(1) Whether or not the moneys paid by Axbridge Pty Ltd at
the Piff’s direction to the account of McCullen and Suarez Ltd fLtd
for the
purchase of shares in Mexigulf Sealand Inc. were held on trust for the
Plaintiff by the Company?
The answer to this issue is in the affirmative. The trust
was a constructive trust. It existed between the Plai and McCullen
and
Sua Suarez Inc. both as principal and/or broker. McCullen and Suarez Ltd were, I
find, incorporated as a vehicle
to facilitate the brokerage service. Indeed
it was intended by Michael Kennedy that McCullen and Suarez Ltd should have
shares in McCullen Suarez Inc. (Exhibit 1 p. 12)
The First reason for this finding is clear. I take
judicial notice of Criminal Case No. 37 of 1994: c Prosecutor -v-
Nare Narendra Singh & Ors.
The three Defendants there were the only three
apprehended and charged in connection with the fraudulent scheme osed
and
run by Michaeichael Kennedy. They were convicted and sentenced to
imprisonment. That being so it is clear that the moneys paid
by Axbridge Pty
Ltd on behalf of the Plaintiff and received by McCullen and Suarez Ltd were
moneys obtained by fraud.
As such, I accept that equity imposes a
constructive trust on the fraudulent recipient namely McCullen and Suarez
Ltd.
As such, I further accept that those moneys are recoverable and
traceable in equity. I accept the case of West Deutsche Bank -v-
Islington London Borough Council [1996] UKHL 12; [1996] AC 669 at p. 716.c. as
persuasive legal authority for this.
The evidence in support of tinding is overwhelming
so much so that there can be no doubt that these moneys were tere trust moneys.
When Michael Kennedy instructed the Defendants by letter dated 28th June
1993 (Exhibit 1, p. 12) to form McCullen and
Suarez Ltd among other things,
he did so on the McCullen and Suarez Inc letterhead. In the centre the
company’s address
is given as “Bank of Boston Building, Suite 1703 C/ Mendez
y via Espana, Apartado 873180, Zona 7, Panama, Republic of Panama.”
From the evidence before me and there is plenty of it,
Michael Kennedy never wrote another letter on that letterhead. He wrote
again on many occasions but not on the letterhead. In that letter of 28th
June, 1993, Michael Kennedy simply signed his
name above his printed name.
He gives no indication as to his status or title or the position he held in
the company
McCullen and Suarez Inc.
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After the incorporation of McCullen and S Ltd on 2
July 1993 (Exhibit 1 p. 16) we see a further correspondence on or about 17tt
17th
August 1993 on the same letterhead of McCullen and Suarez Inc. but whose
address is no longer in Panama as previously
given but at “P. O. Box 1476,
Port Vila, Vanuatu, Tel:(678) 26048) Fax: (678) 26049.” (Exhibit 1 p. 78)
On 16th July, 1993 as seen from Exhibit 7, the following
letter was written and sent to inrs on McCullen and Suarez Irez Inc.
letterhead having its office in Port Vila:
“Dear Sirs,
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Our Firm is pleas to announce that effective July 21, 1993 we will be l be expanding our above
office as a full Service brokerage facility.
(emphasis, mine).
As of the above date I will be transferred from Panama to our new office. The investment opportunities in Centraentral and South
America
are showing investors above average returns. The Mexican Stock Exchange out
performed every exchange in the world
last year.
I look forward to being of se to you and will
carry you in the next few weeks to discuss the many excellent invesinvestment
opportunities that currently exist.
<
Yours sincerely,
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Signed: John R. Anderson
Senior Account Executive.”
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I look next at Exhibit 17 of the Plaintidocumentary
evidence. This contains original transcripts of conversations prepared foed
for
salesmen when approaching clients and investors through the telephones
installed in the office of McCullen and Suarez
Ltd in Port Vila. These were
standard transcripts. I take for example one that reads in parts as
follows:-
“ Good ............., Mr ............... allow me to
intr myself. My name is Ken Bryan, I’m the Senior Broker herr here at
McCullen and Suarez in Vanuatu, How are you today? We’re the people that
have been sending you market reports on Mexican and South American Market
Conditions
........
As Seniorer for my Firm I usually deal
only with regular clientele, .....
/p>
The name of the stock is Mexigulf Sealand ....
Nr ..............., you and I have never done
business before am I right? Response! I e! I appreciate that, but as Senior
Broker it is my job to make sure that ......
Now as your broker, I will advise you every
step of the way from the buy all the way to the sell whll when I will
liquidate your holdings
and you take your profits, less of course, our
brokerage fees at 10%, there no applicable fees on the buying end
now....
I ask only two things in return, one, I am your
B, and expert in the field, when I say sell, we sell ! Sl ! Secondly,
treat this as a trial investment .....
