Stokors SA and Others v IG Markets Ltd Craigcrook Management Services Ltd (Part 20 Defendant)
| Jurisdiction | England & Wales |
| Judge | Mr Justice Field |
| Judgment Date | 27 March 2013 |
| Neutral Citation | [2013] EWHC 631 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Docket Number | Case No: 2010 Folio No. 1331 |
| Date | 27 March 2013 |
[2013] EWHC 631 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
The Rolls Building
Fetter Lane
London EC4A
Mr Justice Field
Case No: 2010 Folio No. 1331
and
Jonathan Nash QC and Rajesh Pillai (instructed by Laytons Solicitors LLP) for the Claimants
Paul Downes QC, Emily Saunderson and Joseph Sullivan (instructed by McClure Naismith LLP) for the Defendant
George Spalton (instructed by Berrymans Lace Mawer LLP) for the Part 20 Defendant
Hearing dates: 20, 21, 22, 26, 27, 28, 29 November; 3, 4, 5, 6, 10, 11, 12, 13, 19 & 20 December 2012
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
The claimants are four investors who in March 2008 entered into agreements with a small Scottish brokerage, Echelon Wealth Management Limited ("Echelon"), under which Echelon was to enter into contracts for difference ("CFDs") on each of their behalves with the Defendant ("IG"). Under these agreements, money paid to Echelon by the investors to fund their CFD trading was to be held in segregated accounts and was to be used only for their own separate trading and not for any other purpose. However, instead of placing the investors' trades as their agent, Echelon placed matching trades with IG under a contract that provided that both parties would deal with each other as principals, and the individuals at IG handling the Echelon account dealt with Echelon on this basis. These individuals knew that Echelon was not carrying on proprietary trading and that the trades placed by Echelon mirrored the trading of its clients. Under its contract with Echelon, IG provided daily spread sheets which showed not only the overall position on the Echelon account and the current position on a Header Account through which incoming and outgoing aggregated payments were first booked, but also the current position on a large number of anonymous sub-accounts allocated by Echelon to its individual clients.
The Echelon account was opened on 19 March 2008 and ended on 23 October 2008, Echelon having gone into liquidation on 17 October 2008. At the time of the liquidation Echelon owed the first three claimants €7,973,909/57, £214,780.14 and €4,153,398.73 respectively in relation to their CFD trading and there is no prospect of these sums being recovered in the liquidation. It is these sums, plus damages for loss of profits that are sought to be recovered in the action.
Echelon's collapse was due to it having allowed one of its CFD clients, a Mr Shami Ahmed, to run up a deficit of £16,000,000 on sub-account E4376, during which time it used the funds paid by and due to others of its clients, including the claimants, to finance its liabilities to IG.
As at 20 October 2008, Echelon's margin account with IG was in deficit to the extent of (£3,317,833). Between April and October 2008, Echelon had been on margin call on 55 out of 135 trading days which included 9 consecutive margin calls between 1 and 11 July 2008 and the continuous period between 29 September and close of trading on 16 October 2008. The growing deficit on sub-account E4376 was recorded in the daily spread sheets produced by IG.
In this action, the claimants seek to recover from IG their losses incurred in Echelon's liquidation, plus lost profits, on the basis that three IG employees, Mr Tobin Utley, Mr David Russell and Mr Ashraf Elgarf, each dishonestly assisted in breaches of fiduciary duty by Echelon arising out of Echelon's failure to hold the claimants' funds on a segregated basis and to use those funds only for the purpose of supporting their individual trading and for no other purpose. The claimants contend that it matters not that these three individuals did not know that the claimants contracted with Echelon on the basis that Echelon was to act as their agent in placing CFD trades and was obliged to keep the claimants' funds in segregated accounts. Their case is that it is enough that from about 24 June 2008 the three employees knew or suspected or turned a wilful blind eye to the fact (as the claimants allege) that Echelon was trading by using funds received from some of its clients to fund cash withdrawals and deficits on the Header Account and the E4376 account when Echelon did not have cash or collateral elsewhere to cover the shortfall on the accounts in deficit. The claimants argue it was to be discerned that Echelon was trading in this fashion from the state of the margin account, the deficits on the Header Account and the increasing deficit on sub-account E4376.
