COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(Mr Justice Carnwath)
B e f o r e :
LORD JUSTICE WARD and
LORD JUSTICE SEDLEY
|(1) BANK OF CREDIT AND COMMERCE INTERNATIONAL|
|(2) INTERNATIONAL CREDIT AND INVESTMENT COMPANY|
|CHIEF LABODE ONADIMAKI AKINDELE|
Smith Bernal Reporting Limited
180 Fleet Street London EC4A 2HG
Tel: 020 7421 4040 Fax: 020 7831 8838
(Official Shorthand Writers to the Court)
Mr G Moss QC and Mr D Marks (instructed by Messrs Finers, London W1) appeared on behalf of the respondent defendant.
Crown Copyright ©
"It is agreed between the Investor and the Company that if, at any time after the expiry of two years and up to a period of five years from the date hereof, the Investor desires to sell the shares and the accretions thereto, if any, in the form of stock dividends (Bonus Shares), the Company shall arrange for the sale of the shares, together with accretions thereto at a price that would give the Investor a return of 15% per annum on his investment, compounded annually. It is hereby expressly agreed that the Company shall be entitled to effect such purchase for itself and/or its nominee or nominees."
"If the Investor holds the shares for a period of more than five years, or at any time during the period of five years from the date hereof, conveys to the Company, in writing, his firm intention to hold the shares for more than five years, these shares shall be transferred to his name or to the name of a nominee, subject to the clearance of the transferee's name by BCCI Holdings and by regulatory authorities if applicable to BCCI Holdings."
"The mechanics of the repayment caused some problems within BCCI. ICIC Overseas did not have a buyer for the defendant's shares in BCCI Holdings and could not fund the divestiture payment itself. The payment could not be booked as expenses without adversely affecting the reported profits at the year end, 31 December 1988, and it could not safely be booked to the [Wabel Pharaon] nominee account in ICIC at that time, since ICIC's half-yearly audit was taking place. Accordingly, Mr Naqvi directed that a temporary overdraft account be opened in the books of BCCI Overseas in the defendant's name. Payment was made through that account. In January the temporary overdraft was 'repaid' by debiting an equivalent amount to the loan account of Wabel Pharaon with ICIC Overseas. There is no evidence that the defendant was aware of these internal arrangements."
"Q.Did you ever regard this as an investment in shares?
A.I regard it as taking my money from a deposit account to another deposit account to earn interest. What only interest me was the rate of interest . . .
Q.Was any clearance obtained so far as you were aware for this agreement from either BCCI Holdings or regulatory authorities?
A.I do not know.
Q.Did you not, looking at that, realise that if you were to be registered as a shareholder, then clearances would be required?
A.It never occurred to me because I was not dealing shares; I was dealing in question of additional rate of interest; and I knew in any case that I was not going to get to five years before I get my money because I would see another venture that required capital.
Q.This agreement is all a sham, is it not?
A.Well, I do not know. I only know that it secure my money. That is all I am interested, and it give me additional rate of interest."
". . in the end Mr Haberman was unable to point to any investment which, as viewed in July 1985, would have offered a guaranteed return over two years of more than about 9 per cent. If anything, his evidence tended to reinforce the central point of the plaintiff's case, that the rate of return offered to the defendant was wholly exceptional for a secure investment."
"In the end it does not seem to me to matter very much who negotiated the 1985 agreement. Whoever was actually dealing with the defendant, it would no doubt have been clear that the offer was being made with the authority of the senior management of BCCI. On the other hand, whoever it was, there is no basis for suggesting guilt by association. There is no evidence that anyone outside BCCI had reason to doubt the integrity of the BCCI management at that time."
"I am satisfied that he did not himself see it as a dishonest transaction. He saw it simply as an arm's-length business transaction with a major bank, for whom he was one of a select group of 'high net worth' customers, and was tying up US$10m for two years."
"The plaintiff's case depends on the high rate of interest and the artificial nature of the agreement. Were these two factors sufficient to put an honest person in the defendant's position on notice that some fraud or breach of trust was being perpetrated, even if he did not know its precise nature or purpose? I am not prepared to draw that conclusion. As I have said, in 1985 BCCI were regarded as a reputable international bank. The defendant would have had no reason to question the form of the transaction. It did not concern him, so long as his investment was guaranteed. Even though he was an experienced businessman, he had no duty to the bank or to its regulators which made it dishonest for him to do other than look after his own interests. If he had seen anything suspicious in it, I do not think he would have wanted to have been involved. That would have been a matter of self-interest, just as it was when he decided to disassociate himself from BCCI in 1988. The form of the agreement was undoubtedly artificial, but there was nothing obviously illegal about it. The interest was very high, but he was entitled to assume that the bank were offering it in good faith and for proper reasons.
The same considerations apply to the 1988 agreement. Although by that time the defendant did have suspicions as to the conduct of BCCI's affairs, he was entitled to take steps to protect his own interest. There was nothing dishonest in his seeking to enforce the 1985 agreement. As I have said, there is no suggestion that he was directly involved in the internal mechanics within BCCI, designed to avoid the scrutiny of the auditors.
Dishonesty in one form or another is the essential foundation of the plaintiffs' case. They have not established it and accordingly the claim must be dismissed."
"For this purpose the plaintiff must show, first, a disposal of his assets in breach of fiduciary duty; secondly, the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff; and thirdly, knowledge on the part of the defendant that the assets received are traceable to a breach of fiduciary duty."
