Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd

JurisdictionEngland & Wales
Judgment Date29 March 2011
Neutral Citation[2011] EWCA Civ 347
Docket NumberCase No: A3/2010/1776 & 1778
CourtCourt of Appeal (Civil Division)
Date29 March 2011
Between
Sinclair Investments (UK) Ltd
Appellant
and
(1) Versailles Trade Finance Limited (in Administrative Receivership)
(2) Versailles Group Plc (in Administrative Receivership)
(3) National Westminster Bank Plc
(4) Anthony V Lomas
(5) Robert Birchall
(6) Royal Bank of Scotland Plc
Respondents and Cross-appellants

[2011] EWCA Civ 347

Before: The Master of the Rolls

Lord Justice Richards

and

Lord Justice Hughes

The Hon Mr Justice Lewison

Case No: A3/2010/1776 & 1778

Claim No HC07C03030

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Robert Miles QC and Richard Hill (instructed by Liam Hemmings, Sinclair Investments (UK) Ltd) for the Appellant

Matthew Collings QC (instructed by Denton Wilde Sapte LLP) for the Respondents

Hearing dates: 14 th, 15 th and 16 th February 2011

The Master of the Rolls

The Master of the Rolls:

1

This is an appeal and a cross-appeal against a decision of Lewison J, who held that the appellant, Sinclair Investments (UK) Limited ("Sinclair"), was not entitled to assert a proprietary interest in the proceeds of sale of some shares in Versailles Group PLC ("VGP"), but was entitled to assert a proprietary interest in funds originally held by Versailles Trade Finance Limited ("VTFL"), albeit to a more limited extent than Sinclair had claimed.

2

The proprietary claims arise out of the insolvency of the Versailles Group, whose business the Judge described as "little but a fraudulent scam" and "a classic Ponzi scheme". The claims give rise to (i) an issue as to the circumstances in which a proprietary interest arises, (ii) an issue as to what constitutes sufficient notice to defeat a person's claim that he is a purchaser for value without notice in good faith, and (iii) a number of other issues relating to tracing claims.

The background

The facts in outline

3

I take the relevant facts largely from the judgment below at [2010] EWHC 1614 (Ch), paras 3–19, where Lewison J set out the background, which was more fully described by Rimer J in an earlier case, Sinclair Investment Holdings SA v Versailles Trade Finance Ltd [2007] EWHC 915 (Ch), paras 7–72.

4

VGP's principal shareholder was Mr Carl Cushnie (or, more accurately, a company which it is agreed is to be treated as his alter ego, and so I shall simplify matters by ignoring it). VTFL was VGP's wholly owned principal trading subsidiary, and, at least ostensibly, its business was a modified form of factoring. This business required money, and funds came from two principal sources, wealthy individuals, known as "traders", and loans made by banks.

5

The traders provided the money to a company, which was not part of the Versailles Group, called Trading Partners Ltd ("TPL"), which was controlled by Mr Cushnie and his associate Mr Clough, and of which they were both directors. From March 1996, TPL solicited funds from traders, who, having been promised high returns, supplied funds to TPL under a form of written agreement ("the traders' agreement").

6

Clause 1 of the traders' agreement provided that the funds would be used to "purchase goods of merchantable quality and goods which have been agreed for sale". In so far as the trader's funds were not so used, clause 2 stipulated that they would be "deposited by [TPL] in trust for [the trader] in a … bank account …". Clause 5 required TPL to account to the trader "for the sale and purchase of all goods and the profit thereon on a quarterly basis", and to "pay the net profit to [the traders] together with quarterly reports". Clause 7 of the traders' agreement provided for repayment "of the monies paid hereunder and accrued interest" on "not less than three months notice in writing" by the trader. It also stated that TPL purchased any goods as the trader's agent.

