The Court of Appeal has given judgment in Sinclair Investments (UK) Limited v Versailles Trading Finance Limited & Others ([2011] EWCA Civ 347), firmly dismissing the appeal - and the defendants' cross appeal - from the judgment of Mr Justice Lewison of 30 June 2011. The decision is of enormous importance. It considers what relief is available for breach of fiduciary duty, and again questions whether the now long-established Privy Council decision in Attorney-General for Hong Kong v Reid [1994] 1 AC 324 is good law.

The facts

The Versailles Group was ostensibly engaged in trade finance, but was - as Lewison J put it - "little but a fraudulent scam". The chief protagonist, Mr Cushnie, assisted by Mr Clough, attracted "traders" to advance their money to a company which they controlled and directed (Trading Partners Limited ("TPL")), for use as trade finance. The money was to be held on trust for the traders until it could be used for that purpose.

The fraudsters also raised further finance using two companies in the Versailles Group: Versailles Group plc ("VGP"), a listed holding company in which Mr Cushnie had a substantial indirect holding; and Versailles Trade Finance Limited ("VTFL"), a trading subsidiary, which issued debentures to three banks, secured by fixed and floating charges over VTFL's assets.

The fraud therefore involved two distinct groups of victims: the traders and the banks. Both groups extended funds, but none of either group's money was in fact used for trade finance. Mr Cushnie instead engaged in "loan kiting", ie arranging for TPL to pay the investments to other companies which he controlled. The monies were then bounced amongst TPL, VTFL, VGP and other companies (known as "cross-firing"). The effect was that each company appeared to be dealing profitably with the other in trade finance ventures, such that the share price of VGP was inflated substantially.

In January 2000, following a DTI investigation into Versailles, three of the lending banks appointed administrative receivers over VTFL and VGP. The extent of the fraud emerged only gradually. Mr Cushnie had acquired assets from his sale of the VGP shares at an inflated value and by various routes, these assets ended up in the hands of the receivers and the banks. The receivers also made a distribution from VTFL's funds (the "VTFL Distribution").

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 for TPL (the "Shares Claim"). 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 traders. In breach of those duties he had used TPL's money in the cross-firing, which had the effect of 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 for 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.

The defendant banks contended that TPL's claim gave rise to a personal right only and was therefore unsecured. The banks also said that if this was wrong, they should be classed as bona fide purchasers for value and therefore take the proceeds free from any proprietary rights.

TPL's second claim (the "Distribution Claim") concerned the sums cross-fired on from TPL to VTFL. TPL argued that it had a proprietary right to the sums paid out in the VTFL Distribution because VTFL owed TPL fiduciary duties in respect of the monies which TPL had entrusted to it. The defendants argued that there was no such right given the "black hole" into which all sums had fallen when cross-fired. TPL said that VTFL's money was a "mixed fund" and that it was therefore for VTFL to distinguish its own money from TPL's.

The Court of Appeal

The leading judgment was given by the Master of the Rolls. The principal issue was (at paragraph 48):

"whether…TPL has a proprietary interest in the proceeds of sale of the Shares, or whether, as the defendants argue, TPL has a right to an equitable account to the proceeds of sale. The difference is vital, because, if TPL is correct, it was the beneficial owner of those proceeds, and its beneficial ownership would override, subject to the question of notice, the payments made to the banks in so far as they were made out of the proceeds of sale. On the other hand, if the defendants' case is right, Mr Cushnie's duty is to account to TPL for the proceeds of sale, which is a personal remedy, which would not override the payments already made to the banks."

One of the central planks in TPL's appeal was that Lewison J ought to have followed the Privy Council decision of Attorney-General for Hong Kong v Reid [1994] 1 AC 324, but had expressly declined to do so. That decision has 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 has a proprietary right to a bribe paid to a fiduciary, TPL's Shares Claim must succeed.

Addressing the Shares Claim first, 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 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 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 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.

As to the Distribution Claim, the Court of Appeal rejected the banks' argument, holding that a proprietary claim should not be lost simply because the defaulting fiduciary has acted in such a way as to create a maelstrom. Agreeing with Lewison J, it held that once it is shown that money held on trust for TPL was paid into a maelstrom, the administrative receivers bore the burden of showing that the money in the mixed account was not that of VTFL, ie the Court reversed the burden of proof. In reaching this conclusion, the Court also conducted a detailed review of the authorities on when a party has notice of another's right to claim.

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


The outcome of the decision on the Distribution Claim comes as no real surprise to practitioners. Mixed fund claims in fraud actions are the norm rather than the exception and the rules are fairly well known and established. The Shares Claim, however, is more controversial. In this respect, the significance of Sinclair is enormous, as proprietary rights carry priority in an insolvency, which is of central importance in a pyramid scheme such as that operated by Mr Cushnie.

The question of whether there should be a proprietary claim to unauthorised profits made by agents and applied in breach of trust is finely balanced. It is true that agents may earn unauthorised profits honestly and it is hard to see why the profits should be subject to a proprietary claim when they do so. It is also true that proprietary claims for unauthorised profits can give rise to anomalies in insolvency situations. However, the consequences of refusing a proprietary claim in cases of bribery are considerable, and potentially even more undesirable. Following the Court of Appeal's decision, it will not now be as easy to strip a recipient of a bribe or the profits made from it, or to trace it into the hands of third parties.

When dealing with proprietary claims to money, it is still a little artificial to suggest that the Court is hidebound by the law of property. Rules of tracing and following money are legal constructs, as artificial as any other, and they have been as much the subject of debate as any other area. The Court will have to "discover" what the rule is and consider its consequences, as Lord Templeman sought to do in Reid. When that decision comes, it will be a difficult one. As the Court of Appeal noted, Reid may need further consideration, but it is unfortunate that the nettle has not been fully grasped and that no definitive decision has been made as to which way the difficult decision must go. Ultimately, it will have to be made otherwise than by the Court effectively withdrawing behind the shield of previous authority.