For a highly instructive and recent investment fraud case involving offshore vehicles, see: Van Zuylen v Whiston-Dew & Anor [2021] EWHC 2219 (Ch) (04 August 2021).
Van Zuylen v Whiston-Dew & Anor [2021] EWHC 2219 (Ch) (04 August 2021) (bailii.org)
See also:
See also:
‘Mediation of Fiduciary
Disputes In Islamic Banking And Finance’:
Mediation of Fiduciary Disputes
In Islamic Banking And Finance | LinkedIn
‘Islamic Trusts’: Islamic Trusts | LinkedIn
‘Trusts Litigation after Brexit’: Trust Litigation after BREXIT | Carl’s Wealth Planning Blog‘
‘Carl Islam – Certified Mediator’: Carl Islam – Certified Mediator | LinkedIn
Van Zuylen v Whiston-Dew & Anor [2021]
‘CONTENTIOUS TRUSTS: EWHC allows investor to recover trust’s assets as remedy for fraud losses
Baroness Jacqueline Van Zuylen has won her claim against investment advisor Rodney Whiston-Dew for the return of GBP2.1 million she entrusted to him in 2011 but which he placed in various trusts and companies for his own use. She has traced some of the money to a charge held by a trust against land in Essex that the England and Wales High Court (EWHC) has now agreed can be regarded as the fruits of Whiston-Dew’s disposal of her money. Whiston-Dew, who is currently serving prison time for another fraud, unsuccessfully argued that he acted properly and honestly, that he is protected by the trust’s corporate veil and that the matter should have been determined by the courts of St Kitts and Nevis (Van Zuylen v Whiston-Dew and GBT Trust, 2021 EWHC 2219 Ch).’ STEP Industry News 05.08.2021.
‘In 2011, the Claimant, Baroness Jacqueline Van Zuylen made a decision that she now deeply regrets. She entrusted over £2.1 million – effectively her entire fortune – to the stewardship of the First Defendant, Mr Rodney Whiston-Dew. Less than half of this money has been returned to her and, with one exception, she has little idea of what has happened to the rest of it. The exception is that some of it (in her submission) is currently represented by advances made on the security of identified land in Essex. By means of this case she is now seeking to make recovery of her losses against the First Defendant and against the Second Defendant, a company incorporated in the Seychelles, now called GBT Global Limited, which I will refer to as “GBT”. Since 12 April 2018, after the events giving rise to claims in this action, GBT has been separately owned and controlled by Mr John Davis. Prior to this GBT was within the ownership and control of the First Defendant and was the vehicle that he used for dealing with the monies entrusted by the Claimant. …
The Claimant has a number of options in how she chooses to use her remedies in relation to the Relevant Charge.
In Re Hallett’s Estate; Knatchbull v Hallett (1880) 13 Ch D 696, Sir George Jessel MR acknowledged that where an asset was acquired exclusively with trust money, the beneficiary could either assert equitable ownership of the asset or enforce a lien or charge over it to recover the trust money. This principle was affirmed (and clarified in relation to its application to mixed assets) by Lord Millett in Foskett v McKeown [2001] 1 AC 102 (HL), 127. The Claimant has asked for the former remedy, although in view of my further findings below, I will give her an opportunity to consider whether this is the remedy that she seeks. …
A third defence that the First Defendant has attempted to raise was based on the proposition that this court had no jurisdiction as the matters in question fell to be determined by the courts of St Kitts and Nevis under the terms applicable to the Azure Trust. The First Defendant raised this challenge to the court’s authority very late in the proceedings and it was dismissed at a previous hearing. As well as being raised late, the point was utterly without merit given that the Claimant has not made any claim for breach of the Azure Trust and has never bound herself to any foreign jurisdiction. Her principal complaints against the First Defendant were based on his deceit, breach of fiduciary duty, breach of contract and breach of the general prohibition under the FSMA. In addition, I have found that the purported second Azure Trust, was used by the First Defendant as an instrument of deceit and as such it should be ignored.
In view of her success with these multiple causes of action, there are a number of ways in which the Claimant could claim for the remainder of loss. She can recover her loss from the First Defendant or from GBT or partly from each of them. Of course, she cannot recover her loss more than once.
In terms of quantifying the Claimant’s loss, her loss includes the difference between the monies that she entrusted to the First Defendant and GBT and the amount or value that she has received back from them.’
Extracts from the judgment of Mr Nicholas Thompsell sitting as a Deputy Judge of the High Court.
Legal Analysis – Further extracts from the judgment
‘(A) The overarching case
The Claimant, in her amended Particulars of Claim, has sought redress under a number of different headings. The Claimant’s overarching case is that she has been the victim of what Mr Dale describes as a “fraudulent scam” and which I would characterise as being most likely a form of Ponzi scheme.
[A Ponzi scheme is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors. The scheme leads victims to believe that profits are coming from legitimate business activity, and they remain unaware that other investors are the source of funds].