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O. K. Fine then Mr........, I will purchase
......... shares for your account and I will sign for them them personally, you
now own these shares, that means that regardless of any upward movement on
the stock in the interim while we are tying
up this transaction, the profits
will go directly into your account, you have my word on that, and my word is
my bound.
I always do what I say. You are now price-protected at $2.40 Pls
on ............ share of Mexigulf Sealand, as long as I have
your word that
you will look after payment immediately, Do I have your word on that Mr
............, O. K. Fine, That’s
good enough for me ...
Thanks again for the trust and confidence you are
placing in me and my company...
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Bye for now.” (eis,
mine).
The person who dealt with taintiff was one Pat
Rafferty. In examination in chief the Plaintiff told the Court thrt that from
the
document he had seen he believed that McCullen and Suarez was a broker. When
cross-examined by Mr Williams as to
who Pat Rafferty was, the Plaintiff said
he knew Pat Rafferty as Sales/Marketing Director of Mexigulf Sealand. The
Plaintiff
maintained his belief that McCullen and Suarez Ltd were acting as
broker and maintained that the purpose of his paying moneys
to it was to
purchase share the Mexigulf Sealand shares. That is consistent with the
transcripts of conversations as
set out earlier.
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Along with Exhibit 53 of the Plaintiff dotary
evidence which is a confirmation Invoice No. 23400 confirming the
Plaintifintiff’s
purchase of 50,000 shares in Mexigulf Sealand for the sum of US$
112,500.00, McCullen and Suarez Inc. issued from their Port
Vila office
actual share certificates. It is abundantly clear that the shares purchased
were shares in Mexigulf Sealand
Inc. There is suggestion that the Plaintiff
was buying McCullen and Suarez Inc. shares in the Mexigulf Sealand Inc. as
the Defendants would lead this Court to believe is not correct. The shares
were clearly shares in Mexigulf Sealand Inc. and
clearly McCullen and Suarez
Inc. representing itself in Vanuatu as McCullen and Suarez Ltd were both
brokers and principal
and I so rule. I rely on the authorities of Exparte
Cooke. In re Strachan [1876] UKLawRpCh 327; (1876) LR 4 Ch. D. 123, and Quistclose
Investments Ltd -v- Rolls Razor Ltd (1970) AC 567.
(2) Whether or not disbursements of funds was a breach of
trust?
The answer to this issue is Yes.
ass="ass="MsoNormal" style="margin-top: 0; margin-bottom: 0">
There is clear evidence that Axbridge Pty Ltd paid moneys
on behalf of the Plaintiff to the accountscCullen and Suarez Ltd.
On . On
2nd March 1994 (Exhibit 1, Vol. 2 p. 363) the Bank confirmed a transfer of
the sum of US$2250.00. to the account
of McCullen and Suarez Ltd.
This was for the purpose of purchasing 1,000 shares in
Mexigulf Sealand.
On 7th March 1994 the Bank confirmed a transfer of the
sum of US$20,250.00 by AxbridgeLtd for the credit of McCulMcCullen and
Suarez Account No. 110 62368980 51. These moneys were for the purpose of
purchasing 9,000 shares in Mexigulf Sealand.
On the same day the Defendants
wrote to the ANZ Bank instructing the Bank to debit certain sums and to
effect certain
transfers to 13 banks in New Zealand totalling the sum of
NZ$8,797.43. These were transferred out of the Australian Dollar
Account of
McCullen and Suarez.
From the US Dollar Account of McCullen and Suarez two
transfers were effected, one to LlBank in London for the sum sum of
US$400.00 and the other to Advance Bank in Sydney, Australia for the sum of
US$1,080.00. That is a total of US$1,480.00.
That is US$1,480.00 of the
Plaintiff’s moneys paid out on the same day it was paid into accounts of two
persons for unspecified
purposes. But certainly this Court cannot assume
that these transfers were for the purchasing of shares in Mexigulf Sealand.
These transfers of funds were clearly outside the purpose for which the
funds were paid. This is sufficient to hold that
McCullen and Suarez were in
breach of trust and so are the Defendants. But I take a look at the last
payment by Axbridge
on behalf of the Plaintiff. On 28th March, 1994 the sum
of US$112,599.00 was transferred and credited to the US Dollar Account
of
McCullen and Suarez. The Bank advised the company on the same day, (Exhibit
1, Vol. 2 p. 431). On the same day, Michael
Kennedy instructs Helen Thomson
(Exhibit 1, Vol. 2 p. 432) to pay Pars Printing the sum of VT132.000 and
Sharper Image
the sum of VT100.000 by cheques. Secondly he instructed that a
bank draft in favour of Telecom New Zealand be effected in the
sum of
NZ$3,355.49. And thirdly Michael Kennedy gave instructions for cash at
VT559.216. It is to be noted that the sum
of NZ$3,355.49 were eventually
debited from the Australian Dollar Account of McCullen and Suarez but I see
that three
days later on 31st March 1994 the Defendants instructed the Bank
to arrange telegraphic transfers to three banks in Canada
where C$3,000 were
transferred; in London where US$3,200.00 were transferred and in the Isle of
Man to Grandale Securities
where the sum of US$80,000.00 were transferred.
