England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		30/06/2010

The Hon Mr Justice Lewison:

Introduction

1. The Versailles Group collapsed in January 2000. Its business was discovered to be little but a fraudulent scam. Both investors and lenders were seriously out of pocket. However, there were some assets that have been recovered. In addition shortly before the collapse Mr Carl Cushnie, a director of Versailles Group plc, sold part of his shareholding at the top of the market for £28.6 million. Those share sale proceeds (or some of them) have also been recovered. Who gets the money? The defrauded investors or the defrauded banks? Mr Richard Hill argued the case for the investors. Mr Matthew Collings QC argued the case for the banks. Both did so extremely well.
2. The trial of the claim has been unusual. Almost all the underlying facts have been agreed, not least because they have been comprehensively found by Rimer J in the course of a judgment he gave after a trial in 2007: Sinclair Investment Holdings SA v Versailles Trade Finance Ltd [2007] EWHC 915 (Ch). However, what was in dispute before me was the extent to which the banks knew about the claimed rights. I will make findings about that in due course. For the moment I outline the underlying story. The following narrative is largely taken from Rimer J's judgment.

The overall picture

3. The holding company for the group was Versailles Group plc ("VGP"). Its principal shareholder was Marrlist Ltd, which was the alter ego of Mr Cushnie. It is thus agreed that Marrlist and Mr Cushnie can be taken to be interchangeable. VGP's principal trading subsidiary was Versailles Trade Finance Ltd ("VTFL"). Ostensibly VTFL's main business was a modified form of factoring. This involved the provision of transaction based finance using two methods called Accelerated Payment Trading ("APT") and Materials Purchase ("MP-APT"). The details do not matter. Rimer J described APT as follows:

"APT involved the provision of funds on a short-term basis to enable transactions to take place. It worked as follows. VTFL would purchase at a discount (usually about 2.5% of the purchase price) goods that its clients (usually small manufacturers or distributors who could not afford to wait for payment) had already agreed to supply to the end-buyers, i.e. customers. VTFL would insure the goods for their full face value, sell them on to the customer for that value and the client would then deliver them to the customer. VTFL would invoice the customer and then, within seven days, pay the client 80% of the discounted purchase price, retaining the remaining 20% until the customer had paid it the full amount of the purchase price. The customer acquired title to the goods as and when it paid VTFL; and when VTFL had received the full price from the customer, it paid the client the remaining 20% of the discounted price less a daily interest charge calculated by reference to the time the customer had taken to pay the full price. VTFL's profit was the amount by which the discount and the interest exceeded its costs of the operation."

4. Plainly, this kind of business requires money up front, at least to the extent of a cash float. Money came from three main sources. First, it came from wealthy individuals, known as "traders". They are the defrauded investors. Second, it came from loans made by banks. Third, it came from the profit derived from the trading activities themselves, a small proportion of which were legitimate.
5. The traders did not provide money directly to VTFL. They provided money to a company called Trading Partners Ltd ("TPL"). This company was not part of the Versailles Group, but it was also controlled by Mr Cushnie and his associate Mr Clough. They were both directors of TPL. Rimer J found: "As from March 1996, it was TPL that solicited funds from traders for the purpose of being applied in APT." The traders had (of course) been promised high returns on the money they advanced. They supplied funds to TPL on the terms of a written agreement. It provided (in part):

"1. We [the trader] may direct you [TPL] as our agents to buy particular goods but in the absence of any specific direction from us you shall purchase goods of merchantable quality and goods which have been agreed for sale.

2. If any of the money provided by us is not currently used in the purchase of goods it shall be deposited by you in trust for us in a money bank account or such other account as we shall from time to time discuss . . .

5. Unless we direct otherwise you will account to us for the sale and purchase of all goods and the profit therein on a quarterly basis and will pay the net profit to us with quarterly reports if so requested and in the absence of any specific direction any profit will be deposited in accordance with Clause 2.

6. Upon request you will provide details of all goods purchased and sold and copies of any invoices relating thereto.

7(a) Any of the monies paid hereunder and accrued interest shall be repaid to us at not less than three months notice in writing expiring at the end of a quarter except for that relating to goods which have been sold but not paid for by the purchaser, in which event repayment in respect of that money shall be made when payment has been received by you for the sale of the goods.

(b) You may terminate this agreement by giving us not less than three months notice in writing expiring at the end of a quarter.

8. You are permitted to purchase the goods as our agents . . "

6. TPL and VTFL entered into written agreements under which VTFL managed TPL's business. The first of the agreements, dated 4 July 1996, provided (in part):

i) The agreement recites that TPL "carries on the business of the provision of trade finance in association with various persons from time to time" and that TPL and VTFL have agreed to enter the management agreement "for the purpose of regulating the terms and conditions upon which the Manager [VTFL] shall take responsibility for the management and administration of the business activities of the Company [TPL]".

ii) By Clause 1(a) TPL "appoints the Manager to manage the business activities of the Company."

iii) Clause 3(a) states that VTFL "shall, subject to the directions of the Board and to the investment policy of the Company, assume the responsibility for the continuous management of the Company's business activities."

iv) Clause 3(b) states that subject to its obligations under clause 3(e)(i) and clause 4 "the Manager shall have complete discretion to enter into contracts for the sale and purchase of goods or any other contracts in the ordinary course of the Company's business subject to the restrictions and limitations contained in this agreement and any other restrictions and limitations as the Board may from time to time intimate in writing to the Manager."

v) Clause 3(c) states that TPL "shall during the continuance of this agreement employ the services exclusively of the Manager to perform all duties and render such services as herein mentioned."

vi) Clause 3(e)(ii) states that during the period of appointment VTFL "shall make all purchases and sales of goods for the Company in the name of the Company or as the Board shall direct."

vii) Clause 3(e)(iii) states that during the period of appointment VTFL "shall carry out its duties hereunder in an efficient and responsible manner and with due skill and care and procure that its relevant directors and employees devote such of their time and attention to the performance of the Manager's duties hereunder as shall be necessary for the purpose."

viii) Clause 3(f) states that TPL "shall effect through the Manager all transactions and dealings in its business of the provision of trade finance."

ix) Clause 3(g) states that "Nothing in this agreement shall make the Manager responsible to any other person in association with whom the Company carries on its business for any of the Company's obligations to those persons".

x) Clause 5 states that "The Manager may open, maintain and operate such bank accounts as it may consider necessary or desirable for the purpose of managing the business activities of the Company. Such accounts shall be maintained in the name of the Company. The cost and proceeds of transactions, income, expenses and relevant charges (excluding the Manager's remuneration payable under clause 6 below) may be debited from and credited to those accounts without further authorisation from the Board."

xi) As regards remuneration, clause 6(A) states that TPL "shall, during the continuance of the Agreement, pay to the Manager ...by way of remuneration for its services hereunder as Manager a fee (exclusive of Value Added Tax) of a sum equal to 95% of the audited profit of the Company in each financial year as shown by its audited accounts, before taxation and before any exceptional or extraordinary items and before deduction of this remuneration".

7. A subsequent agreement increased the level of VTFL's remuneration to 99.5 per cent of TPL's audited profit. Otherwise VTFL's duties did not change in any relevant respect.
8. The money advanced to TPL duly passed to VTFL. However, it was not used for the purchase of goods or in genuine APT transactions. Instead part of it was used to pay purported profits to traders, initially at a rate of 17 per cent, and then 15 per cent. In other words, payments to traders were being made out of money advanced by new investors: a classic Ponzi scheme. Part of it was stolen by Mr Clough. Part of it was also circulated round a number of other companies also controlled by Mr Cushnie and/or Mr Clough. This is known as "cross-firing". The purpose of this was to inflate artificially VTFL's turnover. The scale on which this was done was enormous. Nearly half a billion pounds-worth of transfers were involved. Rimer J described what happened:

"TPL in fact never carried on any business that VTFL could claim to be managing. Investigations carried out by the Serious Fraud Office and the receivers revealed that TPL conducted at most only one legitimate trade in its own name and that made a loss. Whereas each trader's advances to TPL should either have been used to finance specific APT transactions, or else kept on deposit at a bank upon trust for the trader, the advances to TPL were instead used to finance the bank transfers necessary to create the fiction that VTFL was carrying on a genuine, and increasingly profitable, trade and to finance the illusory profits that TPL paid to traders. The traders … were ignorant of the manner in which the funds they advanced were being misused."

9. He also held:

i) As none of the traders' advances to TPL was ever used in any APT transactions, all their advances remained held by TPL on trust for them; and

ii) The management agreements entitled VTFL to transact business in TPL's name. They did not entitle VTFL to use TPL's funds for its own purposes.

10. The money advanced by the banks was also used in the cross-firing. The three banks were National Westminster Bank Plc ("NatWest"), Royal Bank of Scotland plc ("RBS") and Barclays Bank PLC ("Barclays"). The banks thought that they had advanced money for use in a legitimate business. In fact it was used in a fraudulent scam. The banks took fixed and floating charges over VTFL's assets (which consisted principally of its book debts), but it is common ground that neither VTFL nor Mr Cushnie owed them any fiduciary duties. On the other hand it is common ground that Mr Cushnie owed fiduciary duties to both VTFL and TPL.
11. As a result of the fraud, perpetrated by Mr Cushnie with Mr Clough's help, VGP's share price steadily increased. In 1995 Marrlist sold 23 million shares and the public were invited to subscribe for a further 19 million shares. VGP secured a listing on AIM; and subsequently on the London Stock Exchange. Once again, Rimer J described what happened:

"… in the years since its establishment [VTFL] reported an uninterrupted increase in turnover and profit. Between 1992 and 1999 it published annual accounts in which the figures for turnover and debtors were stated to be significantly higher than they in fact were. This in turn resulted in a steady increase in VGP's share price. VTFL's turnover was inflated in the following manner: (i) the accounts showed money paid to and received from other companies controlled and managed by Mr Cushnie and Mr Clough (the so-called "cross-firing" companies) as if they were genuine trading payments and receipts, which they were not; and (ii) the nominal ledger contained entries which purported to be sales, purchases and trading receipts and payments which were not justified by any actual trading. The main cross-firing companies were Artagent Ltd, Discgift Ltd, Superhandy Ltd, but they also included Palmerston Ltd, Normandy, TPL and perhaps (if only to a smaller extent) Marrlist. Mr Cushnie held 99% of the issued shares of Artagent, Discgift and Superhandy and 50% of those of Palmerston. In broad terms, it worked as follows. VTFL had a Customer Service Division, which was a genuine trade generating funds. VTFL was financed by bank loans. It also received finance from, first, VTL and, from March 1996, TPL; and VTL and TPL were successively financed by the traders. The money so received by VTFL was then revolved around the cross-firing companies. The nature of this activity has been investigated by PwC and the receivers and counsel were agreed as to the relevant facts. There is no need to detail it beyond saying that between June 1993 and October 1999 hundreds of millions of pounds were transferred both ways between VTFL and various cross-firing companies. VTFL's receipts were disguised in its cash books to make them appear as genuine sales to genuine customers, so falsely inflating its turnover."

12. For many years the fraud was well concealed. Banks, investors and the financial press were all taken in. Nor did VTFL's auditors discover it.
13. On 17 August 1999 Strathforn Ltd, a Marrlist subsidiary, bought a house at 19 Upper Phillimore Gardens London W8 ("the Kensington property"), which was Mr Cushnie's home. It did so with the help of an advance of £9.975 million from RBS, secured by a legal charge dated 17 August 1999. On 9 November 1999 Mr Cushnie, acting through Marrlist, sold about 5 per cent of his shares in VGP for £28.69 million. The proceeds of this sale were paid into Marrlist's client account at Assets International Management Ltd in four separate credits of £7,173,790 each on the same day. The proceeds of sale of the shares were distributed as follows:

	£'000
Payment to Versailles	9,190
Payment to Trading Partners	1,750
NatWest Loan Repayment	2,250
Investment in Touchbase	800
Loan to Touchbase	500
RBS loan & overdraft repayment	1,490
Purchase of Shares	150
Payment to Mr Clough	1,000
RBS Loan Repayment	9,980
Total	27,110
Remaining Proceeds	1,580
Proceeds from share sale	28,690

14. On 5 May 1999 the Department of Trade and Industry began an investigation into VGP's affairs under section 447 of the Companies Act 1985. On 30 November 1999 Baker Tilley were commissioned to provide a report under section 2.11 of the London Stock Exchange's Yellow Book. On 8 December 1999 dealings in VGP shares were suspended. At that date the share price had stood at 268p and VGP had a market value on paper of £632 million. In early January 2000 the three banks appointed PwC to investigate and review VGP's affairs. On 18 January 2000 the Serious Fraud Office announced an investigation into the VGP group. On 20 January 2000 PwC produced their report; and on the same day the three banks appointed joint administrative receivers in respect of VGP and VTFL. Mr Lomas was one of the receivers, and Mr Greaves was one of his team. Some traders had been repaid in full before the collapse of VGP in January 2000, but the remainder had sums totalling approximately £22.6 million invested. The banks were owed £70.5 million, made up as follows:

i) Nat West: £37.25 million

ii) RBS: £23.1 million

iii) Barclays: £10.1 million.

15. The Barclays indebtedness was incurred pursuant to a facility letter dated 25 October 1999, and secured by a debenture dated 3 November 1999; and it has now been assigned to RBS. For its part Sinclair Investments (UK) Ltd ("Sinclair") has taken an assignment of all TPL's claims. It made claims in its own right in the action before Rimer J; but those claims failed. Its claims in this action are made solely as assignee from TPL; and I shall treat the claims as being brought by TPL itself.
16. In 2001, 2002 and 2005 the joint receivers entered into settlement agreements with Mr Cushnie and Marrlist. The first was dated 26 February 2001. This recited and settled claims that VGP and VTFL had against Mr Cushnie and Marrlist, namely (i) a claim by VGP for some £2.7 million against Marrlist for repayment of dividends paid on the false basis that VGP had distributable profits enabling the dividends to be paid; and (ii) a claim by VTFL against Mr Cushnie for breach of his duties as a director. Dishonesty was not alleged. Nor was a proprietary claim. Under the settlement VTFL and VGP acquired charges over the Kensington property. On 5 December 2001 receivers appointed under the Law of Property Act 1925 sold the property for £8.64 million (rather less than had been paid for it) and net proceeds of some £8.4 million were paid to the receivers. The terms of settlement had provided that certain liabilities (including Marrlist's corporation tax liability) would be paid out of the sale proceeds. Following a further settlement agreement of 5 August 2002 the amount of the tax was quantified; and the result was that the total sum retained by the receivers out of the sale proceeds earlier paid to them was approximately £5.2 million. The receivers still hold that £5.2 million.

The criminal proceedings

17. Rimer J takes up the story:

"[30] Mr Cushnie and Mr Clough were charged with criminal offences. On 8 July 2003 Mr Clough pleaded guilty to count 1 (which alleged the carrying on of Normandy's business with intent to defraud creditors). That count was not pursued against Mr Cushnie and the trial judge (Jackson J) made an order that it should lie on the file. Count 2 ("the Versailles fraud", which became known as count 1 at the trial) was conspiracy to defraud. The particulars were that between 30 June 1991 and 21 January 2000 Mr Cushnie, Mr Clough and Ms Lorraine Marcia Jones conspired together to defraud (i) trade creditors of VTFL, (ii) banks and other lenders to VGP and/or VTFL, (iii) the London Stock Exchange and (iv) shareholders in VGP by dishonestly (a) falsely overstating the trading turnover of VGP and/or VTFL, (b) falsely overstating the assets of VGP and/or VTFL, (c) falsifying accounts, records or documents made or required for accounting purposes and (d) concealing accounts, records or documents made or required for accounting purposes. Count 3 ("the traders fraud", which became count 2 at the trial) was also conspiracy to defraud. The particulars were that, between 1 March 1992 and 21 January 2000, Mr Cushnie, Mr Clough and Ms Jones conspired to defraud the traders (people who might provide moneys to VTL and/or TPL) by dishonestly (a) falsely representing that those moneys would be used for the purpose of specific and genuine trading transactions by or on behalf of VTL and/or TPL and (b) transferring those moneys directly and indirectly between bank accounts held by VTL and/or TPL and bank accounts held by VTFL for the purposes of falsely inflating the turnover and assets of all three companies.