Mr Dale put it very simply. She was deceived. She paid over her money, not as a gift, and wants it and its fruits to the extent that they are traceable, or compensation for being denied the ability to profit from its investment.
The First Defendant’s general response is that the monies were vested into the Azure Trust and that the Azure Trust did invest the Claimant’s money mainly by making loans against property as was envisaged.
I do not accept the First Defendant’s case on this. I do not consider that the Azure Trust was ever properly constituted. I consider that the evidence from the ledger accounts, and the inability of the First Defendant to produce any documentation for the various secured loans that he says were made, are not compatible with the contention that these arrangements were properly operated in the interests of the Claimant.
A large element of the First Defendant’s defence has involved his seeking to distance himself by claiming that the money went into one or other of the Azure Trusts that were created and accordingly that it is subject to the jurisdiction of a foreign court. The latter point is entirely without merit.
The First Defendant claims that he has never benefited from the personal receipt of the Claimant’s money, but it is clear that acting through GBT (which at the time was entirely his creature and was his instrument for wrongdoing) he did arrange for various unexplained payments to be made, at least some of which appear to have benefited companies or trusts associated with him, and he operated with no regard to conflicts of interest.
I have found that the second defendant, GBT, received the Claimant’s money. GBT accepts that, to the extent it did receive funds from the Claimant, and still holds them in a manner that they are identifiable as the Claimant’s funds, they are held on trust for the Claimant. The extent to which GBT is also the proper target of the other heads of claim was not much discussed during the course of the trial, but I will consider it below.
The Claimant, in her amended Particulars of Claim, sought redress under a number of different headings. These included various remedies available under the Financial Services and Markets Act 2000 (“FSMA”), under the tort of deceit, in contract, for breach of trust, for breach of fiduciary duty and in restitution. These claims, insofar as they were actively pursued into the trial, are considered further below.
(B) Deceit
The head of claim which Mr Dale was most keen to emphasise during the trial was that based on the tort of deceit. In the context of what may be the imminent bankruptcy of the First Defendant, as has been discussed above, Mr Dale was aware that, unlike some other heads of claim, this head of claim may continue to be enforceable after the end of any period of bankruptcy.
To make a claim in deceit a claimant must establish that the defendant: (a) made a representation, (b) that was false, (c) knowing it was false, not believing in its truth or not caring whether it was true or false, (d) intending it to be relied on; and that (e) the claimant relied on it, thereby suffering loss.
(a) Was there a representation?
It has been said that “fraud must be distinctly alleged and as distinctly proved”. It is important that the false representation relied upon is identified.
Perhaps, on the basis that it was obvious on the facts put in front of the court, Mr Dale did not spend very much time itemising the particular false representations that were relied on for the purposes of this claim, but when pressed on the point Mr Dale cited the express representations made at the money would be looked after within the Azure Trust by FLT acting as a trustee. The very act of setting up formal trust arrangements with a professional trustee company implied that the investments would be operated in a normal business-like manner. Even if this was not expressly said, there would have been a clear implication that FLT would have stewardship of the money, ensuring that uninvested monies were being held in bank accounts under its control, and that monies invested would be properly secured, for example by ensuring that there was proper documentation of any loan made and that any security would be held by the trustee or by a responsible nominee for the trustee. Furthermore, the involvement of a professional trustee implied that investment decisions would be made by reference solely to the interests of the beneficiaries and not so as to benefit anyone else involved and that conflicts of interest would be avoided, or at least, appropriately managed in accordance with the provisions of the trust deed and applicable law.
I have no doubt that these representations were made. To the extent (if any) that they were not made expressly, they were implied. It is established law that implied representations can form the basis of an action for deceit. Also, where there is a fiduciary relationship relation between the parties (as would have been the case here since the First Defendant was making arrangements as agent on behalf of the Claimant) the fiduciary may be under a duty to reveal information so that non-disclosure would be capable of amounting to a fraud at common law (see for example Conlon v Simms (1986) 18 H.L.R.219). This point is particularly relevant to the First Defendant’s failure to inform the Claimant about the refusal of FLT to act as trustee, leading to the first Azure Trust never being constituted and its purported replacement with a new Azure Trust where GBT would be trustee.
These representations were made by the First Defendant at or before the time that the Claimant started to send money. They were not, however, made by GBT, which remained unknown to the Claimant at this point. Even at a later point, the court has not been directed to any specific representation made by GBT that is said to form the basis of an action for deceit.
Of course, there is a distinction between a statement and a promise about the future. This opens the possibility that the First Defendant could argue that, at the time he started his business relationship with the Claimant, he genuinely intended to set up proper trust arrangements operating on the basis described above, and so the statement was either a promise about the future (which cannot form the basis of an action for deceit) or at most a true representation as to his current intentions.
There are two objections to such an argument.
