UK: England and Wales: no proprietary claim over sale proceeds

The Court of Appeal yesterday delivered an important decision - Sinclair Investments (UK) Ltd. v Versailles Trade Finance Ltd. [2011] EWCA Civ 347 - in which it declined to follow Attorney General for Hong Kong v Reid [1993] 1 AC 324 (a decision of the Judicial Committee of the Privy Council). The court unanimously held that the trial judge (at [2010] EWHC 1614 (Ch)) was right to hold that a proprietary claim did not exist in respect of the proceeds of sale (£28.69 million) of shares purchased by a director in breach of fiduciary duty using funds entrusted to the company. The Master of the Rolls, Lord Neuberger, observed (paras. [80], [88] and [89]):

It seems to me that there is a real case for saying that the decision in Reid [1994] 1 AC 324 is unsound. In cases where a fiduciary takes for himself an asset which, if he chose to take, he was under a duty to take for the beneficiary, it is easy to see why the asset should be treated as the property of the beneficiary. However, a bribe paid to a fiduciary could not possibly be said to be an asset which the fiduciary was under a duty to take for the beneficiary. There can thus be said to be 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. Having said that, I can see a real policy reason in its favour (if equitable accounting is not available), but the fact that it may not accord with principle is obviously a good reason for not following it in preference to decisions of this court.

In my view, Lewison J [the trial judge] was right to reject [the company's] proprietary claim to the proceeds of sale of the Shares. It is true that the decisions in Reid [1994] 1 AC 324, Sugden v Crossland (1856) 2 Sm & G 192, and (at least arguably) Re Caerphilly Colliery Company (Pearson's case) (1877) LR 5 Ch D 336 go the other way. However, there is a consistent line of reasoned decisions of this court (two of which were decided within the last ten years) 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.

... 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. However, those cases also establish that, in such a case, a claimant does have a personal claim in equity to the funds. There is no case which appears to support the notion that such a personal claim entitles the claimant to claim the value of the asset (if it is greater than the amount of the funds together with interest), and there are judicial indications which tend to militate against that notion".