These certainly were not for purchases of shares in Mexigulf Sealand.
Further it can be seen from the Statement of Client Funds
(Exhibit 1, Vpp. 505-506) that on 30th March 1994 the sum of
US$7,US$7,000.00 was paid to Michael Kennedy from the US Dollar Account of
McCullen and Suarez Ltd and similarly on the same
date Michael Kennedy
received US$3,000.00 which was equivalent to VT353.250. He further received
US$837.00 on 31st March
1994. Of the US$112,500.00 paid in by the Plaintiff
on 28th March 1994 only a balance of US$16,959.23 were left as at 31st
March
1994. Clearly those funds were received for the purchase of 50,000 shares in
Mexigulf Sealand. Clearly the way
these moneys were distributed by McCullen
and Suarez Ltd on the instructions of Michael Kennedy through the Defendants
were not for the expressed purpose of purchasing shares in Mexigulf Sealand.
As such, I hold and now rule that McCullen and
Suarez Ltd and the Defendants
for that matter, and for reasons which will follow, were and are in breach
of trust.
come now to the third issu issue: Whether or not
the Defendants assisted in the breach of trust?
There can be no doubt from the facts as shown in the
evideefore the Court that the Defendants assisted in the settingtting up
of
the fraudulent scheme of Michael Kennedy: thus making them liable in law for
assisting in breach of trust. For instances
the Defendants incorporated
McCullen and Suarez as an International Company on 2 July, 1993 (Exhibit 1
pp. 16-19). They
also incorporated Consolidated Services Ltd as a local
company on 12 January 1994 and further the incorporation of Buchanan
Weir
Ltd as an International Company on 4th March 1994. (Exhibit 1 pp. 271 et seg,
372 et seg.) The Defendants opened
bank accounts for those companies
(Exhibit 1 p. 20). The Defendants were appointed as directors by their
nominee companies
and shareholders of McCullen and Suarez Ltd, Consolidated
Services Ltd and Buchanan Weir Ltd. (Exhibit 1 pp. 19; 272, 379).
The
Defendants became signatories to bank accounts of these companies (Exhibit 1
p. 21). The Defendants left the management
of the affairs of the companies
to Michael Kennedy notwithstanding that the office of director was assumed
by the nominee
companies. (Exhibit 1 p. 24).
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I accept the submission by Mr White thate was
nothing by the nominee companies as directors pursuant to Rule 33 (3) of the
he
International Companies (Model Constitution) Order No. 13 of 1993 to entrust
and confer upon Michael Kennedy the
powers exercisable by the directors.
From the evidence it is not clear what position Michael Kennedy held in
those companies.
He never revealed himself (true identity) and his position
(if any at all).
The Defendants received cheques and banked them. The
Defendants gave instructions to the ANZ Bank for the withdrawal of moneys
out of the bank accounts.
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(Mr Sinclair - Exhibit 1 pp. 35, 39, 50, 51, 52, 58, 66,
74, 80, 83, 184, 187, 236, 244, 246, 253-254, 255, 259, 279, 283, 284,
300,
301, 304, Vol. 2 Exhibit 1 pp. 315, 316, 343, 360-362, 463, 471, 473, 478,
479, 480 and 482).
(For Mrett - Exhibit 1 pp. 80, 83, 99-101, 129, 131,
164, 191, 195-196, 197, 198, 226, 234, 234, 263, 271, and Vol. 2 Exhibit
1 pp.
392, 393 and 401-404)
(For Tracy Sprott - Vol. 2 Exhibit 1 pp. 413c, 443-444,
446-447, 449-450)
(For Helen Thomson Vol. 2 “ “ 41span>
(For Jonathan Law “ “ “ 443-444, 446-447, 449-450).
The Defendants installed telephone and fax lines and post
office box for McCullen and Suarez Ltd (Exhibit 1 pp. 44, 85, 125).
The
Defendants negotiated with the ANZ Bank for arrangements to enable
withdrawal of funds from the accounts of McCullen
and Suarez Ltd before
cheques or transfers of funds had been cancelled (Exhibit 1 pp. 133, 157,
170, 171, 183, 185).
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The Defendants caused to be installed tele and fax
lines for Consolidated Services Ltd and the arrangements of office
acc accommodation for the company (Exhibit 1 pp. 292, 317 and 358). Further the
Defendants gave instructions for the disbursements
of moneys from the US
Dollar Account after receipts of funds from Axbridge Pty Ltd on behalf of
the Plaintiff. The particulars
of these are as follows:-
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(i) On 7th March 1994payments were made to Lloyds
Bank in London to the account of one J. N. G. Stidolph flph for the sum of
US$400.00, and the other to Advance Bank in Sydney to the account of one B.