The first is that, viewing the pattern of conduct I consider it far more likely than not that the First Defendant never intended the original Azure Trust to be set up on a proper and above board basis. If he had meant to do this, he would have ensured, or at least attempted, the transfer of the Claimant’s funds to FLT and would have made arrangements for him or GBT to be given some official standing in relation to the management of these investments. He would not have misrepresented to the Claimant that she was a protector in relation to the Azure Trust. When the trust arrangements with FLT failed, he would have honestly discussed this with the Claimant and obtained her consent to setting up GBT as a replacement trustee. He would have also made better efforts for GBT to be properly constituted as a trustee, for example arranging some form of succession from FLT and by appointing the Claimant as its principal beneficiary.
Furthermore, had the initial Azure Trust arrangements been honestly conducted, he would not have regarded himself as being empowered to determine what payments should be made by the Trust. He would also have taken proper steps in relation to the custody of the assets, the documentation of loan terms and the holding of any security.
The second objection is that as the matter progressed there would have been continuing representations in this regard. The Claimant says that she had understood that FLT remained the Trustee throughout the period in which she was making the investments. Whilst it is possible that she did at some point become aware that GBT rather than FLT was purporting to act as trustee, given that she did see and sign documents referring to GBT as trustee, I do not believe that she was ever given a clear explanation that there had been a change of trustee and the implications of this. Even if she thought that at some stage GBT had become the trustee she would still have relied on a continuing implied representation that there would at least be an attempt to run matters run on a proper business-like basis by a trustee who would be making investment decisions for her benefit and taking the appropriate steps to secure her investments. It is clear from the facts as I have found them above that this did not happen, rendering such continuing representations false.
(b) Was the representation false?
It will be clear from my description of the arrangements that the arrangements that were made in no way matched the express or implied representations I describe above.
(c) Did the First Defendant know the representation to be false?
The First Defendant (with many years’ experience as a solicitor operating in the field of international trusts) must have understood what he told the Claimant and what were the implications of this and must have clearly understood that the way that he was arranging for the Claimant’s monies to be dealt with did not meet the position as he had represented it.
His various dealings with the Claimant indicate that he continued to seek to provide false reassurance that everything was in order through such devices as getting her to sign letters suggesting that she was the “protector” of the Azure Trust when he knew that she was not, and a letter of wishes which he had no intention of observing; by producing from time to time statements suggesting that her investments were going well. He made payments to her knowing that she would have assumed that they came from the Azure Trust but which in fact seem to have in some cases to have been funded by transfers from ledgers held by other clients of GBT.
The Claimant gave evidence that the First Defendant was adroit in controlling the meetings that he had with her so that the time spent with her was mostly wasted in small talk and any business element was left to be hurried at the end of the meeting so that she was not left with time to consider what was said or any document that was put in front of her. The fact that the First Defendant did not provide written explanations for her to keep is also consistent with an intention to deceive.
(d) Did the First Defendant rely on the representation and thereby suffer loss?
It is clear that the Claimant acted in the way that the First Defendant intended for her to do. She sent her money to the solicitors’ accounts controlled by GBT. It is fair to conclude, and I do conclude, that she was doing so in reliance on these representations. I have given consideration to the possibility that the Claimant’s naïveté in financial matters was such that she would have sent the money to GBT even if plainly told that there was to be no proper trust arrangement put in place for her but I find this unlikely.
Judged on the figures that were placed before the court, it is equally clear that the Claimant has suffered loss as a result of her reliance on these representations. There is a large shortfall between the money that she has received back and the money which she put into the control of the First Defendant. As well as losing money, she has lost the prospect of a commercial return on that money over a lengthy period.
It is, of course, possible that, even if the arrangements had been operated in accordance with the terms that had been represented to her, that she might have lost money. That is a risk that any investor takes. However, on the basis of the express or implied representations made to her she was not expecting to have the additional risk that her monies would not be properly accounted for. Neither could she have expected that, where investments were made, they would not be properly protected by means of loan agreements or security, or that the trustee that she was told would be operating the fund would not do so and instead another company, with no credentials would act as trustee would do so (and would do so otherwise than on the basis of any appointment from FLT, the person represented as being the trustee who would have custody of her funds.
The arrangements were not as falsely represented, and she has suffered as a result.
It is just possible that these losses could be largely mitigated if the Relevant Charge is transferred to her and yields a substantial profit. Nevertheless, as things stand at present the Claimant has suffered a loss and the court should look for a suitable remedy for this.
I conclude, therefore, that a remedy for deceit is available to the Claimant against the First Defendant, but not against the Second Defendant.
(C) Breach of Fiduciary Duty
The Claimant has also claimed a remedy for breach of fiduciary duty. Again not much time was spent discussing the elements of this cause of action during the course of the trial. The Claimant’s submissions in this regard are largely those set out in the skeleton arguments produced in relation to the opening of the trial.
