Codelco v Interglobal Inc.

• Jurisdiction: Cayman Islands
• Judge: (Smellie, C.J.)
• Judgment Date: 23 May 2002
• Court: Grand Court (Cayman Islands)
• Date: 23 May 2002

Grand Court

(Smellie, C.J.)

CORPORACION NACIONAL DEL COBRE DE CHILE

and

INTERGLOBAL INCORPORATED and AVENDANO SABUGAO

G.F. Ritchie for the plaintiff;

The defendants did not appear and were not represented.

Cases cited:

(1) Aberdeen Ry. Co. v. Blaikie Bros.(1854), 2 Eq. Rep. 1281; 1 Macq. 461; [1843–60] All E.R. Rep. 249, dicta of Lord Cranworth, L.C. applied.

(2) Att.-Gen. (Hong Kong) v. Reid, [1994] 1 A.C. 324; [1994] 1 All E.R. 1, applied.

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

(4) Cayman Islands News Bureau Ltd. v. Cohen, 1988–89 CILR 196, referred to.

(5) Lister & Co. v. StubbsELR(1890), 45 Ch. D. 1; [1886–90] All E.R. Rep. 797, not followed.

(6) Norwich Pharmacal Co. v. Customs & Excise Commrs., [1974] A.C. 133; [1973] 2 All E.R. 943, referred to.

Trusts-constructive trusts-breach of fiduciary duty-recipient of bribe or secret payment made to induce breach of fiduciary duty liable as constructive trustee to person to whom duty owed-liable to account for payment or property acquired, plus interest earned or increase/decrease in value of property-if in breach of duty not to risk conflict of interest, irrelevant whether fiduciary acted in good faith or whether resulting loss

The plaintiff brought proceedings to trace and recover the proceeds of fraud held by the defendants.

The plaintiff was a Chilean state-owned copper mining, refining and selling company, which traded in metals futures. D, the head of its futures trading department was investigated for trading beyond the purposes and limits imposed on him by the company, which resulted in the company”s incurring heavy losses that he concealed. By his contract, D was expressly required to avoid engaging in conduct that might conflict with the plaintiff”s interests. During the investigation it was discovered that he had received suspicious payments from accounts held in the Cayman Islands. D failed to disclose that the accounts were in fact held in the joint names of himself and his wife, and in the name of the first defendant company, which he owned. This was later revealed under a Norwich Pharmacal order made by the Grand Court (see 1996 CILR 1).

D produced forged documents attempting to show that the payments were the proceeds of legitimate investments, but other evidence showed that they represented a share of a payment by MG Co., a metals broker, to induce D and others (including D”s brother-in-law, the second defendant) to procure the plaintiff to enter metals futures contracts with companies in the MG Co. group, or to reward him for having done so.

When prosecuted in Chile, D was convicted of fraud and presenting false documents in criminal proceedings, imprisoned and ordered to pay damages to the plaintiff.

The plaintiff brought proceedings in other jurisdictions relating to a further fraudulent scheme involving another metals brokering group, the proceeds of which were also held in the first defendant”s account here in the Cayman Islands. In England, it obtained a declaration that the balance standing to the credit of that account (less the value of the MG payment)

was held on trust for the plaintiff, and an order for the payment over of that sum. Proceedings there by the plaintiff against MG Co. and individuals employed by it were settled, and their claims to the MG payment assigned to the plaintiff. The second defendant voluntarily paid over the proceeds from his Cayman bank account to the plaintiff.

In the present proceedings the plaintiff sought the determination of certain preliminary issues, namely, whether the first defendant held the MG payment, too, on constructive trust for it, or subject to an equitable charge in its favour, or was otherwise liable to pay it over in equity or at common law.

It submitted that (a) in view of D”s contractual obligations, he owed fiduciary duties to act bona fide in the plaintiff”s interests, not to place himself in a position of potential conflict, and not to receive bribes or secret commissions or profits in the course of his dealings on its behalf; (b) the losses suffered by the plaintiff and D”s receipt of the payment, both of which D had concealed, showed that D had agreed terms unfavourable to his employer and/or received excessive or improper commissions or charges for entering futures contracts; and (c) consequently, D held the payment on trust for the plaintiff, together with any interest on it or property acquired with it.

