Global Currency Exchange Network Ltd v Osage 1 Ltd
| Jurisdiction | England & Wales |
| Judge | Andrew Henshaw,Mr Andrew Henshaw |
| Judgment Date | 04 June 2019 |
| Neutral Citation | [2019] EWHC 1375 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Docket Number | Case No: LM-2018-000057 |
| Date | 04 June 2019 |
[2019] EWHC 1375 (Comm)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
LONDON CIRCUIT COMMERCIAL COURT (QBD)
Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL
Andrew Henshaw QC
(sitting as a Judge of the High Court)
Case No: LM-2018-000057
George Hilton (instructed by Howard Kennedy LLP) for the Claimant
David Warner (instructed by Meaby & Co Solicitors LLP) for the Defendant
Hearing date: 8 March 2019
Draft judgment circulated 6 May 2019
Approved Judgment
Andrew Henshaw QC
Mr Andrew Henshaw QC:
| (A) INTRODUCTION | 2 |
| (B) BACKGROUND FACTS AND EVIDENCE | 4 |
| (1) Percentage of investor funds paid to operating companies | 8 |
| (2) Alleged Ponzi scheme characteristics | 9 |
| (3) Payments made to individuals from investor funds | 10 |
| (C) APPLICABILITY OF CPR PART 86 | 10 |
| (D) LEGAL BASIS FOR PROSPECTIVE INVESTOR CLAIMS | 11 |
| (1) Claim based on fraud by Osage | 12 |
| (2) Investors' right to rescind and claim the Funds | 16 |
| (3) Osage holding on constructive trust based on unconscionability | 17 |
| (4) Breach of fiduciary duties owed by GCEN itself | 18 |
| (5) Quistclose trust | 19 |
| (6) Claims under Insolvency Act 1986 | 23 |
| (7) Guardian Trust claim | 25 |
| (8) Conclusion on this issue | 26 |
| (E) WHETHER COMPETING CLAIMS ARE EXPECTED | 26 |
| (F) CONCLUSIONS | 29 |
(A) INTRODUCTION
The Claimant (“ GCEN”) is an FCA-registered payment institution which provides foreign exchange and payments services to clients. It holds sums of £101,926.81 and €89.50 (“ the Funds”) in accounts referable to the Defendant, one of GCEN's clients. The Defendant (“ Osage”) used GCEN's services to receive, convert to US dollars and transfer funds intended for investment, via Osage, in an oil drilling venture in Osage County, Oklahoma.
Some of GCEN's bank accounts were frozen in 2015, and in September 2016 GCEN obtained from Osage's solicitors a copy of what appears to have been an intended application by the Metropolitan Police under section 295 of the Proceeds of Crime Act 2002 (“ POCA”) for the continued detention of £50,000 cash stated to have been seized from GCEN, naming Osage and others as persons likely to be affected by detention of those funds (“ the CDA document”).
These events led GCEN to perform its own analysis of Osage's accounts with GCEN. In the light of this analysis and the contents of the CDA document, GCEN says it considers there to be a real foundation for an expectation of claims from investors to the Funds, on the basis that Osage may have procured the Funds from investors by deceit and/or misrepresentation and/or unlawful mis-selling practices, and that Osage may be operating a Ponzi scheme (i.e. a scheme whereby later investments are used to pay purported returns on earlier investments in order to create an illusion of genuine investment returns).
In March 2018 GCEN issued the present CPR Part 8 claim in the form of an interpleader application pursuant to CPR Part 86. CPR Part 86 allows a stakeholder to apply to the court for a direction as to where it should pay a debt or money where competing claims are made or expected to be made against the stakeholder in respect of that debt or money by two or more persons.
GCEN accepts that the Funds do not belong to it, and says it is content to pay the Funds to whichever party or parties the court may direct. It anticipates competing claims because:
i) Osage claims the Funds and has previously threatened an injunction and proceedings to recover them, and
ii) if investors were made aware of the details of Osage's investment scheme, GCEN expects that they too would make claims against it for the return of the Funds. GCEN at this stage seeks directions for the service of its application and evidence on various investors to allow them the opportunity to make legal claims to the Funds.
Osage's position is that the proceedings should be dismissed. It points out that GCEN has received no indication of any potential investor claim to the Funds in the 3 1/2 years since Osage's accounts with GCEN were frozen. Osage says GCEN has simply decided unilaterally to withhold payment of monies it holds on Osage's behalf, based on the contents of the CDA document: which is unsigned and was never issued. Osage also submits that there is no plausible legal basis on which an investor could have a relevant claim to the Funds (as opposed to a claim against Osage which the Funds might be used to satisfy) even if he/she had a legal claim of the kind GCEN envisages might be made. GCEN is, on Osage's case, seeking via its Part 86 application an indemnity to which it is not entitled, and should instead simply hand over Osage's money.