G. Carlson for the sum of US$1,080.00. (Exhibit
1 p. 386). These
disbursements occurred on the same day on which ANZ Bank confirmed transfer
from Axbridge Pty Ltd the
sum of US$20,250.00 to the US Dollar Account of
McCullen and Suarez. (Exhibit 1 p. 381).
(ii) Four days later on 11th March, 1994 the Defendants
causede debited the sums of US$900.00 from the US Dollar Account ount
of
McCullen and Suarez Ltd and transferred to Lloyds Bank in London for J. N.
G. Stidolph. Further the sum of US$25,000.00
were debited and transferred to
Lloyds Bank PLC in the Isle of Man for Grandale Securities. And finally the
sum of $2,500.00
were debited and transferred to the account of one James
Hastie at Barnett Bank in Miami, Florida. (Exhibit 1 p. 393).
(iii) Then on 14th March 1994 the Defendants caused a
debit and a transfethe sum of US$3,000.00 to t to the account of Marlin
Travel at the Canadian Imperial Bank of Canada. (Exhibit 1 p. 401).
(iv) On 18th March 1994Defendants caused to be
debited and transferred the sums of US$5,000.00 to Lloyds Bans Bank PLC at the
Isle of Man for the account of Grandate Securities (Exhibit 1 p. 413c)
(v) And on 24th March 1994 the Defendants caused to be
debited and transferred the sum of US$.00 to Barclays Bank in Lonn London
for the account of Abacus Travel (Exhibit 1 p. 418).
(vi) Finally on 31st March 1994 the Defendants caused to
debited and transferred the sums of CAN$3,000.00 to the Cane Canadian
Imperial
Bank of Commerce for one Alex Pancer; US$3,200 to Lloyds Bank PLC, London
for one J. N. G. Stidoph, and US$80,000.00
to Lloyds Bank PLC in the Isle of
Man for Grandale Securities. (Exhibit 1 p. 443).
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The Defendants admit that they made the payments out of
the US Dollar Account of McCullen and Suarez Ltd which are shown on
the US
Dollar Current Account Statement of Funds for the period commencing 1st
January 1994 (Exhibit 1 pp. 505-506).
The Defendants say that they did all this on the
rity of Michael Kennedy (Exhibit 3, Interrogatory 12).
From the foregoing facts proved by evidence, and the
Defendants own admission, I am satisfied that the Defendantisted in the
frauduleudulent scheme and therefore were in breach of trust and I so rule.
But that is not in law sufficient to make the Defendants
liable. The Plaintif to prove that the Defendants were acting
dishonestlyestly in their assistance.
(4) This brings me to the fourth issue: Whether or
not the Defendants were dishoin assisting in the breach each of trust or
fiduciary obligation?
(A) The Law
&GB">
As long ago as 1844 Lord Langdale M.R., in AG. -v-
Corporation of Leicester (1844) 7 Bear. 176, 179 stated:
“It cannot be disputedthe agent of
a trustee, whether a corporate body or not, knowing ththat a breach of
trust is being committed, interferes and assists in that breach of
trust, he is personally answerable, although he may be employed
as the agent of the person who directs him to commit that breach of trust.”
(emphasis, mine)
It has been established that the Defendants were, thr
their nominee companies, directors of the companies, McCullen and Suarez
Ltd, Ctd, Consolidated Services Ltd and Buchanan Weir Ltd. (i) The first question
of law to be asked is how far are the
Defendants as directors trustees of
their companies’ funds?
In Russell -v- Wakefield Works Co. (1875), L.
R. [1875] UKLawRpEq 95; 20 Eq. 474 at p. 479 Sir George Jessel, M.R. said this:
“In this Court the money of the company is a trust
because it is applicable only to the special purposes of t of the company,
in the hands of the agents of the company and it is in that sense a trust
fund applicable by them to those special purposes, and a person taking
it from them with notice that it is being applied to other purposes cannot
in this Court say that
he is not a constructive trustee.” (emphasis
added)
It is established that the funds paid in by Axbridge Pty
Ltd on behalf of the Plaintiff were specifically for the purposes of
purchasing shares in Mexigulf Sealand. And it is established that the
Defendants, without notice and authority to and
from the Plaintiff assisted
in disbursing those moneys or part thereof to and for purposes other
than that for which the funds were intended for.
In Re Lands Allotment Co.
“Although directors are not properly speaking
trustees, yet they have always been cored and treated as trusteesstees of
money which comes to their hands or which is actually under
their control,
and ever since joint stock companies were invented directors have been
held liable to make good moneys which they have misapplied upon the
same footing as if they were trustees...” (emphasis added).
It is established that the Defendants received moneys and
were directly ntrol of them, although they were acting on instructions
ns
of Michael Kennedy whose true and real identity the Defendants did not know
and did not enquire into at the relevant
time.
