Algosaibi Bros v Saad Invs

• Jurisdiction: Cayman Islands
• Court: Grand Court (Cayman Islands)
• Judge: (Smellie, C.J.)
• Judgment Date: 22 February 2013
• Date: 22 February 2013

AHMAD HAMAD ALGOSAIBI AND BROTHERS COMPANY

and

SAAD INVESTMENTS COMPANY LIMITED and 43 OTHERS

(Smellie, C.J.)

Grand Court, Financial Services Division

Trusts-tracing actions-breach of fiduciary duty-breach if fiduciary uses funds without authority to establish proprietary base for tracing claim even if authorized to obtain funds for alternative purpose-claimant not to differentiate between funds obtained with or without authorization

Trusts-tracing actions-general principles-involves identifying new property claimed as substitute for original-claimant required to show (a) proprietary base for claim (i.e. property belonging to it that was taken); (b) series of transactional links (i.e. property used to acquire another identifiable property); and (c) unbroken chain of substitutes-not entitled to rely on ‘swollen assets’ theory (i.e. that defendant”s assets increased by claimant”s property without identification of specific assets)

Trusts-tracing actions-pleading-claimant not required to show full series of unbroken transactional links before discovery provided it enables links to be shown-pleading not to be struck out if only discloses property of defendant subject to claim if discovery required for full particularization

Held, allowing the application in part:

(1) There was no prospect that AHAB could successfully establish a proprietary tracing claim against SIFCO 5 and the claim against it would therefore be struck out. As tracing involved the identification of a new thing as the subject-matter of the claim, on the basis that the new thing was a substitute for the original, three elements of the claim had to be established: (a) AHAB had to identify a proprietary base (i.e. what property belonging to it had been taken); (b) there should be a series of transactional links (i.e. the property must have been used to acquire other identifiable properties); and (c) the chain of substitutes must be unbroken. AHAB was only required, at the interlocutory stage, to show that there was an end product which represented its property, provided that, after discovery had been made, it would be able to establish the other requirements. AHAB had failed, however, to show that SIFCO 5 held an end product which would represent its property. The nature of SIFCO 5”s funding meant that AHAB”s tracing claim was solely relying on the idea that SIFCO 5”s assets must have been increased by virtue of the payment from SICL. As a tracing claim could not simply rely on the ‘swollen assets’ of the defendant, the claim against SIFCO 5 would be struck out (paras. 45–48; paras. 54–56; paras. 86–89; para. 95; para. 108).

(2) AHAB had shown that it had a good, arguable case to establish a proprietary basis for its claims against GT and AWAL. If AHAB could establish that the fraudster had only been entitled to borrow money in line with the new-for-old policy, any funds transferred from the Money Exchange for the purposes of funding the fraudster”s companies would have been obtained without authority. Further, it was a valid inference that a proprietary base for the claim existed on the ground that, since the fraudster was AHAB”s fiduciary, any money he had misappropriated would be subject to fiduciary duties, and there was a prima facie case that he had only been able to obtain the funds which were transferred to the defendants by virtue of this position. The defendants would not be entitled to use the rules of pleading to defeat this claim, as they had an obligation to disclose any documents which were, or had been, in their possession, custody or power and related to any matter in question. Although AHAB”s claim required better particularization in relation to the proprietary base, this did not mean that it was ‘impossible’ for the defendants to give discovery, particularly as discovery was required before AHAB would be

able to complete the tracing exercise. Moreover, the defendants” liquidators, as officers of the court in search of the true ownership and proper disposition of the assets under their control, should have considered themselves duty bound to assist the court in the proper resolution of the claim and therefore would be required to assist AHAB by making a full disclosure (para. 35; para. 112; paras. 121–122; para. 137; paras. 158–161).

(3) GT was not entitled to rely on its assertion that the property would have passed through a route which prevented tracing in order to avoid its disclosure obligations. This was particularly as GT had not undertaken any tracing exercise of its own and it would be wrong to assume, for the purposes of a strike-out application, that it was true. Further, it appeared that contributions to GT came from companies which largely derived their funding from the fraudster and there was no evidence to show that money capable of covering the contributions to GT was funded by third parties. The documents which had been removed from the jurisdiction by the fraudster still remained GT”s property and, particularly as it was the only party capable of recovering them, they would be included in GT”s obligation to obtain and disclose any documents relevant to the claim (paras. 124–126; paras. 134–138).