Held, making the following ruling:

(1) The court was satisfied that D, as the plaintiff”s agent and employee, owed it fiduciary (as well as contractual) duties to act in good faith and in its best interests, and not to place himself in a position in which his personal and professional interests might conflict. He was obliged not to receive any bribe or other secret payment, or make any secret profit in the course of his dealings on behalf of the plaintiff. The court was also satisfied that D had opened bank accounts for the receipt of bribes (including the MG payment) and secret commissions, paid to him without the plaintiff”s knowledge as inducements to enter contracts on its behalf on unfavourable terms and in breach of his contractual and fiduciary duties. The plaintiff had suffered substantial losses as a result of D”s fraudulent trading (para. 25; para. 34).

(2) The plaintiff was entitled to a declaration that moneys representing the MG payment in the first defendant”s bank account (on behalf of D) were held on trust for it. D could not be permitted to profit from his wrongdoing. By receiving bribes or other unlawful payments, in equity, D had not only immediately become a debtor to the plaintiff (as the person to whom he owed the fiduciary duty) for the sums received, but also a constructive trustee of them or any property acquired with them. For these purposes, it was irrelevant whether the MG payment represented a bribe or some other form of secret profit or commission, or whether the plaintiff had suffered any loss as a result. Even if D had acted in good faith, the mere fact that the payment was unauthorized by the plaintiff and received in circumstances conflicting with D”s fiduciary duty would

render him liable to account for it. If the bribe had taken the form of property, he would have been obliged to account also for any subsequent increase in its value or to make up any shortfall if it decreased in value. The givers of the bribes could not recover them, since each had committed an offence in doing so. The balance of the first defendant”s Cayman bank account would therefore be paid to the plaintiff, together with all interest earned on it (paras. 26–28; paras. 30–33; paras. 35–39).

1 SMELLIE, C.J.: The plaintiff (‘Codelco’) brought these proceedings in December 1995 to trace and recover the proceeds of frauds allegedly perpetrated by Codelco”s former chief futures trader, Juan Pablo Davila Silva (‘Davila’), along with others, including his brother-in-law, the second defendant, Juan Marcelo Avendano Sabugao (‘Avendano’).

2 On Codelco”s ex parte application, the court, on December 19th, 1995, granted an injunction effectively freezing the funds held in certain accounts with Deutsch-Südamerikanische Bank A.G., now known as Dresdner Bank Latinamerika (‘Südamero Bank’), held in the names of Avendano and the first defendant, Interglobal Inc. (‘Interglobal’), a Cayman exempt company, owned and controlled by Davila and his wife, Ximena Antonieta Pradenas Villalobos (‘Pradenas’). Codelco contends that the accounts with Südamero Bank, described in more detail below, were used as a repository for the bribes and secret commissions which Davila and Avendano received in furtherance of the frauds.

3 Discovery proceedings were brought in Cause No. 468 of 1995, against Südamero Bank, and in Cause No. 540 of 1995, against Morgan Grenfell (C.I.) Ltd., under the principle established in Norwich

Pharmacal Co. v. Customs & Excise Commrs. (6). The discovery in those proceedings revealed evidence which served to prove the existence of two separate and distinct fraudulent schemes involving metals brokers with whom Codelco traded. The first involved companies within the Metallgesellschaft Group (‘the MG scheme’). More will be said about this scheme later. The second involved Sogemin Metals Ltd. (a company incorporated in England and Wales) and its introducing broker, Sogemin Metals Inc. (a company incorporated in the United States). These two companies are subsequently referred to, collectively, as ‘Sogemin,’ and I shall refer to that scheme as ‘the Sogemin scheme.’

4 Following the discovery of the evidence of these schemes, proceedings were brought by Codelco in various jurisdictions, including the United States, the Channel Islands and Bermuda. In particular, further proceedings were brought in England against Sogemin and against companies within the Metallgesellschaft Group.

5 Following the successful resolution of its action against Sogemin in England in 1999, Codelco pursued its claims arising from the Sogemin scheme in this action and, on December 15th, 1999...