In Selangor United Rubber Estates Ltd -v- Craddock (a
bankrupt) and Others (No. 3) [1968] 2 All 073 at p. 1091 Ungoed-ThomaThomas
J. ruling on this very issue and considering and applying the principles
laid down in the above cases said:
“... It is clear and not disputed that they
(Defendants) owe a fiduciary duty to the company to apply its
assets only for the purpose of the company and are therefore liable
for breach of that duty ...” (emphasis added).
On those authorities Ungoedas J. therefore concluded
that in his view general a credit in a company’s bank accouaccount which
the
directors were authorised to operate were moneys of the company under the
control of those directors and were held
by them for the company in
accordance with its purposes.
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(ii) The second question of law to be asked is how far a
director who acts on the direction of third party bound by the state
of mind
of that third party?
Ungoed-Thomas J., also considered this question in the
Selangor Case (supra) in which he referred to the statement of Mellish,
L. J., in Gray -v- Lewis [1873] UKLawRpCh 99; (1873) 8 Ch. App. 1035 at p. 1056 who said:
“If a person allows himself to be the mere nominee of,
and acts for an person, he must be bound bund by the notice which that
other
person for whom he acts had of the nature of the transaction.”
The statement was said with reference to a ulent and
illegal transaction. The nominees in that case were not directors but
purchasers of shares. In this case the nominees were both directors and
purchasers of shares and that has been established
by evidence before the
Court. Ungoed-Thomas J., concluded on this therefore that in his view a
director acting in a transaction
on the direction of a stranger is fixed
with that stranger’s knowledge of the nature of the transaction.
It is established that the Defendants were directors of
the three companies, Men and Suarez Ltd, Consolidated Services Ltd and
Buch Buchanan Weir Ltd through their nominee companies, namely Global Nominees
Ltd and Credit Facilities Ltd. It is established
that the Defendants acted
in accordance with instructions of Michael Kennedy the beneficial owner of
the three companies.
(iii) The third issue of law to be asked is whether a
stranger (Defendant) is liable as constructive tru
There are two very different kinds of so-ca
constructive trustees. We will be concerned with the second category: those
who whom a Court of equity will treat as trustees by reason of their action, of
which complaint is made.
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One of the early authority on this issue is the case of
Barnes -v- Addy [1874] UKLawRpCh 20; (1874) 9 Ch. App. 244that case Barnes was
husband of the life tenant of the trust, was appointed sole trustee by Addy,
the sole surviving
trustee, and subsequently misappropriated the trust fund.
The question before the Court of Appeal was whether the solicitors
engaged
in respect of the appointment were liable to make good the amount
misappropriated. Lord Selbourne L.C., referred
to both categories of
constructive trustees at pp. 251-252 where he said:
“That responsibility (that is the
responsibilitexpress trustees) may no doubt be extended in equity to y to
others, if they are found either making themselves trustees de son tort,
or actually participating in any fraudulent conduct of the trustee to the
injury of the cestui que trust. But on the other hand,
strangers are not to
be made constructive trustees merely because they act as the agents of
trustees in transacting within their legal powers, transactions, perhaps
of which a Court of equity may disapprove, unless those agents receive
and become chargeable with some part of the trust property, or unless they
assist with knowledge
I an dishonest and fraudulent design on the part of
the trustee.” (emphasis added).
In this passage Lord Selbourne, L.C., is referring to the
second category as “actually participating in any frauduraudulent conduct of
the trustee to the injury of the cestui que trust” and as those who “assist
in a dishonest and fraudulent design on the part of the trustees.”
Lord Esher, M. R., virtually repeated the same thing in
oar -v- Ashwell [1891-94] All ER at p. 994 where he refe referred to
Barnes -v- Addy (Supra):
“There is another recognised state of citances
in which a person to nominated a trustee may bmay be bound to liability as if
he
were a nominated trustee, namely, where he has knowingly assisted a
nominated trustee in a fraudulent and dishonest disposition of the trust
property.” (emphasis added)
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It is the formulation in Barnes -v Addy (Supra)
that forms the basis of the Plaintiff’s claim that the Defendants are liable
as contractive trustees. There are
three elements: (1) assistance by the
stranger, (2) with knowledge, (3) in a dishonest and fraudulent design on
the part
of the trustee. As appears from the passage of Lord Selbourne L.C.,
and Lord Esher, M. R. above, an agent acting for as trustee
is a stranger
within its meaning in those passages, so that he is not liable as a
constructive trustee within the second
category, unless he too assists with
knowledge in a dishonest and fraudulent design on the part of the trustee.
What knowledge therefore is required from the Defendants
to make them fall within the second category?
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The knowledge required to hold the Defendants liable as
constructrustees in a dishonest and fraudulent design, is knowledge
edge of
circumstances which would indicate to an honest, reasonable man that such a
design was being committed or would
put him on enquiry, which the stranger
(Defendants) failed to make whether it was being committed. This was so held
in
Bodenham -v- Hoskins [1843-60] All ER Rep. 692 and which was
referred to in Sheilds -v- Bank of Ireland (Governor & Co.) [1901] I.
