Where property is obtained by fraud, equity imposes a constructive trust on the recipient so that the property is recoverable and traceable in equity.
In Governor and Company of the Bank of Ireland v Pexxnet Ltd and others, the bank credited cheques to the value of €2,400,000 to the first defendant's bank account before the cheques had cleared. €116,000 was then transferred to the first defendant's director's personal account and €2,225,000 was transferred to the fourth defendant's Swiss bank account.
The money allegedly related to funds to buy 750,000 tonnes of scrap metal sourced from railway tracks in the Congo. The bank quickly discovered that the cheques were forged and sought to recover the monies from the defendants alleging conspiracy to defraud. The bank alleged that the first defendant had held the monies received as constructive trustee.
The court confirmed that where property was obtained by fraud, equity imposed a constructive trust on the fraudulent recipient and the property was recoverable and traceable in equity. The victim of the fraud could trace the money through bank accounts even when it might have been mixed with other money, as the money was subject to the constructive trust. All the defendants here were jointly liable for the bank's losses as they had been knowingly involved in the conspiracy to defraud. The court found that the explanation as to what the money related to was too absurd to be believed as the amount of scrap metal involved equated to more than half of the Congo's railway network.
The money was traceable into the fourth defendant's Swiss bank account (which had been frozen by the Swiss bank on discovery of the fraud) as the court held that under English conflict of law principles, English law would govern the basis upon which the fourth defendant received the money.
Things to consider
Where a fraud has occurred, a tracing claim should be considered very quickly, along with obtaining a freezing order before the property which is the subject of the constructive trust is dissipated.