Echelon did not have FSA permission to trade as a principal. The claimants allege that Mr Utley was aware of this and claim in the alternative that by reason of his dealings with Echelon armed with this knowledge he dishonestly participated in the breaches of fiduciary duty identified above. The claimants say that Mr Utley was dishonest because he would have known that Echelon was acting in fraud of its clients by trading as a principal and there was a high likelihood, if not a certainty, that it was dealing with its clients on a false basis as an agent or arranger and therefore misapplying the funds it received on the basis that it was acting as an agent by using them on its own behalf.
The claimants also advanced an alternative claim that IG is liable on the basis that it knowingly received trust property and it is unconscionable for IG to retain it. For the purposes of this claim the trust property is said to be the money deriving from the claimants' funds that was paid to IG by Echelon, the receipt occurring when IG acknowledged a debt in its books to Echelon. The facts relied on to establish the necessary unconscionability are the same as those said to found liability for dishonest assistance. Accordingly, if the dishonest assistance claim fails due to a failure to establish the necessary dishonesty, the knowing receipt claim will fail also.
Dishonest Assistance — the applicable legal principles
The legal requirements for a claim in dishonest assistance are summarised as follows in Lewin on Trusts (18 th Ed) at paragraph 40–09:
(i) there is a trust;
(ii) there is a breach of trust by the trustee of that trust;
(iii) the defendant induces or assists that breach of trust;
(iv) the defendant does so dishonestly.
The claimants contend that fiduciary obligations in relation to the property of another person come within the reference to a trust. IG accepts that in certain cases a fiduciary (for example a company director) is equivalent to a trustee for the purposes of accessory liability. Like Hamblen J in Brown et al v InnovatorOne plc et al [2012] EWHC 1321, I shall assume (without deciding) that there is no requirement that there be a breach of trust stricto sensu in respect of trust property.
The leading authorities on the test of dishonesty are Royal Brunei Airlines v Tan [1995] 2 AC 378; Twinsectra v Yardley [2002] 2 AC 164 and Barlow Clowes International Ltd v Eurotrust International Ltd [2006] 1 WLR 1476. In the last of these authorities Lord Hoffmann explained that the test has two elements:
(1) The subjective element — the Court must consider the defendant's subjective state of mind and what the defendant actually knew and understood;
(2) The objective element — the Court must consider whether or not, with that state of mind, knowledge and understanding, the relevant conduct is dishonest, applying an objective standard of dishonesty.
The following principles are derived from the authorities:
(1) It is not necessary for the Court to establish whether or not the defendant considered that he was acting dishonestly. Instead, the defendant's knowledge of the transaction has to be such as to render his participation contrary to normally acceptable standards of honest conduct. 1
(2) An honest person does not deliberately close his eyes and ears, or deliberately not ask questions lest he learn something he would rather not know and then proceed regardless where there may be a misapplication of trust assets to the detriment of beneficiaries. 2
(3) A dishonest state of mind may consist in suspicion combined with a conscious decision not to make inquiries which might result in knowledge. 3
(4) In a commercial setting dishonesty can be found on the basis of commercially unacceptable conduct. 4
(5) Acting in reckless disregard of others' rights or possible rights can be a tell-tale sign of dishonesty. 5
(6) Recklessness is a species of dishonest knowledge and is therefore relevant to the Court's consideration of dishonesty in this context. "Not caring" does not mean "not taking care", rather it means indifference to the truth. The moral obliquity of this position is in the wilful disregard of the importance of truth. 6
(7) Someone can know, and can certainly suspect, that he is assisting in a misappropriation of money without knowing that the money is held on trust or what a trust means. 7
As stated above, the claimants do not allege that IG knew that Echelon was acting in breach of fiduciary duty in the way in which it was in fact so acting i.e. dealing with IG as a principal rather than as an agent and using non-segregated funds rather than keeping the claimant's funds in segregated accounts. It is submitted on the claimants' behalf that they do not need to establish that IG had this knowledge and it is enough if they can show that Mr Utley and/or Mr Russell and/or Mr Elgarf knew or suspected that Echelon was trading by using funds received from some clients to fund cash...
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