alleged dishonest assistance by Mr Jerne in signing the Westland agreements
(j) The Mimran parties' claim under section 423 of the Insolvency Act 1986
2. The Mimran parties' other claims
(a) The GSS deal
(b) The November 1997 loan to Mr Russo
(c) Claims in respect of the US$7.5m
The Mimran parties' challenge to the Brookscastle settlement
"... acts done or documents executed by the parties to the 'sham' which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principle, morality and the authorities (see Yorkshire Railway Wagon Co v Maclure (1882) 21 Ch D 309 and Stoneleigh Finance Ltd v Phillips  2 QB 537), that for acts or documents to be a 'sham', with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating."
The application to amend