Hampshire Cosmetic Laboratories Ltd v Mutschmann and Cayman National Bank

• Jurisdiction: Cayman Islands
• Judge: (Smellie, C.J.)
• Judgment Date: 31 January 1999
• Court: Grand Court (Cayman Islands)
• Date: 31 January 1999

Grand Court

(Smellie, C.J.)

HAMPSHIRE COSMETIC LABORATORIES LIMITED

and

MUTSCHMANN and CAYMAN NATIONAL BANK

M. Booth and D.M. Murray for the plaintiff;

J.C.B. Chapman for the first defendant.

Cases cited:

(1) Agip (Africa) Ltd. v. Jackson, [1990] Ch. 265; [1992] 4 All E.R. 385; on appeal, [1991] Ch. 547; [1992] 4 All E.R. 451, considered.

(2) Babanaft Intl. Co. S.A. v. Bassatne, [1990] Ch. 13; [1989] 1 All E.R. 433.

(3) Baden v. Société Générale pour Favoriser le Développement du Commerce et de l”Industrie en France S.A., [1993] 1 W.L.R. 509n; [1992] 4 All E.R. 161; [1983] BCLC 325.

(4) Derby & Co. Ltd. v. Weldon (No. 6), [1990] 1 W.L.R. 1139; [1990] 3 All E.R. 263, applied.

(5) Eagle Trust PLC v. S.B.C. Secs. Ltd., [1993] 1 W.L.R. 484; [1992] 4 All E.R. 488, applied.

(6) Guinness PLC v. Saunders, [1990] 2 A.C. 663; [1990] 1 All E.R. 652, applied.

(7) Hallett”s Estate, Re, Knatchbull v. HallettELR(1880), 13 Ch. D. 696.

(8) Haiti (Republic) v. Duvalier, [1990] 1 Q.B. 202; [1989] 1 All E.R. 456.

(9) Montague”s Settlement Trusts, In re, Duke of Manchester v. National Westminster Bank, [1987] Ch. 264; [1992] 4 All E.R. 308, applied.

(10) Ninemia Maritime Corp. v. Trave Schiffahrts G.m.b.H. & Co. K.G. The Niedersachsen, [1983] 1 W.L.R. 1412; [1984] 1 All E.R. 398, applied.

(11) Richmond Gate Property Co. Ltd., In re, [1965] 1 W.L.R. 335; [1964] 3 All E.R. 936, applied.

(12) Tilley”s Will Trusts, In re, Burgin v. Croad, [1967] Ch. 1179; [1967] 2 All E.R. 303, applied.

(13) Westdeutsche Landesbank Girozentrale v. Islington London Borough Council, [1996] A.C. 669; [1996] 2 All E.R. 961, applied.

Trusts-tracing actions-breach of fiduciary duty-company may trace moneys diverted by directors in breach of fiduciary duty and company articles into mixed funds in bank account or property purchased from mixed funds-claim to be satisfied from any identifiable part of funds or by charge over property acquired-recipient”s knowledge of directors” breach unnecessary since claim based on unjust enrichment

Trusts-constructive trusts-knowing receipt-recipient of moneys improperly diverted from company in breach of fiduciary duty is constructive trustee and personally liable to account for funds if knew of breach or failed to make reasonable enquiries-constructive knowledge may be imputed if fraudulent dealing obvious from circumstances of receipt

Injunctions-Mareva injunctions-worldwide injunction-worldwide injunction justified in aid of proprietary tracing claim to secure foreign assets in which diverted funds invested-defendant”s interests safeguarded by plaintiff”s undertaking not to seek enforcement abroad without leave

The first defendant applied for the discharge of a Mareva injunction.

The plaintiff, an English manufacturing and trading company, was owned equally by Y, B and D, the first defendant”s brother, and was part of a group of companies owned by B and D. The financial affairs of the group were controlled by B and D, with Y, managing director of the plaintiff, as a signatory to its accounts.

The plaintiff applied for a Mareva injunction pending proceedings to recover large sums of money which had allegedly been channelled for no bona fide commercial reason through SPIL, the first defendant”s Cayman-registered investment company, to her account with the second defendant bank, and then dissipated at the behest of D. Records which purported to explain the transfers to SPIL were later admitted to be forgeries and, following an alleged burglary at the group”s English offices, few other documents existed.

The Grand Court (Graham, J.) granted a worldwide Mareva injunction over the moneys in the Cayman bank account and the first defendant”s other assets in support of the plaintiff”s equitable tracing claim and claim for the declaration of a constructive trust.