In their skeleton argument, Mr Dale and Mr Benson reminded me of the nature of a fiduciary. A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is a duty of loyalty: a fiduciary must act in good faith, must not profit out of his trust, and may not act for his own benefit for that of a third person without the informed consent of his principal. Counsel referred me in this regard to Bristol and West Building Society v Motthew [1998] Ch 1, 18, per Millet LJ. Additionally, a person exercising a fiduciary power must not exercise it “for a purpose, or with an intention, beyond the scope of or not justified by the instrument creating the power” as was said in Vatcher v Paull [1915] 1 A.C. 372 (PC), 378, by Lord Parker.
The First Defendant clearly took on a role as acting as agent for the Claimant. He received the Claimant’s money into a bank account controlled by him via his company GBT. The Claimant reposed trust and confidence in him as her adviser. He took on the direction of the investment (or at least the disposition) of that money. He purported to deal with FLT and with others on behalf of the Claimant.
I am reminded by counsel for the Claimant that an agent owes a fiduciary duty to his principal (see for example, FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45, [5], per Lord Neuberger). Certainly (in the absence of contractual provision to the contrary), an arrangement according to which an investment manager is given exclusive control over the assets of another gives rise to fiduciary duties (for which see SPL Private Finance (PF1) IC Ltd v Arch Financial Products LLP [2014] EWHC 4268 (Comm), [174], per Walker J).
I accept that the First Defendant should be regarded as a fiduciary and held to the duties applicable to a fiduciary.
The case put forward by the Claimant is that the First Defendant breached his personal fiduciary duties by the way in which he dealt with the Claimant’s monies. Instead of arranging for these to be held on an independent trust with proper supervision, as he said that he would, he kept control of those monies himself. The use to which these monies was put has never been properly explained. Nevertheless, there is enough information within the ledgers, as discussed above, for the court to conclude that these monies were not being used in a way to benefit the Claimant and in making the types of documented, secured investment that she had expected, but rather were used for his own purposes, which may have included accommodating other clients and which appear to have included transactions for his own benefit.
I consider that this case is made out. The First Defendant was in breach of his fiduciary duties and that the Claimant has suffered loss as a result.
Except insofar as a trustee may be considered to be a type of fiduciary, or at least to have fiduciary obligations, I do not think that any case has been made that GBT was acting as a fiduciary. I consider GBT’s liabilities as trustee below.
(D) Breach of the general prohibition under the FSMA
(a) The general prohibition
The Financial Services and Markets Act 2000 (the “FSMA”) includes provisions prohibiting a person from carrying out, or purporting to carry out, a regulated activity unless that person is an authorised or exempt person. This restriction is referred to as the “general prohibition”. The regulated activities to which the general prohibition applies are defined in section 22 FSMA. Under section 22 FSMA, a regulated activity is one which is specified for the purposes of the FSMA and is carried on by way of the business.
The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (as amended) (the “RAO”) specifies various activities, which as a result become regulated activities for the purposes of the general prohibition. The Claimant, in her amended Particulars of Claim, identified various of these specified activities which she alleged the First Defendant to have undertaken.
Two of the types of activity that were originally pleaded on behalf of the Claimant were those of “accepting deposits” and of “safeguarding and administering investments”. However those arguments were not pursued at trial and I do not consider them further.
Mr Dale did, however, make a case for redress based on two further activities specified within the RAO.
(b) Managing investments
The first of these was that of managing investments. Article 37 RAO provides as follows:
“37. Managing investments
Managing assets belonging to another person, in circumstances involving the exercise of discretion, is a specified kind of activity if—
(a) the assets consist of or include any investment which is a security, structured deposit or a contractually based investment; or
(b) the arrangements for their management are such that the assets may consist of or include such investments, and either the assets have at any time since 29th April 1988 done so, or the arrangements have at any time (whether before or after that date) been held out as arrangements under which the assets would do so.
The Claimant’s case here was that the First Defendant, through GBT or otherwise, was in broad terms managing, or at least purporting to manage, the Claimant’s investments.
It may be objected that these investments did not comprise any of the types of assets listed in paragraph (a) of article 37 RAO on the basis that the investment remit was such as to avoid shares and similar securities. The assets were held either as balances on a solicitor’s account or were unsecured loans or loans charged on property.
In answer to this objection, Mr Dale makes the case that nevertheless under the arrangements agreed with the First Defendant, the First Defendant was to have an extremely broad discretion in selecting assets including assets which could have been of the type specified in part (a) of Article 37, and furthermore that at least one of the investments purchased was a shareholding (the investment in Future Properties Limited).
I will accept, therefore, that the First Defendant was managing himself or via GBT, or was purporting to manage the investment of assets that consisted of or included, or may have consisted of or have included investments of the types specified in article 37(a) RAO.
Usually article 37 RAO will not apply when property is being managed by a trustee because the assets are not assets belonging to another person – the assets are in the legal ownership of the trustee. This will usually mean that the trustee (and any director of the trustee who actually undertakes the activities on behalf of the trustee) will not fall within article 37.