7

TPL and VTFL entered into a written management agreement ("the management agreement") on 4 July 1996. Under this agreement, VTFL was appointed to "take [exclusive] responsibility for the management and administration of the business activities of [TPL]". To that end, VTFL was given "complete discretion to enter into [any] contracts … in the ordinary course of [TPL's] business subject to the restrictions and limitations contained in this agreement …." It was further provided that VTFL would "make all purchases and sales of goods in the name of [TPL] or as [it] shall direct." There were also clauses imposing duties of skill and care on VTFL. VTFL was required to maintain any bank accounts opened for the purpose of TPL's business in the name of TPL. VTFL's remuneration was to be "a sum equal to 95% [subsequently increased to 99.5%] of [TPL's] audited profit".

8

The funds advanced by traders to TPL were duly passed to VTFL, but they were not used for the purchase of goods or in genuine factoring transactions. Instead, the funds were (i) used to pay purported profits to traders, initially at a rate of around 16% per annum, (ii) stolen by Mr Clough, or (iii) circulated round a number of other companies also controlled by Mr Cushnie and/or Mr Clough. The purpose of this circulation of funds, referred to as "cross-firing", was to inflate VTFL's apparent turnover and to mask the absence of any genuine business.

9

The scale of the cross-firing was enormous, amounting in all to about £500m-worth. In his earlier judgment, Rimer J explained that there was only one legitimate trade and that made a loss. He concluded that, as none of the traders' advances to TPL was ever used in any factoring transactions, all their advances remained held by TPL on trust for them, and that the management agreement entitled VTFL to transact business in TPL's name, and did not entitle VTFL to use TPL's funds for its own purposes.

10

The money advanced by three banks ("the banks"), National Westminster Bank Plc ("NatWest"), Royal Bank of Scotland plc ("RBS") and Barclays Bank PLC ("Barclays"), was also used in the cross-firing. The banks took fixed and floating charges over VTFL's assets (which consisted principally of its book debts). For present purposes, it is unnecessary to distinguish between the banks.

11

Importantly for present purposes, it is common ground that, while neither VTFL nor Mr Cushnie owed the banks any fiduciary duties, Mr Cushnie did owe fiduciary duties to both VTFL and TPL.

12

As a result of the fraud, which was perpetrated by Mr Cushnie with Mr Clough's help, VTFL reported an uninterrupted increase in turnover and profit each year up to and including 1999. In 1995, a combination of some of Mr Cushnie's shares and some newly issued shares in VGP were offered to the public, and the company was listed on AIM. It was subsequently listed on the London Stock Exchange. VGP's share price steadily increased.

13

As described by Rimer J at [2007] EWHC 915 (Ch), para 23:

"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 [effectively controlled by Mr Cushnie]. 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 March 1996, from TPL; [which was] financed by the traders. The money so received by VTFL was then revolved around the cross-firing companies. … [B]etween 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."

For many years the fraud was well concealed. Banks, investors, VTFL's auditors and the financial press were all taken in.

14

On 17 August 1999, Mr Cushie (through an alter ego company, whose existence I shall disregard as it is irrelevant for present purposes) bought a house in Kensington, London ("the Kensington property"), with the help of an advance from RBS of £9.975m, which was secured on the property.

15

On 9 November 1999, Mr Cushnie sold some 13.9 million shares in VGP ("the Shares"), representing about 5% of his total holding, for £28.69m. The proceeds of this sale were distributed to various parties in about February 2000. These payments included the following: £9.19m to the Versailles group, £1m to Mr Clough, £1.75m to traders, £2.25m loan repayment to NatWest, and £11.47m to RBS, of which £1.49m was an overdraft repayment and £9.98m was repayment of the loan secured on the Kensington property.

16

On 5 May 1999, the DTI had begun 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 Yellow Book. On 8 December 1999, share dealing in VGP, whose market capitalisation was then £632m, was suspended. In early January 2000, the banks appointed PwC to investigate and review VGP's affairs. On 18 January 2000 the SFO announced an investigation into the Versailles Group. On 14 January 2000 PwC produced an initial report; and on 20 January they reported that the position was far worse than they had realised. On the same day the banks appointed certain PwC partners, including Mr Lomas, as joint...

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