England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		25 May 2004

Mr Justice Laddie:

1. This is the judgment in Part 24 applications brought by the claimants in two related actions. The litigation arises out of a large fraud perpetrated on a Brazilian bank, Banco Noroeste SA ("The Bank") in the mid 1990's. The perpetrators of the fraud were a group of individuals based largely in Nigeria. One of, or the, leading light in that dishonest activity was a Chief Anajemba. He has since been murdered. The total loss inflicted on the Bank was $242.5m, of which some $190.3m was transferred from the Bank to third parties by means of electronic SWIFT Transfers.
2. The fraud came to light in the course of a due diligence search undertaken in connection with the proposed sale of the Bank. Eventually that sale proceeded, but on terms which required the current claimants to take an assignment of the right to sue in respect of the losses. No point is taken on the assignment and, during the course of argument, counsel treated the claimants as if they were the Bank. In this judgment I will do likewise.
3. There are four defendants to this application. One is Chief Ezugo Dan Nwandu. The other three are companies of which he is the moving spirit. Those companies are an English company called MacDaniels Limited ("MacDaniels England"), General Securities and Finance Company Limited ("General") and another company called MacDaniels Limited which is incorporated in Nigeria ("MacDaniels Nigeria"). As Chief Nwandu explains in evidence he has filed, MacDaniels England was incorporated for the purpose of acting as an English 'adjunct' or nominee for General. Mr Michael Briggs QC who, with Miss Kathryn Purkis, appears for the claimants argues that, in substance, MacDaniels England is little more than a post-box for General. I do not understand Miss Catherine Roberts, who appears on behalf of the defendants, to dispute that. The reason that there are two separate actions is that the claimants' decision to bring claims against General and MacDaniels Nigeria was made after the proceedings against Chief Nwandu, MacDaniels England and 40 or so other defendants had been commenced. It was thought that a limitation defence might be available to General and MacDaniels Nigeria which would complicate any attempt to join them to the first action. Nothing turns on this now because Miss Roberts accepts, having heard Mr Briggs' submissions, that there is no valid limitation point which these defendants can take.
4. On these applications there is no dispute that a serious fraud was perpetrated on the bank by Chief Anajemba and his colleagues. For the purpose of this judgment I will only refer to Chief Anajemba, but it should be taken as a reference both to him and other defendants implicated in the fraud other than the defendants the subject of these applications. The Vice-Chancellor gave judgment against Chief Anajemba in the sum of $190.3m or so on 1 May, 2003. There is also no dispute that a sum of $8.05m was transferred from the Bank to the defendants in these applications pursuant to fraudulent SWIFT transfers in March and May, 1997. There is no dispute that that money is to be treated as stolen from the Bank. The money was transferred to these defendants with a view to it being changed into Nigerian currency (naira). In fact the money was received by MacDaniels England and was then transferred as to $4,228,680.90 to General and as to $1,720,032 to MacDaniels Nigeria and then distributed to Chief Anajemba's instructions. The latter sums were changed into naira. $2,085,528 of the remainder was paid out directly in dollars to third party creditors, the rest, some $50,000, was retained as commission by these defendants.
5. In their pleadings against these defendants, the claimants make wide-ranging allegations of wrongdoing and they seek against them personal and proprietary relief in the principal sum of $8.05m together with interest. They have already obtained freezing orders in support of these claims. Mr Briggs will be inviting me to continue those orders or to make post-judgment orders in the same terms while Miss Roberts will be inviting me to remove them or reduce their scope. However they both agree that consideration of those issues should be deferred pending my judgment on the Part 24 applications.
6. Although the claim form in the first action against, amongst others, MacDaniels England and Chief Nwandu was served some three years ago, and that against the other defendants was served in November of last year, no defences have been served. This is due, at least in large part, to a moratorium agreed between the parties. Nevertheless, it has been apparent throughout that these defendants assert that they were entirely innocent of any wrongdoing. They say they had no knowledge that theIR money had been siphoned off from the Bank. They believed that Chief Anajemba had acquired these sums legitimately as a result of trading in oil. This claim of innocence is not accepted by the claimants.
7. The Part 24 applications were issued in fairly standard form. They asserted that the defendants had no real prospect of successfully defending the claims against them and that there was no other reason why such claims should be disposed of at a trial. The claimants' original intention was to seek relief based on the causes of action for restitution, knowing receipt and dishonest assistance. Evidence in support, particularly the 25^th affidavit of Keith Oliver, went to these issues. Much of it was designed to show, to a sufficient level of confidence to meet the requirements of a Part 24 application, that the defendants were aware that these funds were stolen. In October 2003, Chief Nwandu served evidence in response, protesting his, and his companies', innocence.