[31] Mr Clough pleaded guilty on counts 2 and 3. The prosecution did not pursue either charge against Ms Jones, in respect of whom the jury was directed to return not guilty verdicts. Mr Cushnie pleaded not guilty on counts 2 and 3. The jury's task was to decide whether he had conspired with Mr Clough to defraud in the manner specified in those counts. The trial occupied four months in 2004. Mr Clough gave evidence for the prosecution, which included admissions that he had perpetrated frauds of the nature alleged under both counts. Mr Cushnie did not give evidence.

[32] On 25 May 2004 the jury found Mr Cushnie not guilty on count 2 (the Versailles fraud) but guilty on count 3 (the traders fraud). On 8 June 2004 the court sentenced Mr Clough to a total prison sentence of six years (reduced on appeal to five) and Mr Cushnie to a sentence of six years. The court made disqualification orders under the Company Directors Disqualification Act 1986 against Mr Clough and Mr Cushnie for 15 and 10 years respectively. Questions of confiscation and compensation were adjourned.

[33] On 29 June 2005 Jackson J made findings as to the benefit Mr Cushnie had derived from the traders fraud. A related finding was that Mr Clough had stolen £4,350,309 from what Jackson J called "the traders' company", a reference to both VTL and TPL. … Jackson J made a confiscation order against Mr Cushnie under s 71 of the Criminal Justice Act 1988 in the sum of £10,140,732. Payment was to be made by 22 April 2007 with, in default, a three-year term of imprisonment. The judge made a further order under s 130 of the Powers of Criminal Courts (Sentencing) Act 2000 requiring compensation to be paid to the traders from the confiscated sum in specified amounts, that due to Sinclair being £1,115,185. The payment in fact made to Sinclair, on 23 November 2006, was £1,054,062·75."

The claims in this action

18. TPL asserts a proprietary claim to the proceeds of sale of Mr Cushnie's shares which it says he held on constructive trust for TPL; in other words that it is the beneficial owner of that money. It accepts that the claim only extends to the net proceeds of sale after payment of the corporation tax on capital gains due on the sale. It says that the claim is good against the banks. The key steps in the argument are as follows:

i) Mr Cushnie owed TPL fiduciary duties. These included the duty not to make secret or unauthorised profits and not to apply traders' funds in breach of the express terms of the trust agreements with the traders.

ii) Mr Cushnie breached those duties by misusing the trust monies entrusted to TPL ("the TPL Trust monies") or allowing them to be misused, in particular by applying the TPL Trust monies in the cross-firing fraud.

iii) The misuse of the TPL Trust monies was calculated to and did prop up VTFL and artificially increase the share price of its parent, VGP, above its true value, which was at all times nil due to VTFL's insolvency.

iv) Mr Cushnie, through his alter ego Marrlist, realised the value of this increase on 9 November 1999 by selling 13.9 million shares in VGP for £28.69 million.

v) The £28.69 million represented an unauthorised gain made by Mr Cushnie He made that gain in the course of his fiduciary relationship with TPL and was only able to make it through the misuse of the TPL Trust monies in the cross-firing fraud.

vi) By virtue of the fact that the gain was made in an unauthorised manner in the course of a fiduciary relationship, and through the misuse of TPL trust monies, the moment it was made it was held by Mr Cushnie on constructive trust for the benefit of TPL.

vii) This gives rise to an equitable entitlement in TPL to claim the traceable proceeds of the gain upon established principles. The entitlement is a proprietary right which is good against anyone except a purchaser for value without notice.

viii) That claim is not subject to any abatement or reduction by reference to competing claims from VTFL (which was itself a fiduciary for TPL and in breach of its fiduciary duty); nor any person standing in its shoes. Nor should there be any abatement in favour of the banks, who are merely creditors of VTFL, nor VGP, which operated only as a holding company for VTFL as defaulting fiduciary.

19. It is common ground that Mr Cushnie realised much (if not all) of the gain he made in selling his shares as a result of his breaches of fiduciary duty. On the other hand it is also clear that the misuse of the monies lent by the banks also had a significant part to play in keeping up the share price. Mr Collings accepts Mr Cushnie was liable to account to TPL (among others) for at least that part of the gain attributable to the misuse of TPL's monies. But he says that the liability to account is a personal liability only. TPL's claim is an unsecured personal claim against Mr Cushnie. Mr Cushnie has not been the subject of any relevant insolvency proceeding. He was thus free to deal with unsecured claims as he pleased. The proceeds of sale of the shares were distributed in satisfaction of Mr Cushnie's liabilities; and TPL has no right to upset that distribution. In particular the payment to RBS in discharge of the mortgage on the Kensington property cannot be undone. But it is also common ground that if TPL can establish a proprietary right to the proceeds of sale of Mr Cushnie's shares it is entitled in principle to trace those proceeds into the Kensington property. Any proprietary right that TPL has in the share sale proceeds is no more than an equitable right. It could be defeated if the proceeds have passed to a purchaser in good faith without notice. Mr Collings says that the banks are entitled to rely on that defence. Mr Hill says that they are not.
20. The primary question, therefore, is whether TPL has a proprietary right to the proceeds of sale of Mr Cushnie's shares in VGP. If the answer is yes, then the second question is whether the banks are entitled to rely on the defence of purchaser in good faith without notice.
21. In addition to this claim TPL advances a proprietary claim in relation to the monies which passed from it to VTFL and were mixed with VTFL's own monies. Mr Hill says that TPL is entitled to what remains of the mixed fund and that it is entitled to trace that fund into the hands of the banks. Mr Collings says that there is no such proprietary right; but that if there is, the banks are not bound by it because they are purchasers for value without notice.
22. It is very important to keep these two alleged proprietary rights separate when considering the question whether the banks had notice of either of them. One is a right against Mr Cushnie personally; the other is a right against VTFL.

General principles

23. Let me start with what I think are uncontroversial propositions. Whether a proprietary right exists is a question of the law of property. No question of the court's discretion is involved: Foskett v McKeown [2001] 1 AC 102, 109. The court cannot grant a proprietary right to A, who has not had one beforehand, without taking some proprietary right away from B. No English court has ever had the power to do that, except with the authority of Parliament: Re Polly Peck International plc (in administration) (No 4) [1998] 2 BCLC 185, 204. It follows that the courts of England and Wales do not recognise a remedial constructive trust as opposed to an institutional constructive trust.
24. If a property right exists in an asset, the person entitled to that property right may enforce it by following the asset unless and until the asset passes into the hands of a purchaser in good faith for value without notice: Foskett v McKeown. He may also trace the value of his proprietary interest into identifiable substitutes for the original asset, unless the substitute has been provided to a purchaser in good faith for value without notice: Foskett v McKeown.
25. Although company directors are not strictly speaking trustees, they are in a closely analogous position because of the fiduciary duties which they owe to the company: Bairstow v Queens Moat Houses plc [2001] 2 BCLC 531, 548. In particular they are treated as trustees as respects the assets of the company which come into their hands or under their control: In re Lands Allotment Co [1894] 1 Ch 616, 631; Re Duckwari plc [1999] Ch 253, 262.
26. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make an unauthorised profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal: Bristol and West BS v Mothew [1998] Ch 1, 18. In accordance with the first facet of the obligation of loyalty it is a breach of fiduciary duty for directors of a company to exercise their powers of management and control otherwise than in good faith and in a way which they believe is in the best interests of the company: Item Software (UK) Ltd v Fassihi [2005] ICR 450. In accordance with the second and third facets, if a director of a company makes an unauthorised profit by the use of his position as a director, he is liable to account for that profit to the company, whether or not he acted in good faith: Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, 144. The precise implications of this proposition are the subject of intense debate; so I will return to it.
27. If a trustee commits a breach of trust, the beneficiary's remedy against him is a personal one. The basic rule, as stated by Lord Browne-Wilkinson in Target Holdings Ltd v. Redferns [1996] AC 421, 434 (omitting citation of authority) is:

"that a trustee in breach of trust must restore or pay to the trust estate either the assets which have been lost to the estate by reason of the breach or compensation for such loss. Courts of Equity did not award damages but, acting in personam, ordered the defaulting trustee to restore the trust estate. If specific restitution of the trust property is not possible, then the liability of the trustee is to pay sufficient compensation to the trust estate to put it back to what it would have been had the breach not been committed."

28. As the Latin makes clear, this is a personal remedy. Lord Millett made the same point in Foskett v McKeown (p. 130):

"A beneficiary's claim against a trustee for breach of trust is a personal claim. It does not entitle him to priority over the trustee's general creditors unless he can trace the trust property into its product and establish a proprietary interest in the proceeds."

29. In Chan v. Zacharia (1984) 154 CLR 178, 198 (cited with approval in Don King Productions Inc v. Warren [2000] Ch 291) Deane J said that the fundamental rule that obliged fiduciaries to account for personal benefit or gain had two separate themes:

"The first is that which appropriates for the benefit of the person to whom the fiduciary duty is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or a significant possibility of such conflict: the objective is to preclude the fiduciary from being swayed by considerations of personal interest. The second is that which requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of his fiduciary position or of opportunity or knowledge resulting from it: the objective is to preclude the fiduciary from actually misusing his position for his personal advantage. Notwithstanding authoritative statements to the effect that the "use of fiduciary position" doctrine is but an illustration or part of a wider "conflict of interest and duty" doctrine … the two themes, while overlapping, are distinct. Neither theme fully comprehends the other and a formulation of the principle by reference to one only of them will be incomplete. Stated comprehensively in terms of the liability to account, the principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or (ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it. Any such benefit or gain is held by the fiduciary as constructive trustee…"

30. It will be noted that in his summary of principle Deane J says that the benefit or gain is "held by the fiduciary as constructive trustee". It is this phrase that causes all the trouble. There are, I think, two streams of authority which have developed largely (although not entirely) without reference to each other; and which appear to me to lead to contradictory conclusions. One stream deals with the "no profit" rule; the other with limitation defences. (It is also a curiosity that there seems to be no judicial agreement on the correct plural form of "cestui que trust"). I will also have to deal with the precedential status of the decision of the Privy Council in Attorney-General for Hong Kong v Reid [1994] 1 AC 324. My task is not to provide a definitive statement of the law, but to find my way through the labyrinth, unaided by Ariadne's skein.

The "no profit" rule

31. The first of the two streams of authority is concerned with the "no profit" rule. In Keech v Sandford (1726) Select Cases Temp King 61 the lessee of the profits of a market devised it to a trustee in trust for an infant. During the currency of the lease the trustee applied to the lessor for a renewal. The lessor refused to renew on the ground that since the lease was a lease of an incorporeal hereditament there was no possibility of distress for rent. Thus he would be confined to his remedy in covenant; and the infant would not be bound by covenant. The trustee took a new lease in his own name. The claim on behalf of the infant was for an assignment of the lease and an account of profits. Lord King LC granted both. It was agreed (and thus not argued) that the principle was that whenever a lease is renewed by a trustee it would be renewed for the benefit of the beneficiary. The argument was whether the fact that the lessor had refused to renew the lease to the infant made any difference. Lord King held that it did not; and that he "must consider this as a trust for the infant". The order for an account of profits appears to be the grant of a personal remedy; the order requiring the trustee to assign the lease is generally thought to have been the vindication of a proprietary interest in the lease, although the question was not argued. The foundation of the principle in Keech v Sandford is that "a renewal must be looked on as an accretion to or graft upon the original term arising out of the goodwill or quasi-tenant right annexed thereto": Re Biss [1903] 2 Ch 40, 56: Halton International Inc v Guernroy Ltd [2006] EWCA Civ 801 §25. In Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, 145 Lord Russell of Killowen said that Keech v Sandford was an "illustration" of the general rule that a fiduciary is "liable to account" for an unauthorised profit; and also said (p. 149) that in Keech v Sandford the trustee was "accountable".
32. In Sugden v Crossland (1856) 2 Sm & G 192 a testator appointed Crossland as one of his executors. By a codicil he revoked that appointment and appointed Horsfield in his place. Horsfield proved the will. Crossland subsequently paid Horsfield £75 to retire and to appoint him instead. One of the questions in issue was whether the £75 (which Crossland had paid out of his own pocket) should be treated as part of the trust fund. Stuart V-C said:

"It has been further asked that the sum of £75 may be treated as a part of the trust fund, and as such may be directed to be paid by Horsfield to the trustee for the benefit of the cestui que trusts under the will. It is a well-settled principle that, if a trustee make a profit of his trusteeship, it shall enure to the benefit of his cestui que trusts. Though there is some peculiarity in the case, there does not seem to be any difference in principle whether the trustee derived the profit by means of the trust property, or from the office itself. I shall therefore direct that the £75 be repaid by Horsfield and dealt with as a part of the assets…"

33. The reasoning sequence is that the £75 is treated as part of the trust fund; and that therefore it must be repaid by Horsfield. In other words, the beneficiaries had a proprietary right to the money. This was a case in which the money in Mr Crossland's pocket could not be said to be an existing trust asset. It must have become a trust asset at the moment that it was paid to Mr Horsfield. Commenting on this decision in Reid Lord Templeman said:

"This case is of importance because it disposes succinctly of the argument which appears in later cases and which was put forward by counsel in the present case that there is a distinction between a profit which a trustee takes out of a trust and a profit such as a bribe which a trustee receives from a third party."

34. I respectfully agree that this is a correct analysis of Sugden v Crossland, but it is a decision at first instance only.
35. In Re Caerphilly Colliery Company (1877) LR 5 Ch D 336 the promoters of a company agreed to sell a colliery to the company for a very large profit. The purchase price was partly in cash and partly in shares in the purchasing company. Some of the shares were placed in the name of Sir Edwin Pearson who was a director of the company; and who was instrumental in seeing the contract carried through to completion. Jessel MR said (p. 340):

"That being the position of Sir Edwin Pearson, can he be allowed to say in a Court of Equity that he, having received a present of part of the purchase-money, and being knowingly in the position of agent and trustee for the purchasers, can retain that present as against the actual purchasers? It appears to me that, upon the plainest principles of equity and good conscience, he cannot. Whether the purchase was or was not an advantageous one for the company, whether the property which they purchased at this large profit was or was not worth the increased price that they paid for it, is a question wholly immaterial for us to consider; he cannot, in the fiduciary position he occupied, retain for himself any benefit or advantage that he obtained under such circumstances. He must be deemed to have obtained it under circumstances which made him liable, at the option of the cestuis que trust, to account either for the value at the time of the present he was receiving, or to account for the thing itself and its proceeds if it had increased in value. The company elect on the present occasion to ask to charge him with the value of the twenty-five share warrants at the time of their delivery."