I. R. 222 at p. 228 where Sir Richard in Kindersley, V. C., said:
“I am constrained to arrive at the conclusion that the
bankers, although I must exonerate them from any deliberate intention
to
commit a robbery or commit a fraud, still were not only parties to the
simple fact of the transfer, but were parties to the fraud in question,
in this sense, that they were aware of the circumstances which made it a
fraud in Parkes, to make the transfer to his private account, and
being cognisant of that, and having been cognisant of it before the time
when the account was opened under the name
of ‘The Rother was Account’, and
being cognisant of it throughout, they concur in a transaction, the effect
of which
is, that for their own pecuniary benefit and act is done by Parkes
which is a fraud upon the plaintiff. Now, according to the plain
principles of a Court of equity such an act can never be sustained ...”
(emphasis added).
In Selangor United Rubber -v- Craddock (supra) at
p. 1097 Ungoed-Thomas J., said this:
“It seems to me imperative asp and keep
constantly in mind that the second category of constructive trustee is
is
nothing
more than a formula for equitable relief. The Court of equity says
that the defendant shall be liable in equity, as though
he were a trustee.
He is made liable in equity as trustee by the imposition or construction of
the court of equity. This
is done because in accordance with equitable
principles applied by the court of equity it is equitable that he should be
held liable as though he were a trustee. Trusteeship and constructive
trusteeship are equitable conceptions. The court
of equity is not
administering criminal law but equity. It is equity and not criminal law or
event tort or contract that
governs whether a person shall be liable in
equity as constructive trustee. So whether a mis-application of a company’s
funds for the purchase of its shares occasions the imposition of liability
as constructive trustee, depends not on the statutory
provision making it a
criminal offence or on statute or criminal law, or common law conceptions,
but on equity and its
principles.”
He was applying the principle as Sir Richard Kindersley,
V.C., stated in Shields -v- Bank of Ireland (supra) when he said that
the act in respect of which relief is given is an act to be judged according
to “the plain principles
of a court of equity”.
It has been submitted to me by Mr Williams that equit
not applicable to this case. I reject that submission outright. Article
95
(2) (2) states:
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“Until otherwise provided by Parliament the Bri
and French laws in force or applied in Vanuatu immedimmediately before the Day
of
Independence shall on and after that day continue to apply to extent that
they are not expressly revoked or incompatible
with the independent status
of Vanuatu and wherever possible taking due account of custom.”
Section 15 (1) of the Western Pacific (Courts) Order in
Council 1961 (as amended) the “British” laws ded:
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“15(1) Subject t provisions of this Order and any
rules made thereunder and to any law for the time bime being ion force in any
territory, the civil and criminal jurisdiction of the High Court shall, so
far as the circumstances admit, be exercised
upon the general principles of
and in conformity with:-
(a) The statutes of general application in England on
the 1st day of January 197span>
(b) The ance of English Common Law and
doctrines of equity, ... Provided that the said said common law,
doctrines of equity and statutes of general application shall be in
force so far only as the circumstances of any particular territory and into
inhabitants ... permit and subject
to such qualifications as local
circumstances render necessary.” (emphasis
added).
This Order was revoked in 1975 but Subsections (1) and
(3) of Section 15 were specifically retained and suently further
amendedended by Section 3 of the High Court of the New Hebrides Regulation 1976.
This has not been expressly revoked and
therefore by virtue of Article 95(2)
is applicable to this case.
I return now to the common law and equitable principles
of this issue of constructrusteeship. In an early case of Berwick -
upon - on - Tweed Corporation -v- Murray (1856) referred to by Ungoed-Thomas
J., in the Selangor United Rubber Case (supra) at p. 1100 where he
quotes Lord Cranworth as saying in reference to the sum received:
“received from David by William under circumstances
which have satisfied me that he knew it was money of the corporation.”
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Ungoed-Thomas J., said this:
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“Clearly what he meant ‘knew’ in that pe was
treated by equity as ‘having notice of the trut truth’, or knowing because of his
failure to make enquiry in circumstances in which “an honest man” would have
done so. “An honest man” is obviously the
ordinary reasonable or honest
person. There the test is an objective test.”
He therefore concluded with regard to the element of
knowledge that the knowledge required to hold a stranger liable as
constructive trustee in a dishonest and fraudulent design, is knowledge
which would indicate to an honest, reasonable man
such a design was being
committed or would put him on enquiry, which the stranger failed to make,
whether it was being
committed.
As to the third element: ‘dishonest and fraudulent
design’ Ungoed-Thomas J., merely held that “for reasons already given,
that this must be understood in accordance with equitable principles for
equitable relief.”