I do not consider that in this case that argument is available to the First Defendant or the Second Defendant. First, even on the First Defendant’s own case that the arrangements were originally made under the auspices of the first Azure Trust, any activity undertaken by the First Defendant or GBT cannot have been made by them as owners in any sense of the assets before GBT purported itself to become a trustee. Secondly, it is my finding that the defendants cannot rely on the terms of the Azure Trust as being applicable. To the extent that GBT was holding any assets it was doing so under a bare trust and the position of a bare trustee is not sufficient to say for the purposes of article 37 RAO that the shares “belong” to the trustee so that the bare trustee is entitled to manage them.
The RAO contains various exclusions (listed at article 39 RAO) which could apply in certain circumstances but none of them are relevant to the circumstances under consideration here. Neither do I consider that there is any argument that the First Defendant and/or GBT were not acting by way of business when they were managing, or purporting to manage, the Claimant’s investments.
Breach of the general prohibition is a criminal offence. I am not sure that I have had sufficient information and argument to conclude to the standards required by the criminal law that the First Defendant and/or GBT committed this criminal offence. It may be that the Financial Conduct Authority will wish to look into this point. However, I consider that on the standard applicable in this civil case, that of the balance of probabilities, the case is made out that the First Defendant and the Second Defendant were in breach of the general prohibition either by managing investments on behalf of the Claimant or purporting to do so without being authorised or exempt to allow them to do this.
(c) Advising on investments
Article 53 RAO specifies the following activity (which therefore becomes a regulated activity if carried on by way of business):
53. Advising on investments
Advising a person is a specified kind of activity if the advice is—
(a) given to the person in his capacity as an investor or potential investor, or in his capacity as agent for an investor or a potential investor; and
(b) advice on the merits of his doing any of the following (whether as principal or agent)—
(i) buying, selling, subscribing for, exchanging, redeeming, holding or underwriting a particular investment which is a security, structured deposit or a relevant investment, or
(ii) exercising or not exercising any right conferred by such an investment to buy, sell, subscribe for, exchange or redeem such an investment.”
The specific act that the Claimant alleges that the First Defendant undertook which falls within this specified activity was when he advised her to cash in her existing investments in order to invest her money with him. There is no doubt that these existing investments included investments falling within article 53(b)(i).
The evidence that the First Defendant advised the Claimant to cash in her investments derives from the Claimant’s witness statement and oral evidence. She said in her witness statement that:
“RWD persuaded me that he would be able to invest all of my savings on my behalf in such a way as to protect my capital and provide a monthly income for life. He said the property was much better than stocks or the share market, “especially on islands like England”. He said that he would be looking after my money. He was very convincing, and I trusted him completely”.
The Claimant elaborated on this statement during her oral evidence. She was clear that she had specifically been advised by the First Defendant that her existing investments were not appropriate for her needs and that she should sell them in order to allow him to provide better investments.
As Mr Dale points out, if this is correct, the arrangements are very similar to those that were dealt with by the court in the recent case of Adams v Options UK Personal Pensions LLP [2021] EWCA Civ 474, where the Court of Appeal (at paragraph 75) approved a dictum by Henderson J that, in drawing the line between what amounted to providing information what amounted to advice that “any element of comparison or evaluation or persuasion is likely to cross the dividing line“.
The First Defendant does not really deal with this issue in his formal defence. However, in his first witness statement he discusses these meetings, mainly in the context of how he says he was instructed to set up trust arrangements. The relevant extracts from his witness statement relating to investment advice include the following:
“During the course of meetings to discuss and determine the strategy to be engaged with regard to the proposed litigation in Guernsey the claimant requested me to review the performance of her IFA, Financial Relationships LLP. The claimant complained that, whereas Rothschild’s Trust had performed badly enough, Financial Relationships LLP had overseen far greater losses. She complained that she had experienced continual difficulties in being able to secure sufficient payments to enable her to sustain her lifestyle. She instructed me to consider taking action against all them to recover losses.
The claimant asked me to advise her [if] what was left of the Rothschild and Financial Relationships funds could be invested to recover capital and yield sufficient to meet her lifestyle requirements. She was adamant that she wanted to avoid the share market and its uncertainties. Bank deposits were out of the question as annual returns were modest to the point of nominal.…
The claimant was adamant that she wished to change the basis of the Financial Relationships LLP investments and to seek opportunities to replace them and secure greater returns for the ultimate benefit of the claimant on a tax beneficial basis.…
The claimant took time to consider her options and ultimately reverted with instructions to proceed…”
The First Defendant, therefore, appears to have accepted that he reviewed her existing investments, although he says that this was in the context of advising whether there might be a case for litigation against her advisers. He also appears to accept that he was asked to advise on how the funds currently held by his advisers could be invested and he does not suggest that he refused to provide such advice. Whilst he indicates that the impetus for changing investments came from the Claimant, rather than from him, his explanation is not inconsistent with the Claimant’s explanation that he, in the context of having reviewed her existing portfolio, advised her that she could do better by investing in property.