36. The other members of the Court of Appeal agreed. The second of the options given to the company (to take the thing itself and its proceeds) must be a proprietary remedy, not least because an option to take the proceeds of the thing must, as it seems to me, engage the principles of tracing a trust asset. However, it is to be noticed that (unlike the case of Sugden v Crossland) this was a case in which the property that was subject to the trust had originally been the beneficiary's property.
37. In Lister & Co v Stubbs (1890) LR 45 Ch D 1 Stubbs was employed by Lister & Co. He received a secret commission from one of his employers' suppliers. He retained part of the commission in cash, and invested part in freehold property and other investments. Lister & Co applied for an injunction restraining disposal of the investments. Nowadays, of course, the court will grant a freezing order in support of a personal claim, as well as a proprietary one. But that was not the case then. Cotton LJ said that the bribe could not be considered to be the property of the employers. In so doing he referred to his pervious decision in Metropolitan Bank v. Heiron (1880) 5 Ex D 319. Since that is a limitation case I will return to it under that head. Lindley LJ said (p. 15):

"Then comes the question, as between Lister & Co. and Stubbs, whether Stubbs can keep the money he has received without accounting for it? Obviously not. I apprehend that he is liable to account for it the moment that he gets it. It is an obligation to pay and account to Messrs. Lister & Co, with or without interest, as the case may be. I say nothing at all about that. But the relation between them is that of debtor and creditor; it is not that of trustee and cestui que trust. We are asked to hold that it is—which would involve consequences which, I confess, startle me. One consequence, of course, would be that, if Stubbs were to become bankrupt, this property acquired by him with the money paid to him by Messrs. Varley would be withdrawn from the mass of his creditors and be handed over bodily to Lister & Co. Can that be right? Another consequence would be that, if the Appellants are right, Lister & Co. could compel Stubbs to account to them, not only for the money with interest, but for all the profits which he might have made by embarking in trade with it. Can that be right? It appears to me that those consequences shew that there is some flaw in the argument."

38. Mr Hill pointed out that the court was not referred to the principle in Keech v Sandford. That is true; but it is inconceivable that an equity judge of the eminence of Lindley LJ was unaware of the principle. One aspect of the decision, then, is that the relation between principal and fiduciary at least as regards a bribe, is one of creditor and debtor (i.e. a personal remedy) rather than beneficiary and trustee (i.e. a proprietary remedy). This decision was followed by the Court of Appeal in Powell & Thomas v Evan Jones & Co [1905] 1 KB 11. Lord Wright referred to it without any disapproval in Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134. In Attorney General's Reference (No 1 of 1985) [1986] 1 QB 491 the manager of a pub employed by a brewery made secret profits from selling beer which he bought from a supplier other than the brewery that owned the pub. He was charged with theft of the profit. Whether he was guilty depended on whether the profit was the property of the brewery. Section 5 (1) of the Theft Act 1968 provided:

"Property shall be regarded as belonging to any person having possession or control of it, or having in it any proprietary right or interest (not being an equitable interest arising only from an agreement to transfer or grant an interest)."

39. Lord Lane CJ said (p. 502):

"There is a clear and important difference between on the one hand a person misappropriating specific property with which he has been entrusted, and on the other hand a person in a fiduciary position who uses that position to make a secret profit for which he will be held accountable. Whether the former is within section 5, we do not have to decide. As to the latter we are firmly of the view that he is not, because he is not a trustee."

40. Among the authorities on which he relied was Lister & Co v Stubbs. Nevertheless Lister & Co v Stubbs is a controversial decision. The main point of controversy is the decision that the principal has no proprietary interest in the bribe. It had both its defenders and its attackers. Its attackers included Lord Millett (Bribes and Secret Commissions [1993] RLR 7) and leading textbooks including Underhill & Hayton and Goff & Jones. Its defenders included Professor Birks and Professor Sir Roy Goode (Ownership and obligation in commercial transactions (1997) LQR 433).
41. I should also mention the well-known decision of the House of Lords in Boardman v Phipps [1967] 2 AC 46. A trust owned a substantial minority interest in a private company, and the defendants were dissatisfied with the way that the company was being run. They therefore made various enquiries ostensibly on behalf of the trust; and thereby obtained confidential information about the company by which they learnt that it would be advantageous to sell off some of the assets of the company. They therefore bought the remaining shares in the company and sold off the loss-making assets. By this transaction the shareholdings of both the trust and the defendants increased markedly. One of the defendants (Mr Boardman) had informed the beneficiaries and the trustees of the negotiations; and asked them whether they had an objection to him taking a personal stake in the company, bearing in mind that the initial enquiries were made on behalf of the trust. The managing trustee declined to buy any shares. It was not in dispute that Mr Boardman had acted in good faith; that he believed he had made full disclosure, and that the trustees and beneficiaries declined to take up the shares that the defendants ended up purchasing. The House of Lords, however, by a bare majority held that the defendants had placed themselves in a special position, which was of a fiduciary character, in relation to the negotiations with the directors of the company relating to the trust shares. Furthermore, out of that special position and in the course of the negotiations they had obtained the opportunity to make a profit out of the shares, and knowledge that the profit was there to be made. The principle that a fiduciary who makes a secret profit is liable to account was not in issue. What was in issue was whether the principle applied to the facts. Nor, as it seems to me, was the precise nature of the remedy (i.e. whether it was proprietary or personal) in issue. At first instance before Wilberforce J the discussion is all in terms of a liability to account. The relief claimed included a claim for a declaration that the shares that had been acquired as a result of the breach of fiduciary duty were held on constructive trust and an order for the transfer of the shares; but the report [1965] 1 WLR 993, 1018 simply says that consideration of the last head of relief was adjourned. In the Court of Appeal [1965] Ch. 992 the report states (p. 1007) that:

"On March 25, 1964, Wilberforce J. held, that the first and second defendants, Boardman and Tom Phipps, were accountable for the proportionate profit on the 21,986 shares in the company and that an inquiry should be held as to the allowances to which they were entitled in respect of their work and skill in obtaining the shares and the profits."

42. Pearson LJ said (p. 1021) that:

"By the judgment it was declared that the defendants hold 5/18ths of 21,986 ordinary shares of £1 each in Lester & Harris Ltd. ("the company") as constructive trustees for the plaintiff, and it was ordered that an account be taken of the profits come to the hands of the defendants and each of them from the said shares…"

43. It does not appear that the defendants were ever ordered to transfer the shares themselves. In the House of Lords the report states the issue on appeal (p. 48) as follows:

"The question at issue in this appeal was whether the appellants were accountable to the respondent as constructive trustees of certain shares of Lester & Harris Ltd., which were purchased by them in the years 1957 to 1959."

44. Whether the remedy was personal or proprietary does not, therefore, seem to have been in issue at any stage of the litigation. Of the three Law Lords in the majority Lord Cohen held (p. 103) that the principle in Regal (which was a case of personal liability to account) applied; and added that:

"… an agent is, in my opinion, liable to account for profits he makes out of trust property if there is a possibility of conflict between his interest and his duty to his principal. "

45. Lord Hodson said (p. 105) that the applicable principle of law was that:

"The proposition of law involved in this case is that no person standing in a fiduciary position, when a demand is made upon him by the person to whom he stands in the fiduciary relationship to account for profits acquired by him by reason of his fiduciary position and by reason of the opportunity and the knowledge, or either, resulting from it, is entitled to defeat the claim upon any ground save that he made profits with the knowledge and assent of the other person."

46. This proposition, too, is framed in terms of a personal liability to account. Lord Guest referred extensively to Regal and said (p. 117):

"Applying these principles to the present case I have no hesitation in coming to the conclusion that the appellants hold the Lester & Harris shares as constructive trustees and are bound to account to the respondent."

47. This formulation does have a proprietary flavour to it. Opinions may differ about whether the remedy awarded in Boardman v Phipps was or was not proprietary. In Ultraframe Ltd v Fielding [2005] EWHC 1638 I took the view that it was not. In the previous round of this litigation Rimer J took the view that it was, at least in part. Apparently the original order that Wilberforce J made has not survived (see Conaglen: Thinking about proprietary remedies for breach of confidence [2008] IPQ 82). But whichever view is right, it seems to me to be clear that the question was never argued, and apparently did not matter.
48. Lister & Co v Stubbs was disapproved by the Privy Council in Attorney-General for Hong Kong v Reid [1994] 1 AC 324 on appeal from the Court of Appeal in New Zealand. Mr Reid, a Crown servant in Hong Kong, had accepted bribes. It was assumed that he had invested the bribes in property in New Zealand. The issue was whether the Attorney-General was entitled to maintain a caveat over the properties. The Privy Council held that he could on the ground that he had an equitable interest in the properties. Lord Templeman gave the advice of the Board. He said:

"When a bribe is offered and accepted in money or in kind, the money or property constituting the bribe belongs in law to the recipient. Money paid to the false fiduciary belongs to him. The legal estate in freehold property conveyed to the false fiduciary by way of bribe vests in him. Equity, however, which acts in personam, insists that it is unconscionable for a fiduciary to obtain and retain a benefit in breach of duty. The provider of a bribe cannot recover it because he committed a criminal offence when he paid the bribe. The false fiduciary who received the bribe in breach of duty must pay and account for the bribe to the person to whom that duty was owed. In the present case, as soon as the first respondent received a bribe in breach of the duties he owed to the Government of Hong Kong, he became a debtor in equity to the Crown for the amount of that bribe. So much is admitted. But if the bribe consists of property which increases in value or if a cash bribe is invested advantageously, the false fiduciary will receive a benefit from his breach of duty unless he is accountable not only for the original amount or value of the bribe but also for the increased value of the property representing the bribe. As soon as the bribe was received it should have been paid or transferred instanter to the person who suffered from the breach of duty. Equity considers as done that which ought to have been done. As soon as the bribe was received, whether in cash or in kind, the false fiduciary held the bribe on a constructive trust for the person injured. Two objections have been raised to this analysis. First it is said that if the fiduciary is in equity a debtor to the person injured, he cannot also be a trustee of the bribe. But there is no reason why equity should not provide two remedies, so long as they do not result in double recovery. If the property representing the bribe exceeds the original bribe in value, the fiduciary cannot retain the benefit of the increase in value which he obtained solely as a result of his breach of duty. Secondly, it is said that if the false fiduciary holds property representing the bribe in trust for the person injured, and if the false fiduciary is or becomes insolvent, the unsecured creditors of the false fiduciary will be deprived of their right to share in the proceeds of that property. But the unsecured creditors cannot be in a better position than their debtor. The authorities show that property acquired by a trustee innocently but in breach of trust and the property from time to time representing the same belong in equity to the cestui que trust and not to the trustee personally whether he is solvent or insolvent. Property acquired by a trustee as a result of a criminal breach of trust and the property from time to time representing the same must also belong in equity to his cestui que trust and not to the trustee whether he is solvent or insolvent."

49. In the course of his review of the authorities (some of which I have already referred to) Lord Templeman expressly disapproved both Metropolitan Bank v. Heiron and Lister & Co. v. Stubbs; and expressly approved the reasoning of Lord Millett in the article to which I have referred. It is clear from that article (although not from the passage that Lord Templeman quoted) that Lord Millett was of the view that there was (and ought to be) a proprietary remedy.
50. Like Lister & Co. v. Stubbs before it Attorney-General for Hong Kong v Reid is a controversial decision. It, too, has its attackers (e.g. Watts Bribes and Constructive Trusts (1994) 110 LQR. 178; Crilley A Case of Proprietary Overkill [1994] RLR 57; Virgo The Principles of the Law of Restitution, 2^nd ed, pp.523-524; McCormack The Remedial Constructive Trust and Commercial Transactions (1996) Company Lawyer 3). Further references to this body of academic literature can be found in Daraydan Holdings Ltd v Solland International Ltd [2005] Ch 119 (§ 78). In Moriarty v Various Customers of BA Peters Plc [2008] EWCA Civ 1604 Lord Neuberger of Abbotsbury did not share Lord Templeman's insouciance about the position of other creditors:

"In my view, the court should not be too ready to extend the circumstances in which proprietary or other equitable claims can be made in insolvent situations, bearing in mind the consequences to unsecured creditors. To raise those in the commercial world, it must sometimes seem almost a matter of happenstance as to whether or not a particular creditor, with no formal security, has a proprietary or equitable claim. However, that fact is that every time such a claim is held to exist in the case of an insolvent debtor, the consequence is that one commercial creditor gets paid in full to the detriment of all the other commercial creditors, who also have no formal security, but are found to have no proprietary claim."

51. On the other hand Attorney-General for Hong Kong v Reid also has its defenders, notably Lord Collins of Mapesbury (in Daraydan itself) and Lord Millett (Proprietary Restitution in Equity in Commercial Law ed. Degeling and Edelman). The leading textbooks also regard it as good law.

Is Reid part of English law?

52. As noted, Attorney-General for Hong Kong v Reid was a decision of the Privy Council on appeal from the Court of Appeal in New Zealand. In Daraydan Holdings Ltd v Solland International Ltd Lawrence Collins J summarised the then state of the authorities (§ 81):

"Attorney General for Hong Kong v Reid has been preferred at first instance to Lister & Co v Stubbs by Laddie J in Ocular Sciences Ltd v Aspect Vision Care Ltd [1997] RPC 289, 412-413 (a breach of confidence case) and by Toulson J (obiter) in Fyffes Group Ltd v Templeman [2000] 2 Lloyd's Rep 643. But Sir Richard Scott V-C in Attorney General v Blake [1997] Ch 84, 96 and the Court of Appeal in Halifax Building Society v Thomas [1996] Ch 217, 229 treated Lister & Co v Stubbs as still binding, although neither of those cases was a case involving bribery of an agent."

53. He held that if Lister & Co v Stubbs were not distinguishable, he would have been free to follow it, on the basis of authorities which held that both a judge of first instance and the Court of Appeal are free to follow decisions of the Privy Council on common law principles which depart, after full argument, from earlier decisions of the Court of Appeal. In Ultraframe Ltd v Fielding [2005] EWHC 1638 (§ 1490) I followed that decision (where the point of stare decisis was not argued). In fact in Daraydan Holdings Ltd v Solland International Ltd Lawrence Collins J did distinguish Lister & Co v Stubbs on the ground that the bribe in his case derived from the claimant's own property.
54. However, since then stare decisis has made a triumphant comeback. Both the Court of Appeal and the House of Lords have emphasised that a first instance judge (and probably the Court of Appeal as well) remain bound by a decision of the Court of Appeal even if it has been disapproved by the Privy Council. In Re Spectrum Plus [2004] Ch 337 Morritt V-C followed the decision of the Privy Council in Agnew v Commissioner of Inland Revenue [2001] 2 AC 710 in preference to the decision of the Court of Appeal in Re New Bullas Trading Ltd [1994] 1 BCLC 485, which the Privy Council had said was wrong. On appeal to the Court of Appeal Lord Phillips held (§ 58) that disapproval of a decision of the Court of Appeal by the Privy Council did not allow the court to refuse to follow the earlier decision of the Court of Appeal. Mr Hill accepted, rightly in my judgment, that this was part of the ratio of the decision. On further appeal to the House of Lords [2005] 2 AC 680 Lord Walker (with whom the other members of the committee agreed) said obiter (§ 153) that the Court of Appeal had been right on the point of precedent; although Baroness Hale floated the possibility that a limited exception might be created. The effect of this, in my judgment, is that I am not free to follow Attorney General for Hong Kong v Reid where it conflicts with decisions of the Court of Appeal.

The limitation cases

55. I must now turn to the limitation cases which seem to have developed largely in parallel to the "no profit" cases, with the occasional crossover. The current statutory provision is section 21 of the Limitation Act 1980, but it does not differ from its predecessors in any material respect. The relevant sub-sections say:

"(1)     No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action—

(a)     in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or

(b)     to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee, or previously received by the trustee and converted to his use.

(3)     Subject to the preceding provisions of this section, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this Act, shall not be brought after the expiration of six years from the date on which the right of action accrued."