8. However the claimants' evidence was not restricted to the issue of knowing receipt and dishonest assistance. Mr Oliver's affidavit also said that the transactions undertaken by these defendants were themselves illegal. Furthermore in January of this year the claimants served a witness statement from Professor Paul Collier which contained expert evidence as to the alleged illegality of the defendants' handling of the $8.05m. The latter evidence was answered by a statement of Dr E E J Okereke served on behalf of the defendants a few weeks ago.
9. Mr Briggs tells me that when Chief Nwandu and MacDaniels England served their evidence, the Claimants concluded they would pursue only the claim based on the restitutionary cause of action at the summary judgment stage. They did not feel it was appropriate to advance arguments on a Part 24 application which were dependent for their success on showing dishonesty on the part of the defendants. The hearing before me has been limited accordingly.
10. Mr Briggs summarises his clients' case as follows. The Bank's money has been passed to these defendants. It has a right to recover it as money had and received. This restitutionary claim is not dependent upon showing that the recipient was a wrongdoer. He says that only two defences to that claim are possible, namely that the recipient was a bona fide purchaser from the Bank of a legal estate in or title to the money for value without notice of the Bank's title or that the defendants had changed their position on the basis of their belief that the funds they obtained were honestly held by Chief Anajemba. Miss Roberts does not rely on the first of these potential defences. Although there is no pleading from her clients, Miss Roberts confirms what is apparent from their evidence, namely that they are running a defence of change of position. Mr Briggs accepts that such a defence might be arguable in respect of sums which the defendants did not retain (i.e. all of the $8.05m save the $50,000 commission) unless the change of position was itself illegal. It follows that, according to him, the outcome of these applications turn on whether the defendants have a triable answer to the allegation that their handling of the $8.05 and the contracts under which they received them, were illegal.
11. It appears that Miss Roberts was only informed that the claimants were abandoning the grounds of knowing receipt and dishonest assistance during a telephone conversation with Mr Briggs at the end of last week. She protests forcefully at this late change in position. She says she should have been notified earlier. I think she is right. She also points out that much of the evidence goes to these issues. She is right on that. It may well be that, depending on the outcome of the remaining issue, an order for costs will need to be made which takes account of the claimants' abandonment of part of the case they were advancing. But Miss Roberts goes further. She suggests that, in all the circumstances, it would be appropriate not to entertain these applications at all. Besides her objection to the lateness of the notification that claimants were restricting their arguments to a much narrower point, she also objects that the point to be advanced by the claimants, namely that the defendants' dealing in the $8.05m was illegal, has not been pleaded. It is therefore not appropriate or fair to deal with it at this stage. The matter should be pleaded properly and then the issue should go to trial.
12. As I have pointed out above, only particulars of claim have been served. The fact that the illegality point has not been pleaded is no surprise. It would need to be raised in response to a plea by the defendants of change of position. In other words, one would expect to find it in the claimants' reply. The pleadings have not got to that stage yet. On the other hand, there can be no doubt that both sides were well aware both that the defendants would be running a change of position defence and that the claimants' response would be one based on illegality. Any doubts as to that were put to rest by the contents of Professor Collier's witness statement and the defendants' response to it in the form of the statement of Dr Okereke. I do not understand Miss Roberts to argue that she is taken by surprise by Mr Briggs' reliance on this point. She does not ask for an adjournment – for example to prepare her arguments or to serve further evidence (in the light of Dr Okereke's evidence it is difficult to see what other evidence could have been served) – nor does she ask for the plea of illegality to be reduced to writing. Her substantive point is that such a radical restriction of the scope of the applications should not be allowed. The only alternative is to allow the issues go to trial.
13. I do not accept Miss Roberts' objection. Each side is aware, and has been for some months, of the nature of the arguments being advanced by its opponents and the material relied on in support of it. It is not suggested that the parties' positions would be made any clearer by further pleadings or evidence.
14. I can therefore turn to consider the substantive issues before me. In doing so I shall assume, as Mr Briggs concedes I must, that the defendants were wholly innocent of the illicit source of the funds supplied to them by Chief Anajemba and remained innocent until well after they had disposed of them (save for the commission) in accordance with Chief Anajemba's instructions.
15. The starting point of the claim is the principle that someone who receives stolen money is placed under a legal obligation to hand it, or an equivalent sum, back to the rightful owner. If he does not, he will be unjustly enriched. The obligation on the recipient is personal. It is not dependent on the stolen money being still in the recipient's hands. As Lord Goff pointed out in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548:

"… the mere fact that the [recipient] has spent the money, in whole or in part, does not of itself render it inequitable that he should be called upon to repay, because the expenditure might in any event have been incurred by him in the ordinary course of things." (p 580)

16. In such a case, the recipient is still as enriched by the receipt of the stolen money as if he had retained the original coinage in his hands. In a simple case where the recipient has received the money and has done nothing with it, or has merely used it to pay for things which he would have had to pay for out of other resources, there is no reason why the victim of the theft should not recover what is stolen and no reason why the recipient should continue to be enriched. Any such enrichment would be unjust. It should be emphasised that this restitutionary claim can be made against an entirely innocent recipient.
17. However, as Lipkin Gorman demonstrates, there may be cases where the victim loses his right to recover the stolen property. First, he may have given good and full consideration for the money. For example the thief might use the funds to buy an article (in Lipkin Gorman, Lord Templeman gave the example of the thief buying a motor car for £20,000 – see p. 560). In such a case, the recipient has not been enriched at all even though the money passed to him by the thief was stolen. In such a case, the recipient may have made a profit on the transaction but he can retain that. He might have made the same profit had he sold the article to someone else.
18. Mr Briggs argues that no case of consideration can be raised here on behalf of these defendants. Miss Roberts agrees. The consequence is that these defendants do not seek to assert that any part of the claim for $8.05m can be defeated on this ground. In particular, Miss Roberts does not suggest that there is a case of consideration which could be run to justify the retention of the $50,000 "commission" kept back by these defendants.
19. The second basis upon which the victim may lose his right to force the recipient to return the value of the stolen money is where, in the light of his belief that the money was not tainted, the recipient changes his position to his detriment. That such a defence to a restitutionary claim exists was confirmed in Lipkin Gorman (see Lord Goff at p 578) and the reason was explained as follows:

"In these circumstances, it is right that we should ask ourselves: why do we feel that it would be unjust to allow restitution in cases such as these? The answer must be that, where an innocent defendant's position is so changed that he will suffer an injustice if called upon to repay or to repay in full, the injustice of requiring him so to repay outweighs the injustice of denying the plaintiff restitution." (p 579)

20. The principle was well illustrated by Lipkin Gorman itself. In substance the facts there were that Mr Cass, a solicitor in the claimant firm of solicitors, had stolen from it just over £222,000. He used it to gamble at the defendant's casino. Because it was not aware of the illicit provenance of the money Mr Cass was using, the defendant allowed him to play. By so doing, it changed position. It exposed itself to the risk of losing money to Mr Cass. In fact Mr Cass did win some money and the defendant honoured those winnings. The fact that it had changed position meant that it did not have to repay the total sum which Mr Cass had taken and used at the casino. On the other hand, although Mr Cass won some money, he lost more. The net result was that, overall, the defendant had net winnings from Mr Cass of just under £155,000. Although it would have been unjust to make the defendant repay all the money used by Mr Cass in the casino it was not unjust to make it repay the balance which it still held.
21. In the present case, I understand Mr Briggs to accept, at least for the purpose of this application, that there is an arguable case that these defendants were both innocent and changed position based on that innocence. The conversion of $4,228,680.90 into naira and its transmission to General, the conversion of $1,720,032 into naira and its transmission to MacDaniels Nigeria, the onward transmission of both those sums and the payment out of $2,085,528 in dollars to third party creditors all took place because these defendants thought it was Chief Anajemba's funds and therefore he had authority to do with them what he liked.
22. Mr Briggs argues that this does not get the defendants home. He says that an innocent recipient cannot rely upon a plea of change of position where that change would be regarded by our courts as wrongful. This submission is based on the following passage in the speech of Lord Goff in Lipkin Gorman:

"I am most anxious that, in recognising this defence to actions of restitution, nothing should be said at this stage to inhibit the development of the defence on a case by case basis, in the usual way. It is, of course, plain that the defence is not open to one who has changed his position in bad faith, or where the defendant has paid away the money with knowledge of the facts entitling the plaintiff to restitution; and it is commonly accepted that the defence should not be open to a wrongdoer. These are matters which can, in due course, be considered in depth in cases where they arise for consideration. They do not arise in the present case." (p 580, emphasis added)

23. In this passage Lord Goff is considering two different classes of case. The first consists of those where the recipient has acted in bad faith or with knowledge of the claimant's entitlement to recovery of the funds. Those are cases where the defendant is not innocent of the claimant's rights. They are cases of knowing receipt or dishonest assistance. The second class consists of cases where the defendant is ignorant of the misappropriation from the claimant and, in respect of that part of the transaction, is innocent, but where his change of position is wrongful.
24. Mr Briggs does not rely on any other authority for his proposition. It should be noted, aNd made clear by Lord Goff, that the principle had no application to the facts of Lipkin Gorman itself since it was accepted that gambling was not illegal, even if gambling contracts are not enforceable. For that reason, the defendant could not be regarded as a wrongdoer.
25. Mr Briggs explains this brief passage in Lipkin Gorman as follows. A court will not allow a party to plead or rely on activity which it regards as illegal or wrongful. Thus, if the change of position is wrongful, the court will decline to allow the recipient to rely on it. If, as he submits, the transactions entered into by these defendants were illegal under Nigerian law, they would be treated as illegal here as well. To adopt the approach of Lord Goff set out at paragraph 19 above, on the one hand there is the injustice inflicted on the victim in having his money taken from him and against that is the position of the defendant who has engaged in illegal activities which the courts here will not recognise. In such a case, there is no injustice in letting the victim's claim prevail.
26. He argues that this is consistent with the decision of the House of Lords in Tinsley v Milligan [1994] 1 AC 340 which cited with approval the following passage from Holman v Johnson (1775) 1 Cowp 341, 343:

"The objection, that a contract is immoral or illegal as between the plaintiff and defendant, sounds at all times very ill in the mouth of the defendant. It is not for his sake, however, that the objection is ever allowed; but it is founded in general principles of policy, which the defendant has the advantage of, contrary to the real justice, as between him and the plaintiff, by accident, if I may so say. The principle of public policy is this; ex dolo malo non oritur actio. No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act. If, from the plaintiff's own stating or otherwise, the cause of action appears to arise ex turpi causa, or the transgression of a positive law of this country, there the court says he has not right to be assisted. It is upon that ground the court goes; not for the sake of the defendant, but because they will not lend their aid to such a plaintiff. So if the plaintiff and defendant were to change sides, and the defendant was to bring his action against the plaintiff, the latter would then have the advantage of it; for where both are equally in fault potior est conditio defendentis."