This case came before HHJ Klein (sitting as a Judge of the High Court) on 25 January 2019. The Judge required GCEN to set out in writing the legal basis for the existing or potential competing claims which it contends might be brought in respect of the Funds, and a succinct factual summary based on the evidence before the court and relevant to those claims. Osage was then to respond in writing. The Judge directed that the present hearing be listed, with a time estimate of half a day in order to:
“(a) Determine whether the stakeholder claim ought to be dismissed on grounds that there exist no competing or potential competing claims to the balance standing in the Claimant's account relating to the Defendant or on the ground that any such competing claims or potential claims are not expected to be made.
(b) In the event that the stakeholder claim is not dismissed, for the court to give such directions as it deems fit, to include:
(i) Who, if anyone, should be notified of and/or joined as Defendant to the claim in accordance with CPR Part 19 or other power of the Court;
(ii) If anyone is to be joined as a Defendant or notified, the method of service and/or notification that should be ordered.
(iii) Fixing a date for a further hearing for directions.”
(B) BACKGROUND FACTS AND EVIDENCE
GCEN states that it provides foreign exchange and payments services to clients including companies, private individuals and investments funds. It is registered with the FCA as a payment institution under the Payment Services Regulations 2009 and with HMRC under the Money Laundering Regulations 2007.
Osage states that it was formed in 2014 to acquire and develop the rights to drill for oil in Osage County, Oklahoma, under the terms of a drilling lease known as the Oklahoma HC-5A lease; and has raised approximately £4.43 million through the sale of non-voting shares to enable it to exploit those rights.
From about February 2015 to September 2015 Osage used GCEN's services to receive funds from new shareholders, to convert them into US dollars, and to transfer funds to Osage's operating partners in Oklahoma. GCEN's functions were:
i) to operate an escrow account of behalf of Osage;
ii) to receive funds paid by prospective shareholders in Osage, and carry out money laundering checks on them on Osage's behalf;
iii) to return such funds to the prospective shareholder if the money laundering checks were not satisfactorily completed;
iv) to transfer the funds to Osage's main account with GCEN if those checks were satisfactorily completed; and
v) to transfer funds in US dollars to operating partners in the US on behalf of Osage when required.
Osage's evidence is that this arrangement gave prospective investors and Osage itself security because investors' funds were held securely while money laundering checks were carried out, pending the issue to the investors of shares in Osage. Osage itself thereby avoided the risk of non-payment for shares which it has issued.
GCEN appears to have notified Osage in July 2015 that its account facilities with GCEN would be withdrawn at the end of August 2015. In September 2015 Osage became aware that its accounts with GCEN, containing the Funds, had been frozen. GCEN says it was notified at this time, September 2015, that it was unable to operate various accounts it held with Royal Bank of Scotland Plc, with whom it had held accounts since January 2013. GCEN subsequently learned that several of those accounts had been frozen. GCEN's evidence (set out in a witness statement of Ms Fiona Hinds, a partner in GCEN's solicitors Howard Kennedy) is that RBS supplied it with certain information in confidence in this regard which, due to statutory and court-ordered confidentiality restrictions, GCEN is currently unable to disclose.
As a result of these matters, GCEN was for a period unable to pay monies out of the accounts referable to Osage. That restriction was subsequently lifted, but GCEN has continued to retain the Funds for the reasons outlined in §§ 2–5 above.
In September 2016 Osage's solicitors provided GCEN with a copy of the CDA document. That document, headed “ First Application for Continued Detention of Seized Cash”, is a completed but unsigned form of application in “ Form A” for an order to be sought from Stratford Magistrates Court under section 295(4) Proceeds of Crime Act 2002 and rules 4 and 5 of the Magistrates' Courts (Detention and Forfeiture of Cash) Rules 2002/2998. The applicant is stated to be DC Charles Teggart of the Metropolitan Police and the subject-matter to be £50,000 in cash seized on 21 January 2016 from GCEN. GCEN states that no assets have in fact been seized from it, and it has not been served with any order arising from the CDA document. Nonetheless, GCEN makes the point that the contents of the document indicate that the Metropolitan Police had a number of serious concerns, apparently based on evidence they had obtained, about Osage's conduct in raising share capital.
The CDA document includes a list of “any...
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