56. The question that has arisen in the cases is whether an action alleging breach of fiduciary duty is a claim to recover "trust property" (in which case no limitation period applies, as a consequence of section 21 (1) (a)) or whether it is simply a claim "in respect of [a] breach of trust" (in which case a six year limitation period applies as a consequence of section 21 (3), unless the breach was fraudulent).
57. A convenient starting point is the decision of the Court of Appeal in Metropolitan Bank v. Heiron (1880) 5 Ex D 319, partly because it is one of the earliest limitation cases to which I was referred; and partly because it is one of the few crossovers between the two streams of authority. In that case it was alleged that a company director had taken a bribe of £250 from a debtor of the company in order to procure a cheap settlement of the debt. The pleading alleged that the director had failed to pay over the bribe; but, in breach of trust and fiduciary duty, had retained it. The issue was one of limitation. James LJ said (p. 323):

"'The ground of this suit is concealed fraud. If a man receives money by way of a bribe for misconduct against a company or cestui que trust, or any person or body towards whom he stands in a fiduciary position, he is liable to have that money taken from him by his principal or cestui que trust. But it must be borne in mind that that liability is a debt only differing from ordinary debts in the fact that it is merely equitable, and in dealing with equitable debts of such a nature Courts of Equity have always followed by analogy the provisions of the Statute of Limitations, in cases in which there is the same reason for making the length of time a bar as in the case of ordinary legal demands."

58. As Lord Templeman pointed out in Reid, this judgment denies that there is any proprietary interest in the bribe. Brett LJ said (p. 324):

"It seems to me that the only action which could be maintained by the company or by the liquidator of the company against this defendant would be an action in equity founded upon the alleged fraud of the defendant. Neither at law nor in equity could this sum of £250 be treated as the money of the company, until the court, in an action by the company, had decreed it to belong to them on the ground that it had been received fraudulently as against them by the defendant."

59. In Reid Lord Templeman commented on this passage:

"This is a puzzling passage which appears to mean that a proprietary interest in the bribe arises as soon as a court has found that a bribe has been accepted."

60. It may be that the explanation of this passage is that Brett LJ was presaging the analysis undertaken by Ungoed-Thomas J in Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555 (and subsequently approved on more than one occasion) to the effect that some kinds of constructive trusteeship arise because a court of equity says that the defendant shall be liable in equity as though he were a trustee; and that he is made liable "by the imposition or construction of the court in equity". Another possible explanation is that Brett LJ was at least flirting with the idea of a remedial constructive trust (which, it is now clear, is not part of English law).
61. Cotton LJ said (p. 325):

"Here the money sought to be recovered was in no sense the money of the company, unless it was made so by a decree founded on the act by which the trustee got the money into his hands. It is a suit founded on breach of duty or fraud by a person who was in the position of trustee, his position making the receipt of the money a breach of duty or fraud. It is very different from the case of a cestui que trust seeking to recover money which was his own before any act wrongfully done by the trustee."

62. It is clear from the way in which the argument is reported (including interventions from the Bench) that the distinction being drawn is between money which had once been the property of the company and money to which the company had no claim except on the ground that its receipt was a breach of trust. In Reid Lord Templeman commented that:

"This observation does draw a distinction between moneys which are held on trust and are taken out by the trustee and moneys which are not held on trust but which the trustee receives in circumstances which oblige him to pay the money into the trust. The distinction appears to be inconsistent with Keech v Sandford, Sel.Cas.Ch. 61, and with those authorities which make the recipient of the bribe liable for any increase in value."

63. He did not suggest that the principle stated by Cotton LJ was not of general application. In Lister & Co v Stubbs Cotton LJ said:

"Mr. Justice Stirling, in the course of his judgment, referred to my decision in the case of Metropolitan Bank v Heiron. I think that I took a correct view in my judgment in that case; and in my opinion this is not the money of the Plaintiffs, so as to make the Defendant a trustee of it for them, but it is money acquired in such a way that, according to all rules applicable to such a case, the Plaintiffs, when they bring the action to a hearing, can get an order against the Defendant for the payment of that money to them. That is to say, there is a debt due from the Defendant to the Plaintiffs in consequence of the corrupt bargain which he entered into; but the money which he has received under that bargain cannot, in the view which I take, be treated as being money of the Plaintiffs…"

64. The issue in Lister & Co v Stubbs was not one of limitation. Cotton LJ applied the same principle that he had formulated in Metropolitan Bank v. Heiron. Thus according to Cotton LJ himself the distinction is one of general application; and is not confined to questions of limitation of actions. In Taylor v Davies [1920] AC 636 property was assigned to assignees for the benefit of creditors. The defendant was not one of the assignees, but was an inspector (which I take to be a position analogous to the supervisor of an IVA). Land held under the assignment was conveyed to the defendant at an undervalue. When the transaction was challenged he relied on a limitation defence. The appeal was argued on the basis that the defendant was "in a fiduciary relation to the general body of creditors and was disabled (under the ordinary rules of equity) from becoming a purchaser of any part of the estate or making any other arrangement with the assignee for his own benefit, except upon the condition of making full disclosure of all material facts within his knowledge; giving full credit for the value of his bargain; and obtaining the consent of the creditors" (p. 647). The main argument was that since the defendant acquired the property in breach of his fiduciary obligations, he became a constructive trustee of it, with the consequence that the property was "trust property". The Privy Council distinguished between the case of an express trustee or a de facto trustee on the one hand and a constructive trustee on the other. In the first of these cases:

"The possession of an express trustee was treated by the Courts as the possession of his cestuis que trustent, and accordingly time did not run in his favour against them. This disability applied, not only to a trustee named as such in the instrument of trust, but to a person who, though not so named, had assumed the position of a trustee for others or had taken possession or control of property on their behalf …"

65. What they meant by the expression "constructive trustee" was "a person who, though he had taken possession in his own right, was liable to be declared a trustee in a Court of equity" (p. 651). They concluded that:

"The expressions "trust property" and "retained by the trustee" properly apply, not to a case where a person having taken possession of property on his own behalf, is liable to be declared a trustee by the Court; but rather to a case where he originally took possession upon trust for or on behalf of others. In other words, they refer to cases where a trust arose before the occurrence of the transaction impeached and not to cases where it arises only by reason of that transaction."

66. This, as it seems to me, is the same distinction as that drawn by the Court of Appeal in Metropolitan Bank v. Heiron. It is also of interest that the phrase "liable to be declared a trustee" is very similar to the passage in the judgment of Brett LJ in Lister & Co v Stubbs that Lord Templeman found puzzling. Taylor v Davies was followed by the Privy Council in Clarkson v Davies [1923] AC 100. Neither case was cited in Reid.
67. In Paragon Finance plc v D B Thakerar & Co [1999] 1 All ER 400, 408 Millett LJ pointed out that the expression "constructive trust" is (or at least was) used by equity lawyers to cover two entirely different situations. The first arises where the defendant, though not expressly appointed as trustee, has assumed the duties of a trustee by a lawful transaction which was independent of and preceded the breach of trust and is not impeached by the claimant. The second covers those cases where the trust obligation arises as a direct consequence of the unlawful transaction which is impeached by the claimant. Millett LJ continued:

"A constructive trust arises by operation of law whenever the circumstances are such that it would be unconscionable for the owner of property (usually but not necessarily the legal estate) to assert his own beneficial interest in the property and deny the beneficial interest of another. In the first class of case, however, the constructive trustee really is a trustee. He does not receive the trust property in his own right but by a transaction by which both parties intend to create a trust from the outset and which is not impugned by the plaintiff. His possession of the property is coloured from the first by the trust and confidence by means of which he obtained it, and his subsequent appropriation of the property to his own use is a breach of that trust. … In these cases the plaintiff does not impugn the transaction by which the defendant obtained control of the property. He alleges that the circumstances in which the defendant obtained control make it unconscionable for him thereafter to assert a beneficial interest in the property.

The second class of case is different. It arises when the defendant is implicated in a fraud. Equity has always given relief against fraud by making any person sufficiently implicated in the fraud accountable in equity. In such a case he is traditionally though I think unfortunately described as a constructive trustee and said to be "liable to account as constructive trustee". Such a person is not in fact a trustee at all, even though he may be liable to account as if he were. He never assumes the position of a trustee, and if he receives the trust property at all it is adversely to the plaintiff by an unlawful transaction which is impugned by the plaintiff. In such a case the expressions "constructive trust" and "constructive trustee" are misleading, for there is no trust and usually no possibility of a proprietary remedy; they are "nothing more than a formula for equitable relief": Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555 at 1582 per Ungoed-Thomas J."

68. A case falling within the first class is a claim for the recovery of trust property. A case falling within the second class is simply a claim for breach of trust. As the facts of Paragon themselves show, the defendant may be a fiduciary or trustee in the first class of case yet the particular breach of fiduciary duty which is alleged falls into the second class. This was also the case in Taylor v Davies. Lord Millett returned to the theme in Dubai Aluminium Co Ltd v Salaam [2003] 2 AC 366. In his speech (with which Lords Hutton and Hobhouse agreed) he reiterated the distinction between the two different classes of case; and said (p. 404):

"In this second class of case the expressions "constructive trust" and "constructive trustee" create a trap. As the court recently observed in Coulthard v Disco Mix Club Ltd [2000] 1 WLR 707, 731 this "type of constructive trust is merely the creation by the court ... to meet the wrongdoing alleged: there is no real trust and usually no chance of a proprietary remedy". The expressions are "nothing more than a formula for equitable relief": Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555, 1582, per Ungoed-Thomas J. I think that we should now discard the words "accountable as constructive trustee" in this context and substitute the words "accountable in equity"."

69. One of the important things about this case is that it was not a limitation case. Yet in the course of his discussion of the authorities Lord Millet cited and relied on the decisions of the Privy Council in Taylor v Davies and Clarkson v Davies; which were. It must follow, therefore, that the distinction between the two classes of case is of general application; and is not a distinction confined to questions of limitation. The distinction drawn by Lord Millett both in this case and in Paragon appears to me to be exactly the same distinction that Cotton LJ drew in Heiron. Where a case falls into the second class, the property that the fiduciary acquires is not trust property; and there is usually no chance of a proprietary remedy.
70. JJ Harrison (Properties) Ltd v Harrison [2002] 1 BCLC 162 concerned the sale of land owned by the company to one of its directors. It was alleged that the director had concealed material facts about the development potential of the land. The sale took place in 1986 but the action was not begun until 1998. The director raised a limitation defence. Chadwick LJ formulated a number of basic principles (§ 25) and said that:

"It follows from the principle that directors who dispose of the company's property in breach of their fiduciary duties are treated as having committed a breach of trust that a person who receives that property with knowledge of the breach of duty is treated as holding it upon trust for the company. He is said to be a constructive trustee of the property."

71. He continued (§ 27):

"It follows, also, from the principle that directors who dispose of the company's property in breach of their fiduciary duties are treated as having committed a breach of trust that, a director who is, himself, the recipient of the property holds it upon a trust for the company. He, also, is described as a constructive trustee. But, as Millett LJ explained in Paragon Finance plc v D B Thakerar & Co [1999] 1 All ER 400 at 408–409, his trusteeship is different in character from that of the stranger. He falls into the category of persons who, in the words of Millett LJ ([1999] 1 All ER 400 at 408) ... "though not strictly trustees, were in an analogous position and who abused the trust and confidence reposed in them to obtain their principal's property for themselves.""

72. Thus Chadwick LJ places the stranger in class 2 of Lord Millett's two classes, and the director in class 1 (see also § 39). But it must be emphasised that what Chadwick LJ was concerned with was a disposal of the company's own property; not the receipt by the director of property from a third party. The concentration on the particular property in issue is confirmed by a later passage in the judgment of Chadwick LJ (§ 29) in which he said:

"There is no doubt that Millett LJ regarded it as beyond dispute that a director who obtained the company's property for himself by misuse of the powers with which he had been entrusted as a director was a constructive trustee within the first category. … The true analysis is that his obligations as a trustee in relation to that property predate the transaction by which it was conveyed to him. The conveyance of the property to himself by the exercise of his powers in breach of trust does not release him from those obligations. He is trustee of the property because it has become vested in him; but his obligations to deal with the property as a trustee arise out of his pre-existing duties as a director; not out of the circumstances in which the property was conveyed." (Emphasis in original)

73. This too, as it seems to me, is the same distinction as that which Cotton LJ drew in Heiron. Gwembe Valley Development Co Ltd v Koshy (No 3) [2004] 1 BCLC 131 concerned secret profits made by a company director in breach of his fiduciary duty to the company. Mr Koshy was the managing director of GVDC. He was also a director and controlling shareholder of another company called Lasco which lent money to GVDC and made a large profit as a result. He failed to disclose his interest in Lasco to the board of GVDC. GVDC claimed an account of profits from Mr Koshy. Again the point in issue was whether Mr Koshy was, in principle, entitled to rely on a defence of limitation. The Court of Appeal applied the two-fold categorisation of trusts expounded by Lord Millett and held that Mr Koshy fell within the second class. The following passages from the judgment of the court are relevant. First (§ 118 (ii)):

"Mr Koshy's personal liability to account to GVDC for profits made by him from his fiduciary position as a director is not dependent on establishing that he has received any money or other property belonging to GVDC as a result of the misapplication of GVDC's assets, whether in the form of payments made by GVDC directly to him, or in the form of payments made, via Lasco, indirectly to him. GVDC's causes of action against Mr Koshy were based on the equitable disabilities or the fiduciary duties to which he was subject as a director of GVDC. As such, he was under a personal liability in equity to account to GVDC for unauthorised profits: either because he was disabled in equity from making an unauthorised personal profit out of the position occupied by him and/or because he acted in dishonest breach of fiduciary duty by deliberately and secretly doing so. The profits made by him are treated as taken for and on behalf of GVDC, as the person to whom he owed the duty to account. As between him and GVDC, equity prevents Mr Koshy from asserting, in answer to the claim for an account, that he is entitled to retain the profits (if any) made by him for his own benefit."

74. The emphasis here is on the personal relationship between Mr Koshy and the company; and the court also emphasises that the claim against Mr Koshy does not depend on showing that he received property "belonging to" GVDC. His liability is said to be "personal"; and the duty is a "duty to account". Second (§ 119):

"If that is the correct analysis, then it is clear in our view that any trust imposed on Mr Koshy is a class 2 trust, within Millett LJ's classification. We agree with the judge that liability to account for unauthorised profits may arise within a wide spectrum of factual situations. However, that does not alter the analysis under s 21(1)(a) and (b), each of which must be applied in accordance with its own terms. We disagree, respectfully, with the judge in treating dishonesty as a factor taking the case from class 2 to class 1, for the purposes of para (b). Nor do we think that is the effect of the passage from Chadwick LJ's judgment in Harrison's case quoted by the judge ([2002] 1 BCLC 478 at [295]). As the judge recognised, in that case the director transferred to himself property which had previously belonged to the company, and in relation to which he had "trustee-like responsibilities" before the transaction in question. By contrast, Mr Koshy's liability to account for undisclosed profits, and any constructive trust imposed on those profits, do not depend on any pre-existing responsibility for any property of the company. They arose directly out of the transaction which gave rise to those profits, and the circumstances in which it was made. The fact that Mr Koshy was in a pre-existing fiduciary relationship with the company was not enough, by itself, to bring the case within class 1, any more than it was in Taylor v Davies."

