Algosaibi Bros v Saad Invs

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

Grand Court, Financial Services Division

(Smellie, C.J.)

AHMAD HAMAD ALGOSAIBI AND BROTHERS COMPANY

and

SAAD INVESTMENTS COMPANY LIMITED and 43 OTHERS

E. McQuater, Q.C., D.Quest and G.Keightley for the plaintiff;

M. Crystal, Q.C. and Ms.C.Wilkins for the GT liquidators;

M. Smith, Q.C. and I.Lambert for the liquidators of the AWALCOs;

T. Lowe, Q.C., D.Herbert and Ms.H.Neilson for the liquidators of SIFCO 5.

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, referred to.

(4) Att.-Gen.(Hong Kong) v. Reid, [1994] 1 A.C. 324; [1993] 3 W.L.R. 1143; [1994] 1 All E.R. 1, referred to.

(5) Belmont Fin.Corp.Ltd. v. Williams Furniture Ltd., [1979] Ch. 250; [1978] 3 W.L.R. 712; [1979] 1 All E.R. 118, applied.

(6) Bishopsgate Inv. Management Ltd. v. Homan, [1995] Ch. 211; [1994] 3 W.L.R. 1270; [1995] 1 All E.R. 347; [1994] BCC 868, referred to.

(7) Boardman v. Phipps, [1967] 2 A.C. 46; [1966] 3 W.L.R. 1009; [1966] 3 All E.R. 721, followed.

(8) Borden (UK) Ltd. v. Scottish Timber Prods. Ltd., [1981] Ch. 25; [1979] 3 W.L.R. 672; [1979] 3 All E.R. 961; [1980] 1 Lloyd's Rep. 160, followed.

(9) Cayman Islands News Bureau Ltd. v. Cohen, 1988–89 CILR 542, referred to.

(10) Clarapede & Co. v. Commercial Union Assn.(1883), 32 W.R. 262, referred to.

(11) Codelco v. Interglobal Inc., 2002 CILR 298, referred to.

(12) Compagnie Fin.& Comm.du Pacifique v. Peruvian Guano Co.ELR(1882), 11 Q.B.D. 55; 52 L.J.Q.B. 181, referred to.

(13) Contadora Enterprises S.A. v. Chile Holdings (Cayman) Ltd., 1999 CILR 194, referred to.

(14) De Bussche v. AltELR(1878), 8 Ch. D. 286, referred to.

(15) F.C. Jones & Son (A Firm) v. Jones, [1997] Ch. 159; [1997] 1 W.L.R. 51; [1996] 3 W.L.R. 703; [1996] 4 All E.R. 721; [1996] BPIR 644, referred to.

(16) Fortex Group Ltd. v. MacIntosh, [1998] 3 N.Z.L.R. 171, referred to.

(17) Foskett v. McKeown, [2001] 1 A.C. 102; [2000] 2 W.L.R. 1299; [2000] 3 All E.R. 97; [2000] W.T.L.R. 667, applied.

(18) Goldcorp Exchange Ltd., In re, [1995] 1 A.C. 74; [1994] 3 W.L.R. 199; [1994] 2 All E.R. 806; [1994] 2 BCLC 578; [1994] CLC 591, referred to.

(19) Group Josi Reassur.S.A. v. Walbrook Ins.Co.Ltd., [1995] 1 W.L.R. 1017; [1994] 4 All E.R. 181; [1995] 1 Lloyd”s Rep. 153; [1994] CLC 415; on appeal, [1996] 1 W.L.R. 1152; [1996] 1 All E.R. 791; [1996] 1 Lloyd's Rep. 345; [1995] CLC 1532, distinguished.

(20) Grupo Torras S.A. v. Bank of Butterfield Intl. (Cayman) Ltd., 2000 CILR 441, applied.

(21) Hampshire Cosmetic Labs. Ltd. v. Mutschmann, 1999 CILR 21, referred to.

(22) James Roscoe (Bolton) Ltd. v. Winder, [1915] 1 Ch. 62, referred to.

(23) Kalley v. Manus, 1999 CILR 566, applied.

(24) Ketteman v. Hansel Properties Ltd., [1987] A.C. 189; [1987] 2 W.L.R. 312; [1988] 1 All E.R. 38; (1986), 36 B.L.R. 1; [1987] 1 F.T.L.R. 284, applied.

(25) Lloyds Bank PLC v. Rosset, [1991] 1 A.C. 107; [1990] 2 W.L.R. 867; [1990] 1 All E.R. 1111; [1990] 2 FLR 155, referred to.

(26) Muschinski v. DoddsUNK(1985), 160 CLR 583, referred to.

(27) O.Co. v. M.Co., [1996] 2 Lloyd”s Rep. 347, followed.

(28) OJSC Oil Co.Yugraneft v. Abramovich, [2008] EWHC 2613 (Comm), applied.

(29) Philipps v. PhilippsELR(1878), 4 Q.B.D. 127, referred to.

(30) Polly Peck Intl.PLC, No.2, Re, [1998] 3 All E.R. 812; [1998] 2 BCLC 185, distinguished.

(31) Powell v. Thompson, [1991] 1 N.Z.L.R. 579, referred to.