These elements were considered and applied by Miller, J.
in Agip (Africa) Ltd -v- on & Ors [1990] Ch.] Ch. 265 at p. 292 where
he said:
“A stranger to the trust will be liable to account
as a constructive trustee knowingly assists in the fthe furtherance of a
fraudulent and dishonest breach of trust. It is not necessary that the
party sought to be made liable as a constructive trustee should have
received any part of
the trust property, but the breach of trust must
have been fraudulent.” (emphasis added)
<
Here evidence show that the Defendants also benefited
from the fraudulent trust. On 31st Ju93 Vitco issued a fee memormemorandum
to McCullen and Suarez Ltd. for the sum of US$3,052.00 (Exhibit 1 pp.
85-86). The Defendants were paid that sum on 26th
August 1993 as indicated
in the statement of Client Fund (Exhibit 1 p. 167). On 22 September 1993 the
Defendants received
US$1,499(sic) (Exhibit 1 p. 210). The Defendants issued
a further Fee Memorandum on 30th September 1993 (Exhibit 1 p. 212)
for
US$3,690.00 which they confirmed receipt of by letter dated 9th November
1993 (Exhibit 1 p. 220). They also confirmed
receipt of the earlier sum of
US$1,469.00. On 23rd December 1993 the Defendants were paid US$2,311.00 for
fees for services
rendered. (Exhibit 1 p. 497). On 28th January 1994 the
Defendants received the sum of US$1,308.00 in fees from McCullen and
Suarez
Ltd (Exhibit 1 p. 505). On 2 March 1994 the Defendants received the sum of
US$1,456.00 in fees from McCullen and
Suarez Ltd (Exhibit 1 p. 505). On 7th
April 1994 the Defendants were paid the sum of US$1,984.00 in fees by the
company.
These are only some examples of payments which the Defendants
received directly from the moneys which are deemed trust property.
<
That takes or extends the liability of the Defendants
much further than the principle stateMillet J., in Agip’s Cass Case
in that the Defendants in the present case did not only knowingly assist in
the dishonest breach of trust but they also
received part of the trust
property.
In New Zealand in 1991 Thomas J., in Powell -v-
Thompson [1991] 1 N.Z.L.R. 597 at p. 613 observed as follows:
“Once a breach of trust has been committed, the
commission of which has involved a third party, the question which arises is
one between the beneficiary and that third party. If the third party’s
conduct has been unconscionable, then irrespective
of the degree of
impropriety in the trustee’s conduct, the third party is liable to be held
accountable to the beneficiary
as if he or she were a trustee.”
The term ‘unconscionable’ means no more than dishonesty.
Finally in 1995 in Royal Brune Airlines -v- Philip Tan
Kok Ming [1995]The Privy Council in allowing the appeal held “that
where a third party dishonestly assisted a trustee to commit a breach of
trust or procured him to do so, the
third party would be liable to the
beneficiary for the loss occasioned by the breach of trust, even though the
third
party had received no trust property and irrespective of whether the
trustee had been dishonest or fraudulent; that in the
context of such
accessory liability honesty was to be judged objectively and acting
dishonestly, or with a lack of probity,
which was synonymous, meant not
acting as an honest person would act in the circumstances ...”.
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That to me is a fair summary of all that has been said in
respect of these issues starting from the earlier cases to this. I
was not
referred to any later cases than the Royal Brune Airlines’ case and I
accept therefore that these are settled principles of law which I am
persuaded to apply to the circumstances
of this present case.
A Further Question.
Could the Defendants have known as reasonable men in the
circumstances that they were particip in a fraudulent scheme? The?
The Court
draws the inference that they knew and turned a blind eye to it. I draw this
inference from the following facts
as seen from the documentary evidence:
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(a) First Contacts.
nbsp;
(i) One of the first contacts made by the Second
Defendant with Michael Kennedy was by telephone on 26 May 1993 which was
subsequently followed by a fax message confirming same (Exhibit 1 p. 1).
<
Michael Kennedy responded to that fax message on 28th May
1993 two days later. His letter i typed and it is not writteritten
on
letterhead of McCullen and Suarez Inc. the company he purportedly
represented or was holding himself out to represent.
In that letter Michael
Kennedy thanked Mr Sinclair for his quick response and after providing
information regarding McCullen
and Suarez Inc. and its domicile being in
Panama Michael Kennedy said this: “The company is in good standing in
Panama and has an operating office that is managed by a British National.”
A reasonable and honest man in the circumstances wo question why if a company is in good standing that a letter purportedly
written tten on its behalf is not typed and is not written on proper letterhead.
Thirdly a reasonable and honest man in
the circumstances would have
questioned the position of this man Michael Kennedy in the company. His
position was never
indicated in any correspondence that he faxed to the
Defendants.