75. The court thus held that the profits were not "trust property" for the purposes of section 21. In my judgment this is clear authority, binding on me, that a claim made against a director in respect of secret profits, where the profit does not come from property previously owned by the company, is a claim falling within class 2 of Lord Millett's two classes. Mr Hill submitted that Lord Millett would have put such a claim into class 1, having regard to the trenchant views that he expressed in the article approved by the Privy Council in Reid. That may or may not be so. But the fact is that Lord Millett was not part of the constitution that decided Gwembe; and I must follow authority that binds me. Such a claim is therefore no more than a claim for breach of trust (section 21 (3)), rather than a claim to recover trust property (section 21 (1) (a)). If it is not a claim to recover trust property I find it difficult to see how it can be said that the claim is one to vindicate a proprietary interest in the profit. As Millett LJ made clear in Paragon where a claim against a fiduciary is in class 2 it is a personal claim rather than a proprietary one.
76. The last of the cases to which I should refer on this issue is the decision of the Court of Appeal in Halton International Inc v Guernroy [2006] EWCA Civ 801. Shareholders in an airline entered into an agreement about voting rights. One of the shareholders was appointed as the attorney of the others for the purpose of exercising their voting rights. It was alleged that the attorney had exercised the rights so as to obtain a profit for itself. The appeal was argued on the assumption that a fiduciary relationship existed. Carnwath LJ (with whom Morritt C and Tuckey LJ agreed) referred to the now familiar passage in Paragon. He then referred to Harrison and to Gwembe; and said (§ 16):

"The difference between the two cases, in short, was that while in the former the director had a pre-existing "trustee-like responsibility" in relation to the particular property which was the subject of the action, in the latter he did not." (Emphasis added)

77. He went on to hold (§ 23):

"For the exception to apply there must be a trust (or trustee-like responsibility) for specific existing property, not merely for the means to obtain it in the future."

78. At this point there was a crossover with the cases on the "no profit rule" Carnwath LJ continued:

"24 To overcome this problem Mr Steinfeld sought to draw an analogy with the old case of Keech v Sandford (1726) Sel.Cas Ch. 61. In that case the trustee of a lease applied for a renewal of the lease for an infant beneficiary, and, on this being refused, obtained a renewal for himself; it was held that he held the lease on trust for the infant. Mr Steinfeld suggests that in such a case the trust of the renewed lease would be a Class 1 trust, even though it arose from the impugned transaction, and the earlier lease was no more than the means to obtain it. He noted that in the leading case of Regal (Hastings) v Gulliver [1967] 2 AC 134, 138, Keech v Sandford was treated as an example of the general rule of equity that a person in a fiduciary position cannot enter into engagements in which his interests may conflict with the interests of those he is bound to protect (p 137–8).

25 Neither of those cases was concerned with the limitation rules. The rule (exemplified by Regal), which prohibits a fiduciary from making a secret profit is not in itself an accurate guide to the scope of class 1. That much is evident from Paragon. Keech v Sandford might arguably be brought within class 1, but, if so, only because of the special nature of the property involved. As was explained in Biss v Biss [1903] 2 Ch 40, 56 per Collins MR, the renewal is treated as "an accretion to or graft upon the original term arising out of the goodwill or quasi-tenant right annexed thereto". It provides no analogy for a similar link between the voting rights and the new shares in the present case."

79. It is noteworthy that Carnwath LJ considered that Keech v Sandford was only "arguably" within class 1 (i.e. a case of a true trust); and then only because of the special nature of the property. He too drew the same distinction as Cotton LJ had drawn in Heiron.

Conclusions on proprietary remedy

80. On this part of the case I summarise my conclusions as follows:

i) I am bound to follow decisions of the Court of Appeal, in preference to decisions of the Privy Council, even if the latter have disapproved those decisions;

ii) Sugden v Crossland is clear first instance authority for the proposition that a fiduciary who, in breach of fiduciary duty, receives property which had not hitherto been (or been treated as) trust property, holds it as an accretion to the trust fund; and that decision was approved in Reid;

iii) But a series of decisions of the Court of Appeal (and of the Privy Council and the House of Lords), both before and after Reid, have drawn a clear distinction between two classes of case both of which have from time to time been labelled "trust" or "constructive trust";

iv) The distinction between the two classes of case is not confined to the availability of limitation defences;

v) The first class of case concerns a real trust, in which the property concerned really is held on trust and counts as trust property. The second does not; and is no more than a way of expressing a liability to account in equity. In the first class of case the claimant is entitled to enforce his proprietary rights. In the second he is entitled to a personal remedy;

vi) The distinction between the two classes is whether the defendant has assumed pre-existing fiduciary duties in relation to the specific item of property in issue. The expression "pre-existing" means duties which precede the events of which complaint is made. If he has, then the case falls within the first class. If he has not; and in particular if the fiduciary duty in relation to the specific item of property arises only as a result of the transaction being impugned, the case falls within the second class.

vii) A claim made in relation to unauthorised profits made by a company director otherwise than by acquiring and subsequently exploiting property formerly owned (or treated as owned) by the company itself falls within the second class of case.

Application to the facts

81. The fiduciary duty relied on in the present case is a duty owed by Mr Cushnie to TPL. The unauthorised profit is a profit realised by Mr Cushnie on the sale of shares in VGP. So far as the evidence goes Mr Cushnie acquired those shares before TPL was even incorporated. But at any rate his initial acquisition of the shares could not, in my judgment, have amounted to an acquisition of property that belonged in any sense to TPL. Before his sale of those shares he did not owe trustee-like duties in relation to that specific property. It follows, in my judgment, that the claim by TPL to the profit realised by Mr Cushnie on a sale of those shares is a claim based on the transaction which gave rise to those profits, and the circumstances in which it was made. It is, therefore, a case which falls into the second class; and gives rise to a personal remedy only. Since the claim gives rise to a personal remedy only, it is not open to TPL to trace those profits into the proceeds of sale of the Kensington property and to assert a proprietary claim to those proceeds. The settlement of personal claims between VTFL and Mr Cushnie cannot be undone by TPL in reliance on a personal claim. That settlement could only be undone by a trustee in bankruptcy or liquidator.

Purchaser in good faith without notice

82. In the light of my conclusion about the proprietary claim this issue does not arise. But in case I am wrong on that question I must nevertheless deal with it. It is not disputed that the banks gave value for the payments that they received. The question is what they knew or are taken to have known, and when.
83. One area of debate was whether the test to be applied was that applicable to cases of knowing receipt of trust property; or whether the test is that of actual or constructive notice. Mr Collings submitted that the former was the correct test. He said that the relevant state of knowledge was that described by Nourse LJ in Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437, 455:

"What then, in the context of knowing receipt, is the purpose to be served by a categorisation of knowledge? It can only be to enable the court to determine whether, in the words of Buckley LJ in Belmont Finance Corpn Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER 393, 405, the recipient can "conscientiously retain [the] funds against the company" or, in the words of Sir Robert Megarry V-C in In re Montagu's Settlement Trusts [1987] Ch 264, 273, "[the recipient's] conscience is sufficiently affected for it to be right to bind him by the obligations of a constructive trustee". But, if that is the purpose, there is no need for categorisation. All that is necessary is that the recipient's state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt.

For these reasons I have come to the view that, just as there is now a single test of dishonesty for knowing assistance, so ought there to be a single test of knowledge for knowing receipt. The recipient's state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt. A test in that form, though it cannot, any more than any other, avoid difficulties of application, ought to avoid those of definition and allocation to which the previous categorisations have led."

84. In coming to his conclusion Nourse LJ referred with evident approval to the judgment of Megarry V-C in In re Montagu's Settlement Trusts. In an earlier part of his judgment Nourse LJ quoted the following passages:

"The former [i.e. notice] is concerned with the question whether a person takes property subject to or free from some equity. The latter [i.e. liability as constructive trustee] 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."

"(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."

85. This part of the case is concerned with whether the banks take free of TPL's equitable proprietary interest in the proceeds of sale of the shares. The claim is a claim to property that is still in the banks' possession or control. It is not concerned with their personal liability to account; which would extend to property they received but subsequently parted with. In Macmillan Inc v Bishopsgate Trust plc (No 3) [1995] 1 WLR 978, 988 Millett J said:

"The plaintiff brings the claim in order to recover his own property and must succeed, if at all, by virtue of his own title. In the latter class of case his claim arises from a breach of fiduciary or other obligation on the part of the defendant. The distinction is that drawn by equity between the claim of an equitable owner to recover his property, or compensation for the failure to restore it, from a person into whose hands it has come and a claim by a plaintiff in respect of a breach of fiduciary obligation owed to him. In the former case he relies upon his continuing equitable interest in the property under an express or resulting trust; in the latter upon an equity between the parties which may in appropriate circumstances give rise to a constructive trust. The distinction, which is crucial, may have been lost sight of in the language of some of the more recent decisions on knowing receipt." (Emphasis added)

86. Akindele was concerned with liability for knowing receipt of trust property; and that liability is a personal liability which extends to a liability to account for property or its value which the knowing recipient no longer has. In those circumstances, as Megarry V-C pointed out, a more stringent test is appropriate. In my judgment, therefore, Akindele is not in point. This is, to my mind, borne out by what Lord Millett subsequently said in Foskett v McKeown:

"A beneficiary of a trust is entitled to a continuing beneficial interest not merely in the trust property but in its traceable proceeds also, and his interest binds every one who takes the property or its traceable proceeds except a bona fide purchaser for value without notice." (p. 127)

"The beneficiary's proprietary claims to the trust property or its traceable proceeds can be maintained against the wrongdoer and anyone who derives title from him except a bona fide purchaser for value without notice of the breach of trust. The same rules apply even where there have been numerous successive transactions, so long as the tracing exercise is successful and no bona fide purchaser for value without notice has intervened." (p. 130)

87. Likewise in Barclays Bank Plc v O'Brien [1994] 1 AC 180, 195 Lord Browne-Wilkinson said:

"The doctrine of notice lies at the heart of equity. Given that there are two innocent parties, each enjoying rights, the earlier right prevails against the later right if the acquirer of the later right knows of the earlier right (actual notice) or would have discovered it had he taken proper steps (constructive notice). In particular, if the party asserting that he takes free of the earlier rights of another knows of certain facts which put him on inquiry as to the possible existence of the rights of that other and he fails to make such inquiry or take such other steps as are reasonable to verify whether such earlier right does or does not exist, he will have constructive notice of the earlier right and take subject to it."

88. Accordingly, in my judgment the relevant test to apply is that of notice, although once again the law is not entirely clear. There is undoubtedly authority which warns against importing concepts like constructive notice into "commercial" transactions. However, in Macmillan Inc v Bishopsgate Trust plc (No 3) [1995] 1 WLR 978, 1000 Millett J said:

"In English law notice in the present context includes not only actual notice (including "wilful blindness" or "contrived ignorance," where the purchaser deliberately abstains from an inquiry in order to avoid learning the truth) but also constructive notice, that is to say notice of such facts as he would have discovered if he had taken proper measures to investigate them. The doctrine of constructive notice has developed in relation to land, where there is a recognised procedure for investigating the title of the transferor. There is no room for the doctrine of notice in the strict conveyancing sense in a situation in which it is not the custom and practice to investigate the transferor's title. But in the wider sense it is not so limited…. It is true that many distinguished judges in the past have warned against the extension of the equitable doctrine of constructive notice to commercial transactions (see Manchester Trust v. Furness [1895] 2 QB 539, 545–546, per Lindley LJ), but they were obviously referring to the doctrine in its strict conveyancing sense with its many refinements and its insistence on a proper investigation of title in every case. The relevance of constructive notice in its wider meaning cannot depend on whether the transaction is "commercial:" the provision of secured overdraft facilities to a corporate customer is equally "commercial" whether the security consists of the managing director's house or his private investments. The difference is that in one case there is, and in the other there is not, a recognised procedure for investigating the mortgagor's title which the creditor ignores at his peril."

89. Thus the context in which the question arises is crucial for the purpose of evaluating what would have been "proper steps" or "proper measures" for the person in question to have taken. Millett J returned to this later in his judgment. He said (p. 1014):

"… Macmillan attempted to establish constructive notice on the part of each of the defendants by a meticulous and detailed examination of every document, letter, record or minute to see whether it threw any light on the true ownership of the Berlitz shares which a careful reader — with instant recall of the whole of the contents of his files — ought to have detected. That is not the proper approach. Account officers are not detectives. Unless and until they are alerted to the possibility of wrongdoing, they proceed, and are entitled to proceed, on the assumption that they are dealing with honest men. In order to establish constructive notice it is necessary to prove that the facts known to the defendant made it imperative for him to seek an explanation, because in the absence of an explanation it was obvious that the transaction was probably improper."

90. He then referred with approval to the statement of Steyn J in Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363, 377:

"… it is right to say, that trust, not distrust, is also the basis of a bank's dealings with its customers. And full weight must be given to this consideration before one is entitled, in a given case, to conclude that the banker had reasonable grounds for thinking that the order was part of a fraudulent scheme."

91. It is, I think, also pertinent to refer to the statement of Lord Herschell LC in Thomson v Clydesdale Bank [1893] AC 282, 287:

"It cannot, I think, be questioned that under ordinary circumstances a person, be he banker or other, who takes money from his debtor in discharge of a debt is not bound to inquire into the manner in which the person so paying the debt acquired the money with which he pays it. However that money may have been acquired by the person making the payment, the person taking that payment is entitled to retain it in discharge of the debt which is due to him."

92. Mr Collings relied heavily on the decision of the Court of Appeal in Carl Zeiss Stiftung v Herbert Smith & Co [1969] 2 Ch. 276. That concerned a claim for an account against solicitors who, so it was alleged, had received money in payment of their fees with "notice" that the money was trust money. To some extent it is an unsatisfactory case because the words "knowledge" and "notice" were often used interchangeably (as Sachs LJ pointed out at p. 296). It is also to some extent unsatisfactory for present purposes; because the claim was that the solicitors were personally accountable in equity, rather than persons who could not defeat an existing equitable interest. However, what I think that Mr Collings is entitled to draw from it are two propositions. First, notice of a claim is not the same as notice of a right. Second, notice of a right depends not only on notice of the facts but also notice of the applicable law. Dankwerts LJ said (p. 290):

"In my view, knowledge of a claim being made against the solicitor's client by the other party is not sufficient to amount to notice of a trust or notice of misapplication of the moneys. In the present case, which involves unsolved questions of fact, and difficult questions of German and English law, I have no doubt that knowledge of the plaintiffs' claim is not notice of the trusts alleged by the plaintiffs." (Emphasis added)

93. At p. 293 he said:

"What the defendant solicitors knew was that the moneys came from the West German foundation and they knew of the allegations contained in the proceedings brought against that foundation by the plaintiffs in which they were instructed to act as solicitors for the West German foundation. They knew that claims were being made against the West German foundation that all their property and assets belonged to the plaintiffs or were held on trust for them. But claims are not the same thing as facts. Mr. Harman contended that for the purposes of the present issue all the allegations contained in the statements of claim in both the actions must be taken as true. That will not do. What we have to deal with is the state of the defendant solicitors' knowledge (actual or imputed) at the date when they received payments of their costs and disbursements. At that date they cannot have had more than knowledge of the claims above mentioned. It was not possible for them to know whether they were well-founded or not. The claims depended upon most complicated facts still to be proved or disproved, and very difficult questions of German and English law. It is not a case where the West German foundation were holding property upon any express trust. They were denying the existence of any trust or any right of property in the assets claimed by the plaintiffs." (Emphasis added)

94. Sachs LJ said (p. 296):

"Firstly, and to my mind decisively, whatever be the nature of the knowledge or notice required, cognisance of what has been termed "a doubtful equity" is not enough. This phrase is to be found in Lewin on Trusts, 16th ed (1964), p. 658, and Underhill's Law Relating to Trusts and Trustees 11th ed (1959) p. 606: it appears first to have been used by Lord Grant M.R. in Parker v. Brooke (1804) 9 Ves 583, 588. The rule, as I understand it, is that no stranger can become a constructive trustee merely because he is made aware of a disputed claim the validity of which he cannot properly assess. Here it has been rightly conceded that no one can foretell the result of the litigation even if the plaintiffs were to prove all the facts they allege." (Emphasis added)

95. Having referred to section 199 of the Law of Property Act 1925 Sachs LJ continued:

"On the assumption that this is the right test (a point to which I will return) it is to be noticed that in many cases, and in particular in the present case, knowledge of the existence of a trust depends on knowledge first of the relevant facts and next of the law applicable to that set of facts." (Emphasis added)

96. It is true that part of the court's reasoning turned on the fact that difficult questions of German law were involved; and that foreign law is a question of fact in an English court. But both Dankwerts and Sachs LJJ treated difficult questions of English law on the same footing. So in my judgment this is a distinction without a difference.
97. Whether a person is entitled to rely on the defence of purchaser in good faith for value without notice must be tested at the moment of the purchase. Subsequent knowledge of notice does not retrospectively remove the defence.
98. On this part of the case, I summarise my conclusions as follows:

i) Where the issue is whether an equitable proprietary interest can be enforced against a person in possession of the property or its identifiable substitute the test is lack of notice, rather than unconscionability;

ii) The notice required is notice of a right, rather than a mere claim;

iii) Notice includes both notice of the facts on which a claim is based and of the law applicable to those facts;

iv) Notice includes both actual notice and constructive notice;

v) Constructive notice means notice of those things that would have been discovered if proper steps had been taken;

vi) But what are proper steps is dependent on the context in which the question arises. In a commercial context it must be obvious that the transaction was probably improper.