(4) The court was entitled to infer that, as the fraudster owned AWAL Bank in part, he would have directly funded it. AWAL Bank was also the subject of a criminal investigation for false accounting and for aiding and abetting the destruction and concealment of documents, and the court was entitled to find that it would be premature to strike out a claim that it had received money from AHAB and then passed it on to AWALCO 3. Further, although it had been shown that AWAL Bank could not have received AHAB”s money immediately prior to its contributions to AWALCO 3, it had held substantial capital before that date-which it could be inferred came from the fraudster and included property misappropriated from AHAB-which it may have later passed to AWALCO 3. AWALCO were, therefore, obliged to comply with their discovery obligations, notwithstanding that the tracing claim was only likely to succeed against AWALCO 3, particularly as AHAB might be able to succeed in a claim for knowing receipt, dishonest assistance and restitution against the other members of AWALCO (paras. 150–155).

(5) The court would not strike out the claims which relied on the letters of credit to form a proprietary basis. Although the money paid out under a letter of credit belonged to the bank, AHAB might be entitled to assert an interest in it by virtue of the fraudster”s role as a fiduciary. As he had obtained the money under the letters of credit by abuse of his position, he might be accountable for these funds under a constructive trust. This would create a proprietary interest in the property which AHAB would be entitled to trace. Further, as this was based on an institutional constructive trust due to the fiduciary”s fraud, it would not conflict with the proposition that a remedial constructive trust could not create property rights in an

insolvency to the detriment of creditors (para. 175; para. 188; paras. 197–201).

(6) AHAB was not prevented from bringing a claim against the companies even though it was no longer pursuing a claim against the fraudster. AHAB had only abandoned this claim due to a procedural limitation on the default judgment. It had therefore fully pursued the principal wrongdoer and was not in violation of the principle that it should act fairly when seeking an equitable remedy. Further, an absolute principle that a plaintiff had to pursue the wrongdoer or lose its claim against the accessory could not be accepted as it would leave no cause of action where the wrongdoer was unavailable (e.g. because he was permanently beyond the jurisdiction). The application to appeal the default judgment would also be refused. The judgment had been entered in default of defence and there was therefore no risk of conflicting decisions with the present action. The court had appropriately calculated the damages to award, based on the lower bound of damages likely to be ultimately recoverable by AHAB against the fraudster, and had been correct not to take into account a potential counterclaim that had not been made. The court had also been entitled to consider the financial records, as their validity had not actually been challenged and they had previously been presented before the court on multiple occasions. Moreover, the defendants had no legitimate interest in the default judgment and so had no standing to appeal it (paras. 204–205; para. 209).

(7) The application to appeal AHAB”s permission to amend its statement of claim would be refused. AHAB was entitled to amend its pleadings, regardless of however negligent or careless the first omission and how late the proposed amendment, provided that there would be no injustice to the defendants, and there would be no injustice if the defendants could be compensated by costs. AHAB”s amendments did not prejudice the defendants as they would be entitled to recover any consequential costs and would be entitled to make any consequential amendments to their own pleadings. There was therefore no reason why the court should have entertained an inter partes contest and it had not breached its obligations to fairness and natural justice. Further, as the defendants had not argued that they would be prejudiced by the amendments, and had actually insisted that amendments be made, they were not acting mindfully of their obligations under the overriding objectives of the court to assist it in dealing with every cause in a just, expeditious and economical way (paras. 220–226).

Cases cited:

(1) Agip (Africa) Ltd. v. Jackson, [1991] Ch. 547; [1991] 3 W.L.R. 116; [1992] 4 All E.R. 451, considered.

(2) Aktieselskabet Dansk Skibsfinansiering v. Wheelock Marden & Co. Ltd., [1994] 2 HKC 264; [1994] HKCA 289, applied.

(3) Arab Monetary Fund v. Hashim (No.2), [1990] 1 All E.R. 673...