27. As Lord Goff explained in Tinsley:

"It is important to observe that, as Lord Mansfield made clear, the principle is not a principle of justice; it is a principle of policy, whose application is indiscriminate and so can lead to unfair consequences as between the parties to litigation. Moreover the principle allows no room for the exercise of any discretion by the court in favour of one party or the other." (p 355)

28. This principle applies as between conspirators in a wrongdoing. Neither can be heard to base his claim or his defence upon the wrongdoing. The court will not take notice of illegal activity. The result is indiscriminate in the sense that the party which benefits from the application of the principle does so not because of any merits on his side but simply because the other party is debarred from relying on the illegal activity for his claim or defence, as the case may be. Mr Briggs says that the same principle must apply not only as between parties to the wrongdoing but also, as here, where the claimant is not a party to the wrongdoing but the recipient of the stolen funds is. On public policy grounds, the court will not allow the recipient to hold onto the claimant's money if, to do so, he has to rely on a change of position which the court considers illegal.
29. Mr Briggs says that the change of position relied on by the defendants here consists of the conversion of most of the $8.05 into naira and the distribution of all of it (less commission) to Chief Anajemba's order. All of that was done under and by reference to a foreign exchange contract which was illegal in Nigeria by virtue of that country's Foreign Exchange (Monitoring and Miscellaneous Provisions) Decree 1995 ("the Decree"). Since it was illegal in Nigeria, it is unenforceable and will not be recognised by the courts here. The latter submission is put in two ways.
30. First, our common law requires the English courts to take notice of the illegality of a contract in each of the following circumstances: (a) contracts the object of which involves committing a legal wrong or carrying out conduct otherwise contrary to public policy; (b) contracts entered into for the purposes of doing the above; or (c) contracts performed in such a way that one party (or both parties) commits a legal wrong or carries out such conduct. Contracts directly unenforceable under a foreign statute/law, or which are by dint of their object contrary to the terms thereof, are affected by public policy. The rationale is that the principle of international comity prevents the courts of country X enforcing a contract governed by the law of country Y, if it is expressly prohibited by, or in light of its terms impliedly contrary to, the law of country Y. Furthermore, separately from the illegality of the forex contracts under Nigerian law, the dealings in the $8.05m were illegal in Nigeria because of the provisions of the Decree and that illegality will be recognised in England
31. Second, the illegality of the Nigeria forex contracts between these defendants and Chief Anajemba has to be recognised here pursuant to the Bretton Woods Agreement Order in Council 1946 ("the Order").

The Decree

32. The Decree sets in place a regime to control dealing in foreign currency in Nigeria. To that end an Autonomous Foreign Exchange Market ("AFEM") is created where transactions "in foreign exchange shall be conducted" in accordance the provisions of the Decree (s 1(1)). The operation of the AFEM is to be conducted through two classes of intermediaries; Authorised Dealers and Authorised Buyers who have to be appointed by the Central Bank of Nigeria. They have to operate in accordance with the provisions of the Decree. Members of the public (which would include Chief Anajemba) could only carry out relevant transactions in foreign currency with any of these defendants if the latter had been Authorised Dealers at the time. S 29 creates a number of offences. In particular it provides:

"(1) … a person who

(b) converts any foreign currency to a use for which it is not intended under this Decree; or

(c) negotiates any draft, foreign bank note, other foreign exchange or any other trading instrument otherwise than ass permitted by this Decree; …

is guilty of an offence under this Decree"

33. The penalties which can be imposed on conviction are severe, including, in the case of an individual, imprisonment for up to five years.
34. Professor Collier's evidence, served in January of this year, considers both the terms of the Decree and the transactions conducted by these defendants. He summarised his conclusions as follows:

"One important issue with which the Claimants are concerned is whether the transactions carried out through General, which is a substantial bureau de change and stockbroking operation, and MacDaniels Nigeria were lawful in Nigeria. The short answer is that they were not." (paragraph 7)