Notice: application to the facts

99. I deal with the disputed payments in chronological order, by reference to the schedule showing the destination of the proceeds of sale of the shares. Like Rimer J in the previous round of litigation I must do so on the basis that TPL was the beneficial owner of the proceeds of sale of the shares (a claim which I have held is ill-founded). This makes the task more difficult. There is also another artificiality. Although the Defence denied the tracing claim in very general terms, it did not positively aver that VTFL's bank accounts were overdrawn at any material time. I ruled that it was not open to the banks to advance that positive case without amendment of the statement of case; but no application to amend was made. It is important to avoid hindsight. What is important is what the banks knew or are taken to have known at the relevant time. For that reason I will "stop the clock" at the various dates of the receipts that are impugned. In this section of my judgment I am considering whether the banks had notice of TPL's beneficial ownership of the share sale proceeds. I am not considering whether the banks had notice of TPL's beneficial ownership of the mixed fund and its identifiable substitutes. For the purpose of considering the question of knowledge or notice Mr Collings accepted that, although the receivers were nominally acting as the agents of VTFL, the banks must be taken to have known (or had notice of) everything that the receivers knew, or of which they had notice.
100. Mr Hill devoted much of his closing address to the question whether the banks could or should have discovered that there had been a fraud practised on VTFL; and whether Mr Cushnie might have been involved in it. In effect he suggested that at a very early stage the banks should not have believed the explanations that Mr Cushnie (who was a long-standing and apparently very successful customer) gave them. In my judgment this sets the bar far too high. In addition the critical question at each of the relevant dates is not the broad question whether the banks had reason to believe that Mr Cushnie had been up to no good; but whether they had notice of TPL's equitable ownership of the share sale proceeds.

Payment to Fred Clough

101. On 7 December 1999 Mr Cushnie directed RBS to pay £1 million from Marrlist's account to Ms Skeete. She appears to have been an associate of Mr Clough. RBS were suspicious about this payment; but for reasons unrelated to the current allegations. Based on a number of manuscript annotations on Mr Cushnie's letter of instruction Mr Hann thought that Mr Cushnie might have been acting under duress. In fact he was not; and on the same day Mr Hann satisfied himself of that. 7 December was the day before VGP's shares were suspended. On that day RBS had no notice of any fraud, let alone that Mr Cushnie himself might have been implicated in it. The reason for the suspension was an allegation that there had been non-compliance with accounting standards relating to VGP's turnover. However, no one thought at that stage that its profits had been overstated; and no one thought that the shares would not be relisted in due course. RBS did not have notice of TPL's equitable ownership of the share sale proceeds on this date.

Payments to Versailles

102. On 15 December 1999 £6 million was paid into VTFL's RBS bank account. The reason for the payment was to provide working capital for VTFL, which was hard up against its borrowing limit. Mr Hill submits that RBS was already aware that these monies represented the profits of Mr Cushnie's share trading; that trading was itself known to be suspicious and the shares in VGP had been suspended on the basis of turnover reporting irregularities. The circumstances of the payments themselves were also highly unusual. All the circumstances taken together were more than enough to have made RBS suspicious of the propriety of what was being done and RBS should not simply have credited these monies to VTFL's accounts.
103. By 15 December the shares in VGP had been suspended because of accounting irregularities. Mr Clough had assured the banks that profitability was unaffected. Mr Young of RBS felt that there was no reason for serous concerns. However, a press report in the FT on 9 December had quoted Mr Cushnie as having said that he was concerned that there might have been a false market in VGP's shares. Mr Dickinson of RBS commented in an internal e-mail on 9 December that "there's no smoke without fire" and commented ironically that Mr Cushnie had timed his share sale superbly. On 10 December the banks met Mr Cushnie and Mr Clough. They confirmed that they were not expecting the accounting problem to impact on reported profitability; and said that they had an accountant's report confirming that. Mr Cushnie also said that he did not know anything about the accounting problem when he sold his shares; although the banks commented that it looked suspicious. The banks decided to instruct independent accountants to investigate.
104. It is plain that on 15 December the banks had no actual knowledge of TPL's equitable ownership of the proceeds of sale of Mr Cushnie's shares. I do not accept that these facts amounted to constructive notice of that equitable interest. At this stage the banks were in the position of any banker who accepts a payment in discharge of a debt. At most, if and in so far as the banks were under a duty to investigate, they did that by instructing independent accountants; and I do not consider that they can be fixed with notice of what the accountants eventually discovered until the discovery was made. It might be different if the banks had delayed unreasonably in giving instructions for the investigations; but in my judgment they did not.
105. Between 1 January 2000 and 6 January 2000 a series of cheques drawn on Marrlist's account were paid into VTFL's account. They amounted in aggregate to £2.5 million. Mr Hill accepted that RBS did not know that these cheques were part of the proceeds of sale of the shares. What he says is that RBS should have been "on the lookout" for further payments out of the Marrlist account; and that if they had chosen to they could have found out that these payments came from Marrlist's account. In my judgment this submission would have the effect of turning the bank into detectives. I reject it. The banks had asked questions of Mr Cushnie and had received answers to those questions. They may have been suspicious but I do not consider that they should immediately have jumped to the conclusion that Mr Cushnie was lying; and that he was implicated in the fraud. As I have said in my judgment the banks acted properly in instructing accountants to conduct an independent review.
106. In addition Mr Cushnie owed fiduciary duties to VTFL and VGP. If and in so far as he had been in breach of those duties he would have been personally liable to make good any default. So the payment of money by Mr Cushnie to VTFL would not have led a reasonable person to suppose that there was some other more remote claimant to the money.
107. The banks did not have notice of TPL's equitable ownership of the share sale proceeds on these dates.

NatWest loan repayment

108. NatWest had lent Mr Cushnie money with which he bought a villa near St Tropez through another company which was his alter ego. At the beginning of February 2000 they received £2.25 million from the Marrlist account to pay off that loan. Things had, of course, moved on between 6 January and the beginning of February. It is necessary to recount what had happened.
109. Shortly before Christmas 1999 the banks appointed PwC as independent accountants to investigate VTFL. They had originally intended to appoint KPMG, but KPMG had a conflict of interest. There was a handover meeting between the two firms on 24 December 1999. The notes of the meeting record that:

"Apparently there is a "club" arrangement which is also in the structure somewhere or at least appears to be party to some transactions. KPMG thought this club might be lending c. £15m to VTF but could not be sure at this stage."

110. What was in contemplation was the possibility that the "club" (which is accepted to be a reference to TPL) might be a creditor of VTFL; not that it might be the equitable owner of the proceeds of sale of the shares. Mr Young of RBS followed this up by talking to Mr Clough, who confirmed that TPL was an unsecured creditor. Mr Young took comfort from this, since the banks were secured creditors.
111. Following PwC's appointment Mr Clough was obstructive and prevented them from having access to the relevant materials until the New Year. He and Mr Cushnie were also reluctant to give PwC the information that they requested. At a meeting on 4 January Mr Clough assured the PwC team that the company was not experiencing a cash crisis; that cash flow for January would be positive; and that the company's problems had been caused by some of its customers' insolvency. Mr Cushnie repeated his previous statement that he had sold his shares because of pressure from his financial advisers. He was also asked about TPL and said that it was "formed of a group of wealthy individuals who provided some of the start up funds on an unsecured basis to [VTFL]."
112. PwC continued their investigation. They were due to present a report on 14 January. Mr Ballard of RBS commented on 11 January that until then "we are unable to give any indication of whether there is a "black hole" within the business…" On 13 January PwC and NatWest met Mr Cushnie. They explained that PwC had not made as much progress as had been hoped; and could not understand how the turnover issues linked with TPL. Mr Cushnie explained that TPL was "a very loose arrangement"; but that the debtors' ledger did include money paid to TPL and not to VTFL. He said that there was little exposure to TPL and felt that it was about £4 million. On the following day NatWest wrote to VTFL. They said that on a number of occasions VTFL had "directed its debtors to make payments" to TPL; and said that in future "all book debts of [VTFL]" must be paid into the RBS account and that the "practice of directing payment to [TPL] must cease immediately." Mr Hill made much of this letter. But in my judgment it was written on the understanding that VTFL had been diverting payment of its own book debts to TPL, and was not an attempt to garner TPL's own book debts for the banks. Rimer J found that there had only been one trade that TPL had funded (and hence only one legitimate book debt owed to TPL); and none of the witnesses who gave evidence before me were able to give any clearer picture. In an email of the same day Mr Ballard of RBS set out his understanding. He said that TPL was a BVI company "funded by a club of friends to provide finance to [VTFL] to cover trade deals when Bank facilities have not been available". He too seems to me to have been under the impression that TPL was lending money to VTFL. The same impression comes out of another email of the same date written by Mr Young. On the same day NatWest reported that PwC believed that about £50 million of turnover shown in VTFL's balance sheet "is in fact passed through the books of [TPL]". When questioned, Mr Cushnie had explained that instructions had been given to pay invoices to TPL because "initially they provided funds to [VTFL] to enable it to conduct its business".
113. PwC presented their initial report on 14 January. As regards TPL they reported:

i) It provided off balance sheet finance to VTFL;

ii) Lending had exceeded £20 million but was believed to be less;

iii) Transactions funded by TPL were recognised in VTFL's profit and loss account.

114. At this stage the working assumption was still that TPL was a creditor of VTFL on the basis of lending. This was confirmed by Mr Clough at a meeting on 13 January. In the course of the following day PwC obtained a copy of the management agreement between TPL and VTFL. Having worked flat out for several days, including an all night session on 19 January 2000, PwC reported early in the morning of 20 January that VTFL's financial position was far worse than anyone had envisaged; and that the company had been the subject of a massive defalcation. The suggestion was that the partners who had "assisted with the funding" of VTFL through TPL "were also the victims of the fraud and had lost substantial funds". But the initial view was that "Cushnie may not have been the perpetrator". It was on that day that the banks appointed the administrative receivers.
115. Mr Greaves was one of the PwC team both during the investigation and subsequently during the receivership. He said that as at 20 January his understanding was that the traders would invest in TPL and that their money had flowed into VTFL. Almost immediately the receivers began proceedings against Mr Clough; and on 26 January 2000 obtained a freezing order against him.
116. PwC presented a report on 31 January 2000. They reported that there had been significant asset understatement and that misappropriated funds had been identified. One of the additional problems was that VTFL had itself been the victim of a completely unconnected fraud. What it thought was its biggest book debt (apparently owed by Marks & Spencer) was itself fraudulent. There was in fact no debt. They produced a diagram showing the circular movement of funds to inflate VTFL's turnover. TPL was part of that circle. The payments out of the circle were all to entities connected with Mr Clough. At this stage the further action included continuing legal proceedings already begun against Mr Clough; and consideration of the merits of actions against other directors for breach of duties. No allegation of complicity in the fraud was yet levelled at Mr Cushnie.
117. It was in this state of affairs that NatWest received the money from Marrlist to pay off Mr Cushnie's loan on the French property. The money was part of the proceeds of sale of Mr Cushnie's shares. It seems probable that NatWest knew that the source of the money was those proceeds of sale. But NatWest did not know that TPL was the beneficial owner of those monies. TPL had not claimed beneficial ownership of them. Did NatWest nevertheless have constructive notice of TPL's beneficial ownership? The first question here is whether NatWest took proper steps. Bearing in mind that a banker is not under a duty to inquire about the source of funds used to discharge a debt owing to the bank, I do not consider that it can be said that NatWest failed to take proper steps. In my judgment therefore NatWest did not have notice of TPL's beneficial ownership of the proceeds of sale of the shares.

The first distribution

118. The receivers made a distribution of about £3.9 million to the banks on 5 January 2001. TPL claims beneficial ownership of this money. Since the banks received this money in partial discharge of their secured debts, they plainly gave value. What knowledge or notice did they have of TPL's beneficial ownership of this money in January 2001?
119. PwC continued to talk to Mr Cushnie. At one meeting in March 2000 Mr Cushnie placed all the blame on Mr Clough. He said he was angry at what Mr Clough had taken from Marrlist; complained about having been ripped off by Mr Clough; and at one point broke down in tears. At this stage the receivers had identified diversion of funds. But all the diversion of funds that they alleged had been diverted to Mr Clough or entities controlled by him. They were aware, however, that the main beneficiary of the inflated turnover was the share price. The receivers were also continuing to attempt to recover whatever assets VTFL had. These included some genuine book debts; and also a claim for repayment from HMRC of corporation tax which had been paid on non-existent profits; and of VAT which had been paid on non-existent turnover. They were also contemplating litigation against VTFL's auditors and Mr Cushnie himself; and had already obtained a freezing order against Mr Clough.
120. By the end of March 2000 Mr Cushnie had instructed Peters & Peters to represent him; and was beginning to make overtures of settlement to the receivers.
121. On 18 April 2000 Mr Greaves, for the receivers, wrote to Sinclair. In his letter he said:

"It appears at this stage that funds invested via [TPL] may not have been utilised in actual transactions with third party clients and customers although we have not by any means completed our investigations in this regard. … It now appears likely that these monies were utilised by [VTFL] over the course of the preceding years. If this were to be the case, it would appear that [TPL] would have the basis of a claim against [VTFL] albeit that this would be an unsecured claim due to the insolvency of the company."

122. The two significant points, to my mind, are: first, that the claim that Mr Greaves had in mind was a claim by TPL against VTFL (not against Mr Cushnie); and second that the claim he had in mind was an unsecured claim (not a proprietary claim, even against VTFL). Under skilful cross-examination by Mr Hill Mr Greaves accepted the possibility that there might be creditors or claimants with a proprietary claim; and that these might include TPL. But this was undoubtedly ex post facto reasoning; and I do not accept that it formed part of Mr Greaves' thought process at the time.
123. At about the same time the settlement discussions between the receivers and Mr Cushnie continued. The receivers appear to have taken the view that whether Mr Cushnie had profited from the sale of the shares was not a matter for them. In other words they did not assert a proprietary claim on behalf of VTFL to those share sale proceeds. In a memorandum of 8 May 2000 Mr Ballard of RBS reported that PwC had still failed to find any money that had actually been diverted from VTFL to Mr Cushnie. All monies going out of the circle had gone to companies controlled by Mr Clough. But the banks had been advised by Denton Wilde Sapte that they had claims against Mr Cushnie, based on misrepresentation and breach of fiduciary duty and failing to exercise the skill and control expected of a director. Mr Cushnie's offer of settlement was £12 million. Of that total, £5 million was to come from "friends"; £1 million was to come from a shareholding he had in a Canadian company, and £6 million was to come from the proceeds of sale of the Kensington property. Mr Ballard concluded:

"Whilst we are confident that we have a sound and readily provable case it is highly likely that other parties (shareholders, Versailles Traders) who have also suffered will look to join in any claim thereby reducing our eventual recoveries from [Mr Cushnie]."

