No proprietary claim against bribed fiduciaries: Lister trumps Reid in Court of Appeal

In Sinclair Investments v Versailles Trade Finance [2011] EWCA Civ 347 the Court of Appeal, in a hugely significant judgment, held that a principal has no proprietary claim to assets acquired by his fiduciary in breach of fiduciary duty “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” – even if the fiduciary could not have acquired the asset had he not been a fiduciary. In so doing the Court of Appeal preferred its own previous decision in Lister & Co v Stubbs (1890) LR 45 Ch D 1 to the Privy Council decision in Attorney-General for Hong Kong v Reid [1994] 1 AC 324. Reid, in which the Privy Council expressly disapproved Lister, had previously been widely viewed as the preferable authority.

Lord Neuberger, who gave the Court of Appeal’s leading judgment with which LLJ Richards and Hughes concurred, preferred what he described as “a consistent line of reasoned decisions… stretching back into the late 19th century, and one decision of the House of Lords 150 years ago, which appear to establish 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.

For the reasons I have given, previous decisions of this court establish that 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.”

In concluding that Lister was the preferable authority both as a matter of precedent and substance Lord Neuberger MR placed weight upon a variety of factors including the following:

Lord Templeman’s reasoning in Reid begged the question it sought to answer: “…Lord Templeman asserts at [1994] 1 AC 324, 331B that a bribe paid to a “false fiduciary vests in… the person to whom the duty is owed”. But that is the very issue he then purports to decide.”
There is a fundamental distinction between (i) a fiduciary enriching himself by depriving a claimant of an asset and (ii) a fiduciary enriching himself by doing a wrong to the claimant. In other words there was no pre-existing proprietary base to justify a claimant asserting property rights in the assets with which a fiduciary enriched himself.
Lord Templeman in Reid may have given insufficient weight to the potentially unfair consequences to the interests of other creditors if a principal had a proprietary claim which would rank ahead of them.
Insofar as the courts nevertheless desired, for policy reasons, to prevent a fiduciary from profiting from a breach of his fiduciary duties, a preferable way of doing this would be to extend, or adjust, the rules relating to equitable compensation rather than those relating to proprietary interests. This would not do violence to the law, as it had consistently been laid down, in relation to property rights and require little interference with authority relating to equitable compensation. More importantly it would not relegate the legitimate interests of other creditors in the same way.

The judgment– handed down on 29 March 2011 – will have important ramifications for many claims against impecunious or insolvent fiduciaries (whether company directors, trustees or other types of agent).

XXIV Old Buildings is currently in the process of compiling a full briefing note considering the Court of Appeal’s decision in more detail. If you would like to receive a copy please contact a member of the practice management team by email at clerks@xxiv.co.uk or by telephone on +44 (0)20 7691 2424.