It is important also to the context here that it is clear that the advice that the First Defendant is said to have given cannot be regarded as generic advice. It related to the specific investments in a portfolio that he had reviewed.
Mr Dale, quite properly, discharged his duties to the court by pointing out various exclusions to the application of article 53 RAO that are set out elsewhere within the RAO. These are listed at article 55 RAO.
Of these exclusions, the only one that might fall into consideration in this case is the exclusion at article 67 which applies where advice is given in the course of carrying on any professional business which does not otherwise consist of the carrying on of regulated activities in the United Kingdom. Under article 67(2) RAO, this exclusion does not apply if the activity in question is remunerated separately from the other services but there is no evidence or suggestion that this was the case.
However, in my view this exclusion does not apply here. For this exclusion to apply, it must be the case that the activities “may reasonably be regarded as a necessary part of other services provided in the course of that other profession or business“. I cannot see how it would be a necessary part of any other business carried on by the First Defendant that he should provide investment advice to the Claimant of the type given here. The proper course for him if he had been asked to advise the Claimant on whether she should sell her existing investments was for him to say that he was not authorised to provide investment advice and that she should discuss the matter with a qualified investment adviser. There is no suggestion in the evidence before the court that this is what he did.
Once again, I am not sure that I have had sufficient information and argument to conclude to the standards required by the criminal law that the First Defendant was breaching the general prohibition, and I will leave it to Financial Conduct Authority to consider whether it wishes to look into this point. However, I consider that on the standard of balance of probabilities applicable in this civil case the case is made out that the First Defendant was in breach of the general prohibition by advising or purporting to advise her to sell her existing investment portfolio without being authorised or exempt to provide that advice. For completeness, I will mention again that I do not consider that there is any argument that the First Defendant when doing this was not acting by way of business.
(d) The civil consequences of breach of the general prohibition
The civil law consequences that flow from a breach of the general prohibition are set out in section 26 FSMA. This provides as follows:
“26. Agreements made by unauthorised persons.
(1) An agreement made by a person in the course of carrying on a regulated activity in contravention of the general prohibition is unenforceable against the other party.
(2) The other party is entitled to recover–
(a) any money or other property paid or transferred by him under the agreement; and
(b) compensation for any loss sustained by him as a result of having parted with it.
(3) “Agreement” means an agreement–
(a) made after this section comes into force; and
(b) the making or performance of which constitutes, or is part of, the regulated activity in question.
(4) This section does not apply if the regulated activity is accepting deposits.”
Accordingly, section 26 provides a separate means of recourse for the Claimant entitling her to recover any property that she has transferred and compensation for any loss she has sustained to having parted with her property.
(E) Breach of contract and rescission
The Claimant in her amended Particulars of Claim has also claimed a remedy in contract and in relation to the rescission of that contract. Very little time was spent discussing these causes of action during the course of the trial as Mr Dale on behalf of the Claimant preferred to concentrate on questions of fraudulent conduct, breach of trust, breach of duty and deceit. The Claimant’s submissions in this regard were largely confined to those set out in the skeleton arguments produced in relation to the opening of the trial.
As a result, no time was spent at trial analysing the formation or terms of any contract between the Claimant and the First Defendant. I do not think it has ever been alleged that there was a contract between the Claimant and GBT.
It may well be that a case can be made out in contract and in relation to the rescission of that contract, but that case was not sufficiently explored at trial for me to reach any meaningful decision about the matter, nor do I need to, in view of what I have found in relation to some of the other causes of action pleaded. Accordingly, I will not make any determination on this question.
(F) Restitution
A further claim made in the Claimant’s amended Particulars of Claim was a right to restitution on the grounds of unjust enrichment. Again this point was not pursued in any detail at trial and, given what I find in relation to other matters there is no need for me to make any finding in relation to this.
(G) Breach of Trust
(a) Who held assets on trust?
As noted above, for various reasons I agree with the contention made on behalf of the Claimant that the funds were never held on the terms of the so-called Azure Trust. That purported trust was an instrument of fraud and any purported transfers to it were void, with the result the purported trustee held any funds received on constructive or resulting trust for the Claimant.
The Claimant goes further and argues that, because GBT was the First Defendant’s creature and nominee, its receipt of money can be treated as the First Defendant’s receipt of money following Prest v Petrodel Resources Ltd [2013] UKSC 34 and its analysis of Gencor ACP Ltd v Dalby [2000] 2 BCLC 734 (which I deal with in more detail below).
I do not agree that these cases can be read as having this effect. It is one thing to say that, where a wholly owned company is used for the purposes of carrying out a fraud, the use of a company does not afford a defence to its owner for his own wrongdoing. It is another to seek to reassign who should be regarded as the legal owner of the property in question. The First Defendant was never an owner of the assets held by GBT and in the absence of an ownership interest it is difficult to see how he could be regarded as a trustee. He may have brought about a breach of trust by GBT, and may be liable for doing that, but it is not correct to regard him as the person holding assets on trust for the Claimant.