The first defendant applied for the discharge of the injunction. D gave evidence that the moneys transferred to SPIL included, inter alia, directors” bonuses, which were invested off-shore to avoid tax exposure, and B”s repayment of a debt to the first defendant (now invested in property abroad). Y alleged, and the documentary evidence suggested, that the transfers had occurred without his knowledge or consent. According to the first defendant, her Cayman bank account contained the remainder of moneys transferred from SPIL, some of which had since been paid out on D”s directions and some invested abroad in his name, and also money of her own. Some funds were held on trust for Y.

She submitted that (a) since the sums already paid out of the Cayman account on D”s directions and held on trust for Y exceeded the amount which the plaintiff could hope to recover, it should bring its claim against the recipients of those moneys rather than herself; (b) since she had had no knowledge of whether the moneys had been transferred to SPIL in breach of fiduciary duty or in contravention of the plaintiff”s articles, having relied on D to keep proper records of transactions with the group, she was not personally liable as a constructive trustee of those moneys; (c) the plaintiff had no legitimate claim for compound interest on the sums allegedly diverted from its business; (d) Mareva relief was inappropriate, since she had co-operated fully with the court, giving discovery of her assets, and there was no real risk of their dissipation; and (e) the court should not have imposed a worldwide injunction since this might expose her to proceedings elsewhere which could affect the interests of innocent third parties.

The plaintiff submitted in reply that (a) it was entitled to trace the missing moneys, since they had been misappropriated in breach of the directors” fiduciary duties; (b) those moneys could be traced notwithstanding that they were now in a mixed fund together with the first defendant”s own moneys or invested in property abroad; (c) the first

defendant”s knowledge of the breaches of fiduciary duty was unnecessary for such a claim, since it was based on her unjust enrichment; (d) compound interest should be applied to the claim for the same reason; (e) however, since the first defendant must have been aware of the fraudulent scheme, or at least closed her eyes to it in circumstances warranting enquiries, she held the moneys on constructive trust for it; (f) moneys paid out from the company without Y”s knowledge or consent and therefore in breach of the articles were recoverable by the company from the recipient in any event; (g) there was a genuine risk that the enjoined assets could be dissipated if the injunction were lifted, since moneys paid out of the Cayman account on D”s orders had disappeared and the first defendant, who had not given full discovery of her assets, could easily transfer the remaining moneys away from the Islands; and (h) a worldwide Mareva injunction was necessary in view of the international nature of the first defendant”s assets and investments, and the undertakings and provisos which were already in place would prevent resulting litigation outside the jurisdiction without the leave of the court.

Held, refusing to discharge the injunction:

(1) The plaintiff had a good arguable case in respect of its tracing claim and its alternative claim for a declaration of a constructive trust. There was prima facie evidence that large sums of money had been diverted from its accounts for no justifiable commercial reason in breach of its directors” fiduciary duties to the company, and arguably in breach of its articles of association, since the relevant transfers had occurred without the approval of a member of the board, Y, and without proper bank mandates (page 29, line 17 – page 30, line 9).

(2) The plaintiff, if it succeeded, would be entitled to trace the moneys misappropriated by D with B”s collusion through the first defendant”s Cayman bank account, including sums which had subsequently been paid out to D and invested abroad. Its claim would be satisfied from any identifiable moneys in the account notwithstanding that there had been a mixing of funds and it would acquire a proportionate beneficial interest in any property purchased with those moneys. Since the first defendant and her company had been unjustly enriched at the plaintiff”s expense, the plaintiff would not have to show that she had known of her brother”s breach of fiduciary duty (page 30, line 30 – page 31, line 12).

(3) Furthermore, the first defendant would be personally liable to account for moneys received by her and to pay compound interest on them if it could be shown that they were received in the knowledge that they had been transferred in breach of trust or that she failed to make the reasonable enquiries that an honest person would have made as to the purpose of the transfers. The first defendant, who had at various times controlled SPIL and had retained her directorship throughout the period in question, had been at least wilfully blind to her brother”s scheme.

However, since here the ostensible reason for the transfers was merely tax avoidance, it would be inappropriate to impute constructive knowledge to her on the basis that fraudulent dealing could be inferred from the circumstances of her receipt (page 30, lines 13–26; page 31, line 15 – page 32, line 5).

(4) The continuation of the Mareva injunction was justified on the merits of the case and in view of the risk of dissipation of the first defendant”s assets. Her experience in international finance would enable her to transfer moneys out of the Islands with ease and much of the money paid out on D”s request had simply disappeared. Nor had she yet made full discovery of her other overseas assets. A worldwide injunction against her in respect of assets wherever held would continue to secure the plaintiff”s interest in foreign assets into which former SPIL funds were being invested. Such an injunction was commonly granted in aid of a tracing claim. The first...