"After careful consideration I do not feel that we should be justified in disturbing the judge's finding that Mr James genuinely believed that the agreement was a good commercial proposition for Belmont. It was a belief which, on his view of the commercial aspects of the case, Mr James could have sincerely held."
"In the present case, the payment of the £500,000 by Belmont to [the shareholders of Maximum], being an unlawful contravention of section 54, was a mis-application of Belmont's money and was in breach of the duties of the directors of Belmont. £489,000 of the £500,000 so misapplied found their way into the hands of City with City's knowledge of the whole circumstances of the transaction. It must follow, in my opinion, that City is accountable to Belmont as a constructive trustee of the £489,000 under the first of Lord Selborne LC's two heads.
There remains the question whether City is chargeable as a constructive trustee under Lord Selborne's second head on the ground that Belmont's directors were guilty of dishonesty in buying the shares of Maximum and that City with knowledge of the facts assisted them in that dishonest design. As I understand Lord Selborne LC's second head, a stranger to a trust not- withstanding that he may not have received any of the trust fund which has been misapplied will be treated as accountable as a constructive trustee if he has knowingly participated in a dishonest design on the part of the trustee to misapply the fund; he must himself have been in some way a party to the dishonesty of the trustees. It follows from what I have already held that the directors of Belmont were guilty of misfeasance but not that they acted dishonestly."
"What the decision in Belmont (No. 2) shows is that in a 'knowing receipt' case it is only necessary to show that the defendant knew that the moneys paid to him were trust moneys and of circumstances which made the payment a misapplication of them. Unlike a 'knowing assistance' case it is not necessary, and never has been necessary, to show that the defendant was in any sense a participator in a fraud."
"So, if the directors of a company in breach of their fiduciary duties misapply the funds of their company so that they come into the hands of some stranger to the trust who receives them with knowledge (actual or constructive) of the breach, he cannot conscientiously retain those funds against the company unless he has some better equity. He becomes a constructive trustee for the company of the misapplied funds."
"In my judgment the answer to that question must plainly be Yes for they are fixed with all the knowledge that Mr James had. Now, he had actual knowledge of all the facts which made the agreement illegal and his belief that the agreement was a good commercial proposition for Belmont can be no more a defence to City's liability as constructive trustees than in conspiracy.
Apart from this, clearly, in my judgment, Mr James knew or ought to have known all the facts that I have rehearsed, showing that there was in any event a misfeasance apart from illegality."
"A third party who has notice - actual or constructive - that a transaction, although intra vires the company, was entered into in excess or abuse of the powers of the company cannot enforce such transaction against the company and will be accountable as constructive trustee for any money or property of the company received by [him]."
"He is liable as a constructive trustee if he received it with notice, actual or constructive, that it was trust property and that the transfer to him was a breach of trust . . ."
"The former is concerned with the question whether a person takes property subject to or free from some equity. The latter 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."
"If liability as a constructive trustee depended on his knowledge, then he was not liable as a constructive trustee, and his estate is not liable for any chattels that have been disposed of, as distinct from any traceable proceeds of them. Even if he was not a constructive trustee and was a mere volunteer, his estate is liable to yield up any chattels that remain, or the traceable proceeds of any that have gone ... But unless he was a constructive trustee, there appears to be no liability if the chattels have gone and there are no traceable proceeds."
"(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."
"In dealing with estates in land title is everything, and it can be leisurely investigated; in commercial transactions possession is everything, and there is no time to investigate title; and if we were to extend the doctrine of constructive notice to commercial transactions we should be doing infinite mischief and paralyzing the trade of the country."
"Clearly Courts would not readily import a duty to enquire in the case of commercial transactions where they must be conscious of the seriously inhibiting effects of a wide application of the doctrine. Nevertheless there must be cases where there is no justification on the known facts for allowing a commercial man who has received funds paid to him in breach of trust to plead the shelter of the exigencies of commercial life."
"In this respect equity should now follow the law. Restitutionary liability, applicable regardless of fault but subject to a defence of change of position, would be a better-tailored response to the underlying mischief of misapplied property than personal liability which is exclusively fault-based. Personal liability would flow from having received the property of another, from having been unjustly enriched at the expense of another. It would be triggered by the mere fact of receipt, thus recognising the endurance of property rights. But fairness would be ensured by the need to identify a gain, and by making change of position available as a default in suitable cases when, for instance, the recipient had changed his position in reliance on the receipt."
"Towards the end of 1988 the defendant decided to end his relationship with BCCI, and in particular to terminate the share agreement. A number of factors led to this decision. In late 1987 there had been rumours in the Nigerian press of irregularities involving BCCI. He had received warnings from senior business figures in Nigeria. One was Dr Onaolapo Soleye, a former Nigerian Minister of Finance, who has provided a witness statement. He says that he informed the defendant of 'unorthodox and irregular banking practices around the world', and warned him of the effect a scandal relating to BCCI could have on his business image and that of BCCI Nigeria. The defendant also became aware later in 1988 that various BCCI officials had been arrested by US Customs in Tampa in connection with money laundering offences. He considered selling his shares in BCCI Nigeria, but was dissuaded from doing so by Dr Soleye and others, because of the tribal imbalance it would create within the bank.
At this time the defendant was seeking to realise £20m of his own money, and to raise a further £40m, to finance a property investment venture in the UK. The major banks involved including N M Rothschild in London and BNP, objected to him raising part of the finance from BCCI."
Order: appeal dismissed with costs; leave to appeal to the House of Lords refused.