A simple approach to justice!

Citation

Rider, B. (2014), "A simple approach to justice!", Journal of Financial Crime, Vol. 21 No. 4. https://doi.org/10.1108/JFC-08-2014-0037

A simple approach to justice!

Article Type: Editorial From: Journal of Financial Crime, Volume 21, Issue 4

Many took the view on the basis of the Court of Appeal’s decision in Sinclair Investments (UK) Ltd v. Versailles Trade Finance Ltd [2011] EWCA Civ 347 that the viability of proprietary claims against fraudsters and those involved in corruption had been undermined. Indeed, this was our sentiment in our editorial comment published in 19 JFC 325. There has over the years been controversy as to the circumstances in which the courts are prepared to impose a constructive trust on property that has been acquired in breach of a fiduciary duty. This has very important implications in cases of fraud where there may be insolvency and, consequently, the ability of a claimant to assert that property is in fact theirs and therefore they do not have to compete with other claimants and creditors. Furthermore, in such circumstances, the ability to trace property and assert ownership over derivative property can be exceedingly important. This procedure has in the law of equity been held to exist only where there is a proprietary claim.

In Sinclair Investments, the Court of Appeal decided that an interpretation of the law based on two Victorian appellate decisions (Metropolitan Bank v. Heiron [1880] 5 Ex D 319 and, in particular, Lister & Co v. Stubbs [1890] 45 Ch D 1) was correct and should be followed by English courts over and above the opinion expressed by the Privy Council and especially by Lord Templeman in Attorney General of Hong Kong v. Reid [1994] 1 All ER 1. The Court of Appeal in Sinclair Investments, following the older authorities, took the view that the imposition of a constructive trust on the proceeds of fraud or bribery is only permissible where there is a proprietary nexus. In other words, there has to be a misappropriation of property (possibly including information) or the diversion by the agent or other fiduciary of a valuable opportunity which would otherwise have gone to the principal. Consequently, in the case of a fiduciary, merely taking a secret profit or receiving a bribe as there is no proprietary nexus, tracing and the imposition of a trust are not possible.

As we emphasised in our editorial in May 2012, Lord Templeman rejected this approach in a robust judgement against a corrupt prosecutor who has taken bribes and laundered his ill-gotten gains. Lord Templeman taking the view that crooks should not be allowed to retain the benefits of their wrongdoing had no hesitation in rejecting the traditional view that there is in such cases, a limitation on how far equity could go in providing restitution, and allowed the Hong Kong Government to follow the bribes into property in New Zealand. This view, based on an earlier decision of the Singapore courts, was seen in many common law jurisdictions as not only sensible but commendable as a matter of public policy. It opened the door to effective civil claims against fiduciaries who had abused their position, and in particular agents who had taken bribes and secret commissions. While after the Sinclair Investment case, one or two English decisions favoured the approach of Lord Templeman, the better view was that the English law had been pitched back to the days of Lister & Co v. Stubbs. Of course, the decision of the English Court of Appeal was only binding on English courts, and those in Australia and New Zealand tended to Lord Templeman’s views.

The Supreme Court in FHR European Ventures LLP v. Cedar Capital Partners LLC [2014] UKSC 45 has subjected the law to analysis both in terms of its development and policy. This is most welcome particularly given the disappointment of many practitioners that the Sinclair Investment decision was not appealed to the Supreme Court. The Supreme Court has come down firmly in favour of a more simple and, with respect, rational approach which permits proprietary claims in secret profit cases and in regard to bribes. The Court considered that the earlier decisions should not be followed and essentially endorsed the decision, if not quite the approach, taken by Lord Templeman in Reid. Consequently, the ability of claimants in cases of fiduciary misconduct to achieve effective and meaningful restitution is significantly increased. The more so when it is remembered just how wide equity’s jurisdiction is in regard to the duty of loyalty that those in a fiduciary relationship owe to their principal.

Lord Neuberger as then Master of the Rolls presided in the Court of Appeal in the Sinclair case and now as President of the Supreme Court presided in the most recent decision. It was thought that Lord Neuberger had in the Court of Appeal, found the arguments of experts such as Professor Sir Roy Goode (see, for example, 127 LQR 493) particularly persuasive. Sir Roy has consistently argued over many years that the uncertainties that are created for third parties in commercial transactions as a result of the more extensive application of proprietary remedies are unacceptable. On the other hand, views expressed in the literature by such as Justice David Hayton (e.g. [2012] The Company Lawyer 161) emphasised the historical role of equity in providing effective restitution and ensuring that justice is in fact done. From the perspective of those who are concerned to promote integrity and provide effective legal mechanisms that can be used to deprive those who abuse their position of their ill-gotten gains, the Supreme Court’s decision is to be warmly welcomed.

Barry Rider
31 July 2014