35. He explains how he arrives at this conclusion based on the provisions of the Decree and confirms that there were and are no other relevant legal provisions which would have the effect of rendering the transactions lawful (paragraph 11).
36. The defendants answer this in three ways. First they alleged that the Decree had been repealed. Shortly before the hearing they gave notice by letter that they no longer pursued this suggestion. The second answer is to say that the Nigerian authorities have neither prosecuted any of the actors in this particular fraud for breaches of the Decree and that, to date, no one has been prosecuted under it for any other wrongful forex activities. The suggestion is that this legislation is being ignored by the Nigerian authorities and, for that reason, should be ignored by me. I reject that submission. I do not know how far, if at all, the Nigerian authorities have got with their inquiries into the activities of Chief Anajemba. I have no idea how many other breaches, if any, of this forex legislation are alleged to have occurred in Nigeria, how strong the proof of wrongdoing is and how far the Nigerian authorities have got with any inquiries they may have made. Therefore it is impossible to conclude that the legislation is ignored in Nigeria. Furthermore even if the Nigerian authorities have, to use Mr Briggs' terminology, "underprioritised" the pursuit of breaches of the Decree, that does not alter the fact that it is existing criminal legislation in that country. There is no material before me which suggests that any Nigerian court in a similar position to me would turn a blind eye to it.
37. The third point was raised by Miss Roberts for the first time in the course of her submissions. She says that it might be that one of the parties to the challenged transactions might have been appointed an Authorised Dealer at the relevant time. She does not know whether that is so, nor does she have instructions that it was so, but she says it might turn out to be the case on further investigation. This will not do. In paragraph 9 of Professor Collier's witness statement it is stated that the claimants are not aware of any relevant authorisation. Although this evidence was responded to some 3 months later, this point was neither challenged or addressed. It is no answer to a Part 24 allegation to say that some defence might turn up in the future.
38. In my view, even at this stage, all the evidence points one way. All of the transactions entered into by these defendants in relation to the claimants' $8.05m were illegal and any contracts entered into to effect such transactions were also illegal. There is no real or substantial case to the contrary.
39. I should mention that during the course of argument I suggested to Mr Briggs that the conversion of the dollars to naira was covered by the Decree but that, perhaps, that was not so in respect of the $2,085,528 which was passed on to Chief Anajemba's creditors without conversion. Mr Briggs said that even that sort of transaction would be caught by the provisions of s 29(1)(c) of the Decree, set out above. That is probably so. But in any event this point, if it is a point at all, was not taken by the defendants and it must be remembered in this context that Professor Collier's evidence was that "the transactions" were illegal. By that he clearly meant all the relevant transactions. In their evidence in reply to this, the defendants did not seek to draw any distinction between the $2,085,528 and the rest of the $8.05m.
40. It follows that I accept the submission that the transactions, save for the retention of the commission, were illegal as were the contracts providing for them and no real case to the contrary has been put forward.

Is the Nigerian illegality recognised at common law?

41. Although Mr Briggs puts his case both at common law and under the Order, I did not understand Miss Roberts to dispute that, were he to succeed on the former, little point would be served by examining the strength of the latter. The nature of Mr Briggs' submissions are set out at paragraph 30 above. In support of them he relies on Foster v Driscoll [1929] 1 KB 470, Reggazoni v KC Sethia (1944) Ltd [1958] AC 301, Kahler v Midland Bank [1950] AC 24 and Ralli Brothers v. Compania Naviera Sota y Aznar [1920] 2 KB 287.
42. I do not understand Miss Roberts to dispute Mr Briggs' general proposition. Her point is that this was an undeveloped area of law and that the courts have to decide on a case by case basis whether the wrongdoing is of sufficient significance to deprive the recipient of his defence of change of position. In each case the court needs to decide whether the recipient's actions are so heinous that it would be equitable to require restitution in full.
43. I do not accept that submission. It would represent a return to the principle of the length of the Lord Chancellor's foot (or the foot of whosoever takes the Lord Chancellor's place). It seems to me that the approach of Lord Goff in Tinsley, set out at paragraph 27 above, applies to this sort of case. There is no room for the exercise of any discretion by the court in favour of one party or the other. If the recipient's actions of changing position are treated here as illegal, the court cannot take them into account. The recipient cannot put up a tainted claim to retention against the victim's untainted claim for restitution. It may be, as Mr Briggs suggests, that in some cases the illegality will be so minor as to be ignored on the de minimis principle. This is not such a case.
44. It follows that there is no defence to the claim. The claimants are entitled to recover all of the $8.05m. I should add that, even were the commission of $50,000 not illegal as being payment for carrying out illegal forex operations, it would be money retained by the defendants for no consideration (for none was asserted). It would have to be returned to the claimants for the same reasons as the $155,000 had to be returned by the defendant in the Lipkin Gorman case.