124. He also expressed concern that any settlement could not be "completely clean or unassailable – there could clearly be the potential of a claim of preference from other parties or creditors of [Mr Cushnie] (there is the possibility of a large tax claim in the future re the share sale)." Mr Ballard accepted that the defrauded traders might have a claim; but when it was put to him in cross-examination that the banks themselves were proposing to settle a proprietary claim to the share sale proceeds, Mr Ballard's response was that his recollection was that the claim was one for misfeasance and breach of duty. This is borne out by the fact that the receivers never advanced a proprietary claim on behalf of VTFL. Mr Greaves agreed in evidence that there was a concern that other people might have competing claims and that, if they did, any settlement could be vulnerable. The concern that Mr Ballard expressed was not a concern that anyone might have a proprietary claim against Mr Cushnie. Mr Lomas also recognised that there had been a big and very public fraud; that many people had lost a lot of money; and that it was likely that someone would "have a go" at Mr Cushnie. But he did not consider who might have claims and on what basis. His concern was that settling any claim against someone "in an insolvency environment" is likely to give rise to the risk of challenge by someone who has lost out. Accordingly, the concern was that if Mr Cushnie (or Marrlist) became insolvent, the settlement of an unsecured claim against either of them could be set aside under the insolvency legislation. The upsetting of any settlement would not depend on the existence of any (let alone a competing) proprietary claim. It would simply require a liquidator or trustee in bankruptcy to assert that one creditor had been preferred over another. This is confirmed by Mr Ballard's subsequent memorandum of 12 September 2000.
125. On 29 June 2000 Mr Hill of Sinclair had a conversation with Mr Lomas, the receiver. Mr Lomas said that the receivers had not yet decided whether to go after Mr Cushnie. There was a dispute on the evidence about whether Mr Lomas told Mr Hill that he believed that Mr Cushnie was involved in "a stock scam". In the previous round of litigation Rimer J found that he did not. Before me Mr Lomas said that it was likely that he did not use those words, and that he had no recollection of the conversation; although Rimer J recorded his evidence at the first trial as being definite and categorical. So the evidence before me differed from that before Rimer J. I find that Mr Lomas and Mr Hill did have a conversation, the gist of which Mr Hill recorded. Part of the conversation was about the ramping of the share price. A number of nominee companies were mentioned, but I am not satisfied that Mr Lomas said that Mr Cushnie was personally involved. To this day no one knows the extent (if any) to which Mr Cushnie was involved with the nominee companies and I do not consider that Mr Lomas would have expressed his suspicions to Mr Hill. But in the end, I do not consider that this dispute affects the outcome.
126. In July 2000 TPL was ordered to be wound up in the BVI. Mr Akers was eventually appointed as joint liquidator. He met Mr Greaves of PwC on 18 August. Mr Greaves explained his understanding of TPL:

"The original idea was that the traders' money should be available to finance certain specific [VTFL] trades. The funds were meant to be linked to specific deals. However [Mr Greaves] said that this clearly never happened."

127. He said that Mr Clough viewed TPL money as "a general kitty available for use whenever necessary". He said that the traders clearly had an agreement with TPL which in turn had an agreement with VTFL. Thus the traders "could sue on the agreement with TPL." Mr Akers said that:

".. we are most interested in the cash. We are interested in a tracing process that leads somewhere to ultimate cash. Our problem is that our money probably went into PwC's black hole and, therefore, we and PwC are potentially looking to the same people to repay us that money."

128. Mr Greaves agreed that TPL could potentially look to VTFL for repayment but noted that "there was nothing left in VTFL for unsecured creditors and therefore for the traders and TPL". Mr Akers said that as liquidators of TPL they might have better rights in some jurisdictions; and suggested that Mr Greaves should think about actions where the liquidators had better rights than the receivers. He also said that he needed to know "where the money actually flowed beyond VTFL"; and said that the main issue was "how to divide up the money between the banks and the traders". Later in the meeting Mr Akers suggested that he "may be able to pursue an action against Cushnie and Malcolm [another director of VGP] for selling their shares in November 1999 and making profit"; and then referred to litigation against Mr Cushnie "for taking other people's money into an insolvent company and using it". What emerges from the record of this meeting is that Mr Greaves regarded TPL's claims as claims of unsecured creditors; and Mr Akers did not assert any proprietary claim to the share sale proceeds on behalf of TPL. He did however trail the possibility of a tracing process that might lead to cash. But in context, and in particular his reference to the "black hole", what he had in mind was the possibility of tracing TPL's money into VTFL and, if possible, beyond it. He must also have had in contemplation the possibility that, as liquidator, he might be entitled to set aside certain dispositions of property. That is what he must have meant by saying that liquidators had better right. There was no mention of any claim to ownership or partial ownership of a mixed fund. It is true that the possibility of action against Mr Cushnie was mentioned, but there was no hint that any such action would be a proprietary claim. I will return to this meeting when considering whether the banks had notice of the mixed fund claim.
129. Mr Ballard reported on the proposed settlement on 12 September 2000. His memorandum also included the following:

"No new skeletons have come out of the cupboard. Denton Wilde Sapte and the Receivers still believe that it would be a challenge to mount a case against Cushnie for fraud from the evidence to hand. The allegations from David James made in May, in particular regarding the share ramping, remain difficult to trace back specifically to Cushnie."

130. Mr Lomas reported to the banks on 24 November 2000. In his report he made many points, which included the following:

i) Apart from raising funds from traders and paying interest and principal to them the only activity of TPL was cross-firing;

ii) The financing raised by VTFL from the banks, the traders and shareholders was used to fund trading losses, overheads, interest, tax and dividends as well as siphoning money into Clough-related entities.

131. No specific allegation was made against Mr Cushnie. In the course of his evidence Mr Ballard agreed that by this time the banks had a good idea that the traders had been defrauded and that there was nothing material behind the management agreement between TPL and VTFL. He was equivocal about whether the banks knew that the management agreement had been violated; although he was prepared to accept that the misuse of TPL's monies involved a breach of duty by Mr Cushnie. But he did not accept that the banks knew that the monies that were distributed to them were the subject of an adverse claim. His position (which I accept) was that the receivers' report contained everything he knew.
132. As I have said, the receivers made a distribution to the banks on 5 January 2001. The distribution was made at least in part out of recoveries that the receivers had made. I do not know whether the distribution included any of the share sale proceeds; although it cannot have included any of the proceeds of sale of the Kensington property, which had not then been sold. Mr Hill submitted that at the date of the distribution the receivers had the following knowledge:

i) They knew of the arrangements that were supposed to be in place in relation to traders' funds and they had the trader agreements.

ii) They knew that these arrangements had been breached by the misapplication of traders' funds.

iii) They knew that this involved a violation by Mr Cushnie of his duties to TPL.

iv) They knew that this involved a violation of the management agreement between TPL and VTFL.

v) They knew that that this had led to a mixing of funds by VTFL.

133. Assuming, for the moment, that these submissions are well-founded, I do not consider that they can amount to notice of the proprietary claim to the share sale proceeds. They go to the mixed fund claim with which I deal later.

The settlement agreements

134. At this stage in early 2001 the banks' strategy was to do as quick a deal as possible with Mr Cushnie. They wanted to get ahead of other potential claimants. Clearly they wanted to recover as much money as possible. At the same time they did not want either Mr Cushnie or Marrlist to become insolvent; as that would have raised the spectre of a trustee in bankruptcy or liquidator seeking to set any settlement aside. I do not consider that either the receivers or the banks thought that rival claimants might have proprietary claims to the share sale proceeds or their identifiable substitutes. Indeed no such claim was ever advanced by VTFL on its own behalf, even though, on the face of it, it had as much of a claim as TPL. From the perspective of the banks and the receivers any rival claim (personal or proprietary, secured or unsecured) was a potential danger.
135. Barclays, who had been last on the scene as a lender, assigned their claims to RBS. They did not want to be seen doing a deal with Mr Cushnie. On 14 February 2001 Mr Lomas met Mr Akers. Mr Lomas remembers this meeting as particularly aggressive. His note of the meeting records (among other things) the following:

i) Mr Akers said that the traders considered that they had a proprietary claim "to trump the banks";

ii) Two of the individual traders were intent on pursuing Mr Cushnie himself;

iii) Monies were all put into the same pot so they were "equitable tenants in common".

136. Mr Lomas was content to see TPL as a competing creditor or claimant against Messrs Cushnie and Clough but was alarmed at the thought of TPL believing it had pari passu or prior claims to VTFL's own realisations. Mr Lomas also noted a reference to Clayton's case. The question at this stage is whether at the meeting a proprietary claim against Mr Cushnie was made. I have concluded that it was not. Mr Akers differentiated between TPL's claims on the one hand and the individual traders' claims on the other. It was the latter rather than the former who were thinking of pursuing Mr Cushnie himself. The proprietary claim mentioned by Mr Akers was a claim based on the mixing of monies (as the reference to Clayton's case shows), not on the profit made by Mr Cushnie on selling his shares. Indeed the sale of shares was not mentioned at all. Mr Hill suggested that Mr Greaves had accepted in cross-examination that he knew that TPL had a proprietary claim against the share sale proceeds. I do not think that he did. He accepted that TPL had grounds for a claim but not that it was a proprietary claim. Since Mr Akers had not advanced such a claim, that is not surprising. I will return to this meeting when considering whether the banks had notice of the mixed fund claim.
137. On 26 February 2001 VTFL, VGP and the receivers entered into a series of settlement agreements with Mr Cushnie. These included a "dividends settlement agreement" under which Marrlist agreed to pay £2.7 million to VGP in respect of dividends that VGP had unlawfully paid to Marrlist. They also included a settlement agreement between Mr Cushnie and Marrlist and VTFL and the receivers, under which Mr Cushnie agreed to pay VTFL £2.3 million to compromise breach of duty claims against him (although the agreements made it clear that dishonesty was not alleged); and under which Marrlist purchased VTFL's computer software and client lists for an aggregate price of £2.5 million, together with a receivable from VTFL (the Touchbase debt) for £500,000. The payments were all secured against a mortgage over the Kensington property; and the agreement provided for Mr Cushnie and Marrlist to sell the Kensington Property in order to effect the payments due. The agreement was later modified, so as to accommodate the claim of HMRC for the corporation tax payable on the sale of the shares. Mr Hill does not assert that TPL has priority over that claim; because he accepts that the unauthorised profit in issue is Mr Cushnie's net profit on the share sale. It seems probable that the price allocated to the computer software was inflated; but Mr Collings and Mr Hill both agreed that no legal consequences flowed from that.
138. Mr Collings and Mr Hill also agreed that the date of the settlement agreement was the date at which notice of TPL's proprietary claim should be judged. Mr Hill makes two points: one factual and the other legal. The factual point is that he says that at the date of the settlement the receivers had notice of TPL's proprietary claim to the share sale proceeds. The legal point is that the receivers were acting as agents for VTFL. VTFL was itself a party to the cross-firing fraud and hence knew (or had notice of) TPL's proprietary claim. Alternatively VTFL was itself a defaulting fiduciary and, as against TPL, cannot have a claim to any part of the share sale proceeds in priority to TPL's claim because it would be liable immediately to disgorge any recovery that it made from Mr Cushnie.
139. The only advance in the receivers' knowledge in the period between the distribution and the settlement agreement was what Mr Lomas had learned in the meeting of 14 February. In my judgment what he learned at that meeting was not enough to amount to notice of TPL's beneficial ownership of the share sale proceeds. As I have said, Mr Akers did not advance such a claim, and if the liquidator of TPL did not advance the claim, it would be going too far to say that Mr Lomas ought to have worked it out for himself.
140. What about VTFL? The starting point of the argument here is, in effect, that Mr Clough's and Cushnie's knowledge of the fraud should be attributed to VTFL before the onset of the receivership; and that VTFL retained or is to be treated as having retained that knowledge whatever the receivers themselves knew or did not know. It is an argument based on knowledge rather than on notice. The first difficulty in the way of this submission is that the fraud was a fraud practised on VTFL as much as on TPL. As a general rule a principal is not fixed with his agent's knowledge where the agent is acting in fraud of the principal: Cave v Cave (1880) 15 Ch D 639; In re Hampshire Land Co [1896] 2 Ch 743; JC Houghton & Co v Nothard Lowe and Wills Ltd [1928] AC 1. It seems to me that a majority of the speeches in the House of Lords in Stone & Rolls Ltd v Moore Stephens [2009] 1 AC 1391 recognise this principle even where the company is a participant in the fraud, unless the company is a "one man company" (see Lord Scott §109; Lord Walker § 174; Lord Brown § 201; Lord Mance § 240). In the present case there were a number of innocent shareholders (not least those who bought Mr Cushnie's shares for £28.6 million just before the collapse). It is not a case of a one man company. The second is that like a natural person, a company can "lose its memory": El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685, 697 (agreeing with Millet J on the principle but disagreeing on the facts). It is often the case that insolvency practitioners are called upon to investigate frauds practised on a company by delinquent directors. As Lord Scott pointed out in Stone & Rolls claims of this kind cannot be defeated by reliance on a fraud practised by a director against the company. In addition the claim in the present case is at one remove. It is a claim by TPL to beneficial ownership of the share sale proceeds which in turn derived from an asset which was the personal property of Mr Cushnie himself, rather than an asset of VTFL. In my judgment VTFL is not to be treated as having had knowledge or notice of TPL's beneficial ownership of Mr Cushnie's shares. The allegation that VTFL is bound to disgorge any recovery that it made from Mr Cushnie on the ground that it is itself a fiduciary for TPL seems to me to be a claim for a personal remedy, rather than a proprietary one. It could not rank in priority to the banks' security.

Recoveries from Mr Clough

141. On 8 March 2001 McCombe J gave summary judgment for VTFL against Mr Clough for a liquidated sum of £11.3 million and for damages to be assessed. VTFL has made recoveries by enforcing that judgment. The recoveries began in August 2002 when two properties belonging to Mr Clough were sold. These were not part of the share sale proceeds.

Conclusion

142. In my judgment the banks did not, at any relevant time, have knowledge or notice of TPL's beneficial ownership of the share sale proceeds.

The mixed fund claim in principle

143. The second way in which TPL puts its claim is by alleging that in breach of fiduciary duties owed to it by VTFL its monies were mixed with VTFL's monies. The mixed fund was then used for improper purposes. As a defaulting fiduciary VTFL is not entitled to any remaining part of the mixed fund, unless it can prove that it is its own money. That is not possible in the present case; and the result is that the recoveries made by the administrative receivers belong in equity to TPL.
144. The first step in the argument is the assertion that the relationship between VTFL and TPL was a fiduciary one. Mr Collings disputed this. He attempted to say that the management agreement was a sham; but this was not open to him on the pleadings. On the basis that it was a genuine agreement it seems to me that since it gave VTFL the power to manage bank accounts in TPL's name, it must at the very least have imposed upon VTFL fiduciary duties as regards TPL's money which had been entrusted to its control. Those fiduciary duties would, as it seems to me, have included a duty not to use the money otherwise than for trade finance. It would also have included a duty not to mix TPL's money with its own. The use of the money in the cross firing fraud was unquestionably not the use of that money for trade finance. Accordingly in using the money in that way VTFL was, in my judgment, in breach of fiduciary duty. This is consistent with the view of Rimer J in the last round of this litigation, with which I respectfully agree.
145. All the witnesses agreed that it is not possible to trace any of TPL's money through VTFL. VTFL was variously described as a "black hole" or a "maelstrom". In addition, as I have said, I ruled that it was not open to VTFL on the pleaded case to assert that its accounts were overdrawn or stood at a particular credit balance at any particular moment. There was no application to amend. So one common defence to this kind of claim (namely that the balance of the mixed fund cannot exceed the lowest intermediate balance) does not fall to be considered.
146. In those circumstances Mr Hill relies on the following steps in support of TPL's claim to what is in the receivers' hands. In Cook v Addison (1869) LR 7 Eq 466, 470 Stuart V-C formulated the principle as follows:

"It is a well-established doctrine in this court, that if a trustee or agent mixes and confuses the property which he holds in a fiduciary character with his own property, so as that they cannot be separated with perfect accuracy, he is liable for the whole."