(32) Practice Direction (C.A.: Leave to Appeal and Skeleton Arguments), [1999] 1 W.L.R. 2; [1999] 1 All E.R. 186, applied.

(33) Shalson v. Russo, [2005] Ch. 281; [2005] 2 W.L.R. 1213; [2003] WTLR 1165; [2003] EWHC 1637 (Ch), referred to.

(34) Sinclair Invs.(UK) Ltd. v. Versailles Trade Fin. Ltd., [2012] Ch. 453; [2011] 3 W.L.R. 1153; [2011] 4 All E.R. 335; [2011] Bus. L.R. 1126; [2011] 2 BCLC 501; [2011] WTLR 1043; [2011] EWCA Civ 347, followed.

(35) Streeter v. Immigration Bd., 1999 CILR 264, referred to.

(36) Swiss Bank & Trust Corp.Ltd. v. Iorgulescu, 1994–95 CILR 149, applied.

(37) TMSF v. Wisteria Bay Ltd., 2007 CILR 310; further proceedings 2008 CILR 231, applied.

(38) TSB Private Bank Intl. S.A. v. Chabra, [1992] 1 W.L.R. 231; [1992] 2 All E.R. 245, referred to.

(39) Taylor v. Anderton, [1995] 1 W.L.R. 447; [1995] 2 All E.R. 420, applied.

(40) Universal & Surety Co.Ltd., In re, 1992–93 CILR 157, applied.

(41) Westdeutsche Landesbank Girozentrale v. Islington London Borough Council, [1996] A.C. 669; [1996] 2 W.L.R. 802; [1996] 2 All E.R. 961, referred to.

(42) Yeshiva Properties No.1 Pty. Ltd. v. MarshallUNK(2005), 219 ALR 112; [2005] NSWCA 23, distinguished.

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

The plaintiff (‘AHAB’) brought an action against the defendants in respect of fraud.

The fraudster was the director of one of AHAB”s businesses, the Money Exchange, and caused US$9.2 bn. of loss to AHAB by making unauthorized borrowings and misappropriating funds, including funds paid out

under fraudulent letters of credit. He was alleged to have used US$6.2 bn. to fund the defendant companies, now in liquidation, including SIFCO 5, the GT group and the AWALCO group (together ‘the companies’). SIFCO 5 was largely funded by external banks, but received some funding from SICL, a company controlled by the fraudster which was funded from multiple sources, including the fraudster. GT was alleged, based on documents obtained from third parties (e.g. bank statements), to have received funds misappropriated from AHAB directly from the fraudster, as a capital contribution, and from companies which the fraudster controlled. AWALCO consisted of several special purpose investment vehicles which co-mingled money from various sources, invested it and then distributed the returns to the investors. AWALCO 3 acted solely with funds from AWAL Bank, an entity which was owned in part by the fraudster, from which it was alleged to have received property misappropriated from AHAB.

It had originally been alleged that the borrowings that the fraudster had made were unauthorized, however it emerged that some had been authorized by AHAB under a ‘new-for-old’ policy-whereby the fraudster could take out a loan for the benefit of the Money Exchange so long as it replaced an existing one. AHAB obtained a judgment in default of defence against the fraudster (in proceedings reported at 2012 (1) CILR 335), but could not enforce this until it had amended its pleadings to include the new-for-old policy.

AHAB alleged that the companies had received funds misappropriated by the fraudster and brought tracing actions against them. Before disclosure had been made, the companies applied for the tracing actions to be struck out on the grounds that AHAB had not disclosed a reasonable cause of action and that the claims had not been adequately particularized.

SIFCO 5 submitted that AHAB had not shown a proprietary basis for its tracing claim as it had not identified any of SIFCO 5”s property in which AHAB had a proprietary interest. Even if AHAB were able to show which unauthorized loans had been paid to SICL, SICL had received funding from other sources which would have been adequate to cover its contributions to SIFCO 5. As AHAB could not simply rely on the fact that SIFCO 5”s assets must have been enlarged due to the receipt of AHAB”s property (the ‘swollen assets’ theory) in lieu of pointing to specific assets in which it had an interest, its claim should be struck out.

AHAB submitted in reply that the funds which came through SICL ‘must have’ been derived from the unauthorized loans by virtue of the fraudster”s ownership of SICL, and that this inference was so strong that the burden of proof had been passed. SIFCO 5 therefore had to show that the funds from SICL had not been AHAB”s property.

GT submitted that, as some of the payments to the fraudster had been authorized under the ‘new-for-old’ policy, and AHAB had not shown in its pleadings that the funds it had received from the fraudster had come from unauthorized borrowings, AHAB had not shown a proprietary basis for the claim. Further, any money which may have belonged to AHAB

would have reached GT through a route which prevented tracing (e.g. through an overdrawn bank account) and GT should not be subjected to the cost of disclosure to avoid AHAB”s obligations to particularize the claims.

AHAB submitted in reply that it had only authorized the fraudster to borrow money for the benefit of the Money Exchange. Payments away from the Money Exchange, therefore, were not authorized and AHAB still retained a proprietary claim to any money paid to the defendants. Moreover, even if AHAB were prevented from being able to trace the funds, this should be...