The Privy Council decision of Attorney-General for Hong Kong v Reid [1994] 1 AC 324 has generally been taken to hold that a principal has a proprietary right to a bribe paid to a fiduciary. That proposition has also been adopted in Hong Kong. However, in the recent decision of Sinclair Investments (UK) Limited v Versailles Trading Finance Limited & Others [2011] EWCA Civ 347, the English Court of Appeal expressly declined to follow Reid. In Sinclair, the main issue was whether the company had a proprietary interest in the unauthorised gains made by a fiduciary in breach of his duties. Although its impact in Hong Kong remains to be seen, the decision is significant as it affects civil claims to recover bribes and is especially important given that proprietary claims confer priority in an insolvency over those of general creditors.

The facts

The Versailles Group (consisting of Versailles Trade Finance Limited ("VTFL") and its listed holding company Versailles Group plc ("VGP")), was ostensibly engaged in trade finance but which was in fact "little but a fraudulent scam". The fraudsters obtained funds from investors through an investment company (Trading Partners Limited ("TPL")) on the basis that they would be held on trust for them to be used in trade finance, and also by way of loans from three banks. The funds, however, were not in fact used in trade finance. Instead, they were used to pay purported profits to the TPL investors, stolen, or circulated round a number of other companies also controlled by the fraudsters (known as "cross-firing"). The effect of the cross-firing created the appearance of a genuine profitable business and resulted in the inflation of the share price of VGP.

Shortly before the collapse of the Versailles Group, Mr Cushnie, the central figure in the scheme and a director of VGP and TPL, sold part of his shareholding at the inflated value and acquired other assets from the proceeds.

The fraud gradually came to light and TPL was wound up and liquidators were appointed. The lending banks appointed administrative receivers over VTFL and VGP. Both the investors and the banks suffered substantial losses.

Sinclair, an investor, took an assignment of TPL's claims (hereafter Sinclair will be referred to as "TPL"). TPL made claims which were based on the assertion that the profit Mr Cushnie had made from his sale of shares in VGP was subject to an equitable proprietary claim by TPL. TPL argued that Mr Cushnie owed TPL fiduciary duties, including duties not to make unauthorised profits, or to apply funds in breach of the agreement with the investors. In breach of those duties he had used TPL's money for cross-firing, which had the effect of fraudulently raising VGP's share price. By selling his inflated shares, Mr Cushnie had therefore made an unauthorised gain. Hence TPL said that the proceeds were subject to an equitable proprietary claim by TPL. On that basis TPL therefore also claimed a proprietary right to the traceable proceeds of the gain. Since a proprietary claim would be good against anyone, save for a bona fide purchaser for value, TPL said that it should therefore take priority over the banks' claim against Mr Cushnie.

The defendant banks contended that TPL's claim was only an unsecured personal claim.

The English Court of Appeal

The principal issue to be decided was whether TPL had a proprietary interest in the proceeds of sale of the shares in VGP, or whether TPL had a right to an equitable account to the proceeds of sale.

One of the central planks in TPL's appeal was that Lewison J in the court below ought to have followed the Privy Council decision in Reid, but had expressly declined to do so. That decision had generally been taken to hold that a principal has a proprietary right to a bribe paid to his agent. The Court of Appeal accepted that, if a principal did have a proprietary right to a bribe paid to a fiduciary, TPL's claim must succeed.

However, the Court of Appeal stated that it should not as a rule follow Privy Council decisions, but rather its own decisions, or those of the House of Lords/Supreme Court. If Reid was to be followed, it was up to the Supreme Court to do so.

The Court of Appeal then went on to doubt whether Reid had been correctly interpreted, whether it was correct as a matter of law and therefore whether the Supreme Court would indeed follow it. Citing two of its own recent decisions (Gwembe Valley Development Co Ltd v Koshy (No 3) [2004] 1 BCLC 131 and Halton International Inc v Guernroy [2006] EWCA Civ 801), the Court of Appeal held that Lewison J had been right to reject TPL's proprietary claim to the proceeds of the share sale. Although the Court of Appeal conceded that Reid may point the other way, it stated (paragraphs 88-89) that there was 150 years' of authority which established that:

"a beneficiary of a fiduciary's duties cannot claim a proprietary interest, but is entitled to an equitable account, in respect of any money or asset acquired by a fiduciary in breach of his duties to the beneficiary, unless the asset or money is or has been beneficially the property of the beneficiary or the trustee acquired the asset or money by taking advantage of an opportunity or right which was properly that of the beneficiary… a claimant cannot claim proprietary ownership of an asset purchased by the defaulting fiduciary with funds which, although they could not have been obtained if he had not enjoyed his fiduciary status, were not beneficially owned by the claimant or derived from opportunities beneficially owned by the claimant."

The Court of Appeal added that if it were to be policy to prevent fiduciaries from profiting from a breach of fiduciary duties, it should be dealt with by extending the rules relating to equitable compensation, and not proprietary remedies.

In summary, the Court of Appeal agreed entirely with the judgment of the court below.


Although there have only been a few Hong Kong cases which have considered Reid, it has been applied in Hong Kong such as in the Court of First Instance case of Secretary for Justice v Hon Kam Wing [2003] 1 HKLRD 524. Reid therefore remains, at least for the time being, good law in Hong Kong.

In Hon Kam Wing, the Secretary for Justice sought to recover from the estate of a former police officer and others in respect of bribes allegedly paid to the officer which had subsequently been used to acquire various assets including properties and bank accounts. In the trial of a preliminary issue of whether the claims were time-barred under the Limitation Ordinance, the court had to consider whether the trust which was held to have arisen in Reid was a real trust or whether it gave rise to equitable relief. The court accepted that equity regarded the bribe as a legitimate payment which was intended for the principal. Such payment had to be handed over to the principal immediately upon receipt and equity imposed a constructive trust over it for the benefit of the principal. The trust which arose in Reid was, therefore, a real trust.

Although Reid has, over the years, been accepted as the preferable authority with regards to the nature of a principal's civil claim to recover a bribe from a fiduciary, the issue has always been controversial. In particular, Reid has been criticised as having failed to give sufficient weight to the potentially unfair impact a proprietary claim (which confers priority in an insolvency) could have on the legitimate interests of other creditors.

At the same time, there are strong policy arguments for ensuring that a fiduciary does not retain gains from his or her breach of fiduciary duty. Coincidentally, the refusal by the English Court of Appeal to follow or apply Reid comes at a time when there is an increasing push internationally to curb bribery and corruption. If Sinclair is followed in Hong Kong, it will no longer be as easy to bring a civil claim to strip a recipient of a bribe or the profits made from it, or to trace it into the hands of third parties.