I do accept, however, that GBT, insofar as it held assets deriving from the Claimant was doing so as a bare trustee.
It is clear that in transferring funds into the control of GBT the Claimant was not intending to gift them to GBT, or to the First Defendant, and it must be the case that GBT held such funds as it received upon trust from the moment of their receipt into a solicitors’ account controlled by it.
(b) The nature of the trust
The precise legal analysis for the classification of this trust is not particularly important in this context. Given the Claimant’s lack of awareness about GBT it seems unlikely that the funds were being received by GBT under the terms of an express trust. The facts better fit an analysis that the arrangements be analysed as having given rise to a constructive trust or a resulting trust.
There are various ways in which a constructive trust could be said to have arisen. As noted by Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington L.B.C. [1996] AC 669 (HL), 715, if money is paid to someone by mistake and he knows of the mistake but retains the money, he is a constructive trustee of the money for the payer.
Similarly, if a transfer is induced by a fraudulent misrepresentation, the transferee will hold the transferred funds on trust for the transferor once the transaction is rescinded, as was found in National Crime Agency v Robb [2015] Ch 520. That case is also authority for the proposition that a constructive trust will also arise where the contract begins as a legitimate transaction but is later affected by supervening fraud.
However, the principle that a constructive trust will arise only at the point of rescission is subject to an exception where the transfer is not merely induced by fraud but is itself nothing more than an instrument of fraud, as explained in Global Currency Exchange Network Ltd v Osage 1 Ltd [2019] EWHC 1375 (Comm). In that case Andrew Henshaw QC, sitting as a deputy judge of the High Court said (at [41] onwards):
“Lewin on Trusts, para 7-031 states as an exception to this principle that the rules relating to rescission are not requisite “where a contract is not merely induced by fraudulent misrepresentation but is itself the instrument of fraud and no more than a vehicle for obtaining money by false pretences”. GCEN relies on this exception. It argues that there is a real foundation for believing that Osage was operating a Ponzi scheme. If so, then investors would still own the Funds in equity without the need to rescind their investment contracts: the contract would have been merely a dishonest device to obtain money for which “it is meaningless to impose a requirement for the fraudster to be notified as ‘rescission'”: Halley v Law Society [2003] WTLR 845, para 48. The situation would be “not simply a case of a valid contract being induced by fraud; but that the fraud so infected the whole transaction that it had no legal effect at all”, i e where “The ‘agreements’ were fictitious contracts … merely part of an elaborate charade (or mechanism) by which the loser was persuaded to part with his money”: ibid, para 45. On that basis, the position would be “akin to theft” with the result that the Funds would be immediately traceable by investors: Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, 705C–D, 715H
Given what I have found in relation to deceit, and to the non-applicability of the terms of the Azure Trust, the description given here seems highly apposite to me and I think that GBT should be regarded as having held the funds throughout as a constructive trustee under an immediately effective constructive trust.
However the effect is little different if the arrangements are instead classified as giving rise to a resulting trust.
As explained in one of the leading works on trust law, Lewin on Trusts, (20th Edition at paragraph 8-002), a resulting trust arises by operation of law if a person makes a disposition of property upon trust but no trusts are effectively declared, or if the trusts that are declared failed to exhaust the beneficial interest.
If I am wrong that the arrangements gave rise to a constructive trust, then I see a strong argument that GBT was holding the assets on a resulting trust.
Either way, GBT should be regarded as holding these assets on bare trust and should be regarded as subject to the duties of trustee.
(d) Consequences of finding a trust
GBT has, rightly, not placed any reliance on the so-called Azure Trust and has accepted that the money transferred by the Claimant to it was held on a bare trust. It follows that GBT must account for this receipt and the fruits and that the Claimant is entitled to call for the money and an account at will.
GBT accepts that, to the extent it did receive funds from the Claimant, and still holds them in a manner such that they are identifiable as the Claimant’s funds, they are held on trust for the Claimant (although it does not accept that it is still holding any such funds). However, GBT, under the stewardship of Mr Davis, has been concerned to give due consideration to any other creditors. In this, I think Mr Davis has been operating quite properly. Mr Davis and his firm can be criticised for their original involvement in allowing the First Defendant to use the firm’s client account as if it were a bank account. They will need to account for their actions in this regard to the SRA and may well suffer regulatory sanctions as a result. However, my impression has been that since taking over GBT, Mr Davis has been doing his very best to act fairly in the interests of all of those who have a claim against GBT.
Mr Dale has asserted that GBT must be regarded as acting as a bare trustee of any asset that is holding on behalf of the Claimant. I agree. If this were the only money that GBT had received that was held on trust for anybody, then it would be right that returning the money subject to the trust would take precedence over the claims of any other creditors of GBT. However, GBT denies that it is still holding any of the Claimant’s money and also it seems highly unlikely that the Claimant’s money was the only money that had been held on trust by GBT. It seems likely from what the court has seen in the various ledgers that the Claimant is not the only victim of this Ponzi-like arrangement and that others too may well claim that GBT is holding their funds on a bare trust.