147. Ungoed-Thomas J applied the principle in Re Tilley's Will Trusts [1967] Ch 1179, pointing out that:

"The words in that passage "so as that they cannot be separated with perfect accuracy" are an essential part of the Vice-Chancellor's proposition, and indeed of the principle of Lupton v. White. If a trustee mixes trust assets with his own, the onus is on the trustee to distinguish the separate assets, and to the extent that he fails to do so they belong to the trust."

148. It follows that the receivers bear the burden of showing that money in their hands cannot be that of TPL. As we know, however, the receivers have made recoveries of, among other things, book debts. Mr Hill argues that those recoveries are part of the mixed fund. In Re Oatway [1903] 2 Ch 357 Joyce J said:

"Trust money may be followed into land or any other property in which it has been invested; and when a trustee has, in making any purchase or investment, applied trust money together with his own, the cestuis que trust are entitled to a charge on the property purchased for the amount of the trust money laid out in the purchase or investment. Similarly, if money held by any person in a fiduciary capacity be paid into his own banking account, it may be followed by the equitable owner, who, as against the trustee, will have a charge for what belongs to him upon the balance to the credit of the account. If, then, the trustee pays in further sums, and from time to time draws out money by cheques, but leaves a balance to the credit of the account, it is settled that he is not entitled to have the rule in Clayton's Case applied so as to maintain that the sums which have been drawn out and paid away so as to be incapable of being recovered represented pro tanto the trust money, and that the balance remaining is not trust money, but represents only his own moneys paid into the account. … It is, in my opinion, equally clear that when any of the money drawn out has been invested, and the investment remains in the name or under the control of the trustee, the rest of the balance having been afterwards dissipated by him, he cannot maintain that the investment which remains represents his own money alone, and that what has been spent and can no longer be traced and recovered was the money belonging to the trust."

149. In Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1994] 4 All ER 890, 939 Hobhouse J said:

"… the beneficiary is entitled to ask what has been done with the sums taken out of those accounts [i.e. mixed accounts]. If they have been used to acquire an asset he is entitled to a charge upon that asset. If that asset should subsequently be sold and the proceeds of sale repaid into one of the fiduciary's bank accounts, the beneficiary is entitled to follow those proceeds of sale."

150. In Foskett v McKeown Lord Millett said (p. 130):

"The beneficiary's proprietary claims to the trust property or its traceable proceeds can be maintained against the wrongdoer and anyone who derives title from him except a bona fide purchaser for value without notice of the breach of trust. The same rules apply even where there have been numerous successive transactions, so long as the tracing exercise is successful and no bona fide purchaser for value without notice has intervened."

151. Similarly in Director of The Serious Fraud Office v Lexi Holdings plc [2009] QB 376 Keene LJ said (§ 36):

"It is the case that where misappropriated trust assets are thereafter applied in the acquisition of other property the beneficiary is entitled at his option either (a) to assert, via a constructive trust, beneficial ownership of the proceeds (or a commensurate part of them) or (b) to make a personal claim against the defaulting trustee, if need be enforcing an equitable charge or lien over the proceeds in question to secure restoration by the defaulting trustee of the misappropriated assets. These are true alternatives. In the first kind of claim, the beneficiary is in effect saying: "Those proceeds (or part of them) belong to me." In the second, alternative, kind of claim the beneficiary is in effect saying "The trustee is obliged to account personally to me for his misappropriation and those proceeds stand charged as security for his personal obligation to me"."

152. Accordingly Mr Hill argues that in principle he is entitled to say that where money from the mixed fund has been used in a genuine transaction (e.g. the provision of trade finance) he is entitled to trace that money into the chose in action (i.e. a book debt) acquired in return for the trade finance. The chose in action is, in effect, an investment made with money from the mixed fund. When the book debt is discharged by payment, he is again entitled to trace the monies back into the mixed fund. The same is true as regards the repayment of tax by HMRC. The tax was paid out of the mixed fund, and when that money is returned to the mixed fund the same principle applies.
153. I accept this submission in principle. However, the proprietary entitlement to the mixed fund is an equitable entitlement. It is dependent on tracing; and cannot prevail against a purchaser in good faith for value without notice. Lord Millett made this clear in Foskett v McKeown. He said that:

"the beneficiary's right to claim a lien is available only against a wrongdoer and those deriving title under him otherwise than for value. It is not available against competing contributors who are innocent of any wrongdoing."

154. The process of tracing in such a case is assisted by the evidential presumptions established by these cases. But the presumptions are not irrebuttable. Thus if, on the evidence, it is clear that a particular receipt in VTFL's hands cannot be a part of the mixed fund or its identifiable substitute then this argument cannot succeed: see Lexi Holdings §§ 51, 53. In my judgment there are at least two receipts which cannot be said to be part of the mixed fund or its identifiable substitutes. The first is the payment received from the auditors' professional indemnity insurers by way of compromise of VTFL's claim for professional negligence. The gross recovery was of the order of £2.5 million; and the net recovery after deducting the costs of recovery was £1.7 million. The second is any receipt which represents the proceeds of sale of Mr Cushnie's shares. Neither of these receipts originated with the mixing of TPL's money with VTFL's. The payment from the indemnity insurers came from its own funds, presumably derived from its own insurance business. The proceeds of sale of the shares came from the pockets of the buyers who were duped into buying the shares. Thus in my judgment VTFL has demonstrated that these receipts cannot belong beneficially to TPL. It follows, in my judgment, that TPL's claim to this money is an unsecured personal claim against VTFL. This reasoning applies also to any identifiable substitute for the share sale proceeds. This includes not only the proceeds of sale of the Kensington property; but also the payment made by Marrlist in respect of the overpaid dividends, which was funded from the share sale proceeds. In addition it appears that Mr Cushnie, acting through Marrlist, lent part of the share sale proceeds to a Mr McCarthy. The debt was subsequently assigned to the receivers; and they have recovered some £475,000. This money cannot belong to TPL beneficially, because ultimately it derived from the pockets of the buyers of the shares. In Lexi Holdings the Court of Appeal held that where a personal claim is made it could be supplemented by an equitable charge or lien. But as I understand the judgment that equitable charge or lien would attach only to the traceable proceeds of the original trust fund. Thus as regards these two receipts TPL's personal claim against VTFL is unsecured; and cannot rank in priority to the banks' secured claim. As I understand it, the money that actually remains in the receivers' hands is the remnant of the share sale proceeds. I do not consider that TPL can assert a proprietary claim to that money.
155. So far as the remaining recoveries are concerned, it seems to me that the receivers have not discharged the evidential burden of showing that the recoveries cannot have been part of the mixed fund or its identifiable substitutes. In principle, therefore, I consider that TPL has a claim to those recoveries. These will include the book debts, the repayment of tax and the recoveries made from Mr Clough and his entities.
156. Monies have been distributed to the banks. The distributions were as follows:

Date	Distribution	Barclays' share	NatWest/RBS share
28 February 2000	£313,000		£313,000
5 January 2001	£3,956,766	£555,530	£3,401,236
26 September 2001	£4,750,000	£669,275	£4,080,725
26 November 2001	£500,000	£70,450	£429,550
13 August 2004	£2,497,000	£365,917	£2,231,082
13 January 2005	£500,000	£70,450	£429,550

157. Whether these distributions were exclusively made out of recoveries in which TPL has a proprietary interest I cannot say. To the extent that the distributions were made out of recoveries in which TPL has no proprietary interest, it cannot trace them into the banks' hands. But to the extent that they were made out of recoveries in which TPL had a proprietary interest, it is entitled to trace the receipt into the hands of the banks, subject to any defence of purchaser in good faith without notice. There may have to be yet a further round of this litigation in order to determine how much of the distributions came from the mixed fund or its identifiable substitutes.

Notice of TPL's right to the mixed fund

158. It is clear that VTFL itself, as a defaulting fiduciary, cannot claim to be a purchaser in good faith without notice of the breach of trust consisting of its own misapplication of TPL's money. What of the banks? I do not consider that the banks had notice of TPL's proprietary interest as at 28 February 2000, just over a month into the receivership; and Mr Hill did not argue otherwise.
159. However, by 5 January 2001 the position was different. To summarise:

i) Mr Greaves' letter of 18 April 2000 recognised that VTFL had misapplied TPL's money and that TPL would have the basis of a claim against VTFL, but he was contemplating a personal unsecured claim;

ii) At the meeting between Mr Akers and Mr Greaves on 18 August 2000 Mr Akers said that he was interested in a tracing process that led to some cash. But what he had in mind was the possibility of tracing TPL's money into VTFL and, if possible, beyond it. There was no mention of any claim to ownership or partial ownership of a mixed fund;

iii) Mr Lomas' report to the banks on 24 November 2000 specifically referred to the cross-firing and the mixing of money.

160. Mr Lomas described his own state of mind at the time of the distribution. He knew that there were some real assets to recover in the shape of book debts on behalf of VTFL. He knew that the banks had mortgage debentures over the book debts; and he accounted to the banks for his recoveries. Whether those recoveries might be impressed with a trust in favour of TPL did not enter his mind. Had he thought that the debts did not belong to VTFL or that they were not covered by the banks' charges, he would not have accounted to them in the way that he did. He appreciated that there were mixed monies, but that was as far as it went.
161. Did this amount to notice of TPL's proprietary interest in the mixed fund and its identifiable substitutes? In my judgment it did not. The receivers plainly knew that TPL had a claim against VTFL, but they regarded it as an unsecured personal claim. It is true that Mr Akers had referred to tracing at the meeting of 18 August; but that was in the context of tracing TPL's monies through VTFL and out the other side, rather than making a claim to the mixed fund. Moreover, it was mentioned in the course of a preliminary and tentative discussion between him and Mr Greaves, and it was not followed up by any formal claim. I hold therefore that in January 2001 the banks did not have notice of TPL's proprietary rights in the mixed fund; and that they are therefore entitled to rely on the defence of purchaser in good faith without notice. It follows, in my judgment, that TPL is not entitled to trace the second distribution into the hands of the banks.
162. However, by the time of the third distribution in September 2001 the banks knew more. At his meeting with Mr Lomas on 14 February 2001 Mr Akers asserted the existence of a proprietary claim that would "trump the banks"; an assertion that caused Mr Lomas to be "alarmed". That claim was made on the basis that monies were all put into the same pot, so that TPL and VTFL were equitable tenants in common. The assertion that TPL and VTFL were equitable tenants in common can only have been the assertion of a proprietary claim to assets in VTFL's hands or to which VTFL was entitled. The reference during the course of the meeting to Clayton's case was consistent only with a claim to proprietary interest in a mixed fund. On 12 April 2001 Mr Akers asserted a claim to monies that had been recovered from Optel, one of Mr Clough's companies. That was a claim to the sum itself. On 30 April 2001 he asserted a similar claim to monies recovered from some of the cross-firing companies. In a witness statement made on 4 July 2001 in connection with an application under section 236 of the Insolvency Act 1986 Mr Akers said:

"On the basis that the money of TPL may have been mixed with VTFL funds, TPL may also be able to recover assets from Frederick Clough and from companies associated with him or companies which have received transfers from TPL or VTFL…. I believe therefore that TPL may have an interest in any assets recovered or which may be recovered by the JARs as a result of their legal action."

163. Taken together these assertions of TPL's proprietary claim were sufficient notice of its claim to the mixed fund. Mr Lomas knew all the relevant facts and Mr Akers had asserted the legal basis for the claims. The claim made in the witness statement was not limited to monies that had been diverted to Mr Clough; but extended to companies which had received transfers from VTFL. Mr Lomas must have taken these claims seriously otherwise he would not have recorded his alarm. In the course of his evidence he said, in effect, that he must have taken the view that the claims were without foundation, because he simply carried on as before. I accept that evidence, but it does not in my judgment prevent notice of the proprietary right having been given to the banks. After all, if a purchaser takes the view that a claimed equitable right is non-existent and carries on regardless, he does so at his own risk. It is he who must live with the consequences of his own error.
164. In my judgment by September 2001 the banks had notice of TPL's equitable entitlement to the mixed fund and its identifiable substitutes.

The extent of TPL's claim

165. Assuming that some or all of the distributions to the banks on or after 26 September 2001 came out of the mixed fund or its identifiable substitutes, how much is TPL entitled to trace? At the time of the collapse VTFL held some £23 million of TPL's funds. However, payments to TPL had also been made out of the mixed fund during the life of VTFL. These were purported payments of interest, but in fact they were returns of capital. In addition, TPL received £1.75 million from the share sale proceeds. The net loss is of the order of £10.1 million. In my judgment TPL is not entitled to trace in respect of monies that it has in fact received back out of the mixed fund, even though those monies were fraudulently misrepresented as having been payments of interest. Further proceedings may be necessary to determine the precise amount.
166. Mr Collings argued that the banks were entitled to a rateable proportion of the mixed fund; and that it ought to be divided between TPL and the banks in the proportions in which their money was used to finance VTFL's fraudulent trading. TPL was out of pocket to the tune of £10 million; and the banks were out of pocket to the tune of £70 million. Thus the mixed fund should be divided between them in the ratio 10:70. However, in my judgment this confuses ownership and obligation. TPL is entitled to assert beneficial ownership of the mixed fund and its identifiable substitutes. The banks, by contrast, are lenders. Their relationship with VTFL is that of creditor and debtor, not beneficiary and trustee. When the banks parted with their money they intended it to become VTFL's money. They exchanged it for an obligation by VTFL to repay. In my judgment Mr Collings' submission is inconsistent with the decision of the Court of Appeal in Halifax Building Society v Thomas [1996] Ch 217, 229 in which Peter Gibson LJ said:

"In Daly v. Sydney Stock Exchange Ltd (1986) 160 CLR 371, 379 Gibbs CJ refused to accept that money lent by an investor to a firm in a fiduciary relationship with him should be treated as subject to a constructive trust. He said that the reasons of Lindley LJ in the Lister case, 45 Ch D 1 appeared to him to be "impeccable when applied to the case in which the person claiming the money has simply made an outright loan to the defendant." In the present case there was no fiduciary relationship between Mr. Thomas and the society in respect of the mortgage but merely that of debtor and secured creditor."

167. Likewise in the present case the banks are secured creditors and have chosen to rely on their security. In my judgment they cannot be said to be beneficial contributors to the mixed fund in any relevant sense.
168. Accordingly, in my judgment TPL's proprietary claim is not diminished by the banks' claims as lenders. Had the banks been entitled to rely on the defence of purchaser for value without notice, TPL's equitable rights would not have prevailed against them. But as from September 2001 the banks did have notice, so this defence is unavailable.

Result

169. TPL's proprietary claim to the share sale proceeds fails. TPL's proprietary claim to the mixed fund succeeds in part. TPL is entitled to trace the mixed fund into the hands of the banks:

i) To the extent that distributions were made on or after 26 September 2001; and

ii) To the extent that the distributions were made out of recoveries that cannot be identified as having originated from sources other than the mixed fund; and

iii) Only to the extent of its net loss.

170. I will hear argument on the order that I should make to give effect to my decision; including what (if any) directions I should give for the quantification of TPL's right. I might add that it seems to me that the law is in need of clarification by a higher court; and that if applied for I would be minded to grant permission to appeal.