The casual way in which monies were transferred from one client of GBT to another makes it extremely difficult, if not impossible, to determine how far any particular balance or asset that GBT may have held at any point should be regarded as representing funds derived from one client of GBT or another. Where funds that were held on trust become mixed with other funds held on a different trust, and the total remaining is less than the amount needed to meet claims of all beneficiaries, then the funds remaining available will need to be shared amongst all those who have a valid equitable claim.
To the extent that GBT has received the trust funds and has not accounted for them, then Mr Dale is correct in his argument that GBT cannot deny an obligation to return money because it has parted with it or mingled it, in breach of trust. However that obligation to account is an unsecured claim (except to the extent that it might be secured by a lien over the Relevant Charge, as explained below). If, as I expect will prove to be the case, GBT does not have the assets to meet all of the claims that will be made against it, it will need to go into some form of insolvency proceedings. Its liquidator or administrator will have a hugely difficult task in working out what are the valid claims made against GBT and on what trusts any assets remaining to be held by GBT are held. The Claimant’s claim will need to take its place alongside other unsecured claims – behind secured claims and after repayment of any segregated funds that are substantiated to have been held on trust for others. In anticipating this likely outcome, I can understand Mr Davis’s caution about GBT paying or transferring assets to the Claimant ahead of other potential claimants without the sanction of a court order to justify this.
(H) Tracing into the Essex Land
(a) The Claimant’s tracing claim
The Claimant claims that she should be entitled to trace her monies into the charge over the Essex Land which I have defined at paragraph 115(d) above as the “Relevant Charge”.
During the trial the court heard that the existence of this charge, and of other charges over the property, are being disputed in a separate action. I have seen the Particulars of Claim in relation to that action. This alleges further frauds on behalf of the First Defendant. It is not proper for me to comment on that action and I have been invited on behalf of the Claimant to ignore both this action, and any other purported charges over the same property for these purposes, and concentrate solely on the proposition that has been put to me that this particular charge (for whatever it is worth and on the assumption that it validly exists) is traceable as an asset of the Claimant. I am content to approach the matter on this basis.
(b) The nature of tracing
Tracing trust property or property subject to a fiduciary relationship is a well-established process which may be applied where funds or assets are transferred in breach of trust or fiduciary duty. It is based on the legal theory that the beneficial interest in the property will persist unless it is transferred to a bona fide purchaser of the legal estate without notice or until the beneficial interest is overreached. The beneficiary may claim a proprietary remedy to vindicate his beneficial interest provided that he can follow his property or trace into its proceeds.
In tracing trust money through bank accounts, the courts may encounter evidential difficulties, but this does not necessarily operate as a bar to prevent the tracing remedy being successfully pursued. This is explained in Lewin on Trusts as follows:
“Evidential difficulties may arise, however, particularly where a number of bank accounts are involved, some of which may be abroad and banking records are incomplete or not available. In such cases the court may be prepared to draw the inference that a payment into one account is attributable to a previous payment out of another account and therefore traceable where the two payments are of a similar though not identical amount and the time gap between them is reasonably short.”
One of the principal cases cited in Lewin as demonstrating the court’s willingness to draw the appropriate inferences is El Anjou v Dollar Land Holdings Plc [1993] 3 All E.R. 717, 734–736.
In El Anjou, the claimant was the victim of a fraudulent share-selling scheme perpetrated by three Canadians. The fraudulent scheme involved the transfer of money through various jurisdictions and ultimately into a London-based property development project. The first defendant in that case was not itself involved in the fraud. The claimant faced various evidential difficulties. There was no direct evidence linking the funds received into the ultimate recipient’s account to the funds the claimant had previously transferred. The claimant had transferred $1,600,000 but the funds ultimately received were only $1,541,432 and the funds were ultimately received 20 days after the claimant’s transfer.
Nonetheless, the Millett J held that the claimant could trace into the ultimate recipient’s account. He placed particular emphasis on the fact that there was “no evidence that the Canadians had any substantial funds available to them which did not represent proceeds of the fraud” (735F) and said, at 735H-736A:
“The victims of a fraud can follow their money in equity through bank accounts where it has been mixed with other moneys because equity treats the money in such accounts as charged with the repayment of their money. If the money in an account subject to such a charge is afterwards paid out of the account and into a number of different accounts, the victims can claim a similar charge over each of the recipient accounts. They are not bound to choose between them. Whatever may be the position as between the victims inter se, as against the wrongdoer his victims are not required to appropriate debits to credits in order to identify the particular account into which their money has been paid. Equity’s power to charge a mixed fund with the repayment of trust moneys (a power not shared by the common law) enables the claimants to follow the money, not because it is theirs, but because it is derived from a fund which is treated as if it were subject to a charge in their favour.”’