(ii) The second contact which is in evidence was made by
telephone on 28th June 1993 which was later confirmed by formal letter
addressed to Mr Sinclair and despatched by courier. The Defendants
acknowledged receipt on 2nd July 1993. Michael Kennedy
wrote on official
letterhead of the company McCullen and Suarez Inc. As I have already alluded
to earlier in this Judgment
this is the only correspondence Michael Kennedy
has put on official letterhead of the company. He does not indicate his
position in the company. On the top left hand corner it is stated:
“Founded Scotland 1891, Founded Chile 1898”
And on the top right hand corner it is stated:
&nB">
“Mineral and Land Agents.” (Exhibit 1 p. 12)
A reasonable and honest man in the circumstances would
have kfrom this that McCullen and Suarez Inc. was holding out itst itself
as
land agent and therefore would have known that any moneys received by the
company in relation to the purchase of shares
in Mexigulf Sealand would be
moneys held on trust for that purpose by the company.
(iii) Vitco Australian Dollar Client Trust Account.
On 2nd July 1993 the Defendants banked the sum of
A$5,947.95 into the Vitco Australian Dollient Trust Account No.
.
110-5186293-052 at the ANZ Bank, Port Vila. (Exhibit 1 p. 28). This was done
by the Defendants on the instructions of Michael
Kennedy (Exhibit 1 pp.
13-15, 20-22, 26-27). On 5th July 1993 Mr Barrett wrote to the Manager of
ANZ Bank instructing
the Bank to debit the Vitco Australian Dollar Trust
Account with A$5,947.95 and to place same on a deposit to roll over on
19th
July 1993 and then thereafter on a monthly deposit in the name of Vitco/McCullen
and Suarez. (Exhibit 1 p. 29).
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On the same day Mr Barrett wrote again to the Bank
instructing that the deposit be closed and a credit to the Vitco Client
Trust Account be made for the sum of A$5,947.95. (Exhibit 1 p. 30).
On the same day 5th July 1993, Michael Kennedy instructed
Mr Sinclair to effect one transfer of A$3,500. ANZ Bank in Sydney
to
the Account of one S. A. & F. B. Stevens. Mr Sinclair acted on that
instruction on 6th July 1993. (Exhibit
1 pp. 31-32).
These moneys would to a reasonable and honest man in the
circumstances were trust moneys as is clear from the name used in the
Account. Yet one day after the moneys were paid in, the Defendants turning a
blind eye on this fact caused to and procured
the transfer of A$3,500.00 of
that fund back to Australia. Clearly it was not for purchase of shares in
Mexigulf Sealand.
Rather it was paid into a joint account of presumably a
couple. Those moneys were held by Vitco in trust not for McCullen and
Suarez
Inc. or Michael Kennedy as the name of the Account would lead us to believe.
Rather it was held by Vitco in trust
for those who paid the moneys in as
beneficiaries. The Defendants could have known that and I say that they knew
and
yet turned a blind eye to it as reasonable men in the circumstances.
(iv) The Newsletters.
These were admitted and tendered as evidence by the
Plaintiff as Exhibit 7. The First Defendant admits in hisers to
interrogatorietories
admitted as Exhibit D3 stating in answer to Interrogatory 10
that he saw extract of a newsletter which briefly described shares
in
Mexigulf Sealand and quoted price for those shares which was recommended as
“good buy”. He states in answer to Interrogatory
11 that he was shown the
newsletters by either Mr Sinclair, Second Defendant or Helen Thomson. On 15
March, 1994 Mr Barrett
wrote to Coopers & Lybrand in New Zealand stating as
follows in paragraph 3, first sentence:
“Ultimately, the product being sold is, we believe,
offshore real estate or share in offshore companies which own real estate
...” (Exhibit 1, Vol. 2 p. 405)
From this I am satisfied that the Defendants knew that
shares were being sold and therefore most of the moneys being paid in
during
the relevant period between 28th June 1993 and 30th April 1994 were moneys
held in trust for that purpose. Having
known this fact they turned a blind
eye and disbursed moneys in breach of trust.
(v) Enquiry.
/p>
The Defendants from their evidence did not know the true
identity of Michael Kennedy and the full natf his companies’
acti activities. They did not enquire into all these matters claiming a defence
of confidentiality under the provisions of
the Companies Act [CAP. 191] and
the International Companies Act No. 32 of 1992. That defence is not
sustainable. In fact in my considered view I believe that Parliament
legislated on
confidentiality laws to ensure that fraudsters should be
deterred from achieving their fraudulent schemes and intentions by
placing
on those charged with the implementation of the provisions of those
legislations and to satisfying themselves
fully that such a one is not a
fraudster before assisting him. Where it is shown that they have failed to
make due and
proper enquiries as they are expected to so as reasonable men
in the circumstances, as here, then it cannot be a defence to
them that
their omission was to preserve confidentiality. I therefore reject the
Defendants submissions made in that
regard.
(vi) Immediate Clearance of Funds.
<
p class="MsoNoMsoNormal" style="margin-top: 0; margin-bottom: 0">
There is abundant evidence showing that Michael Kennedy
wanted astructed the Defendants to effect transfers of funds
immediately after funds were paid in. For instance on 3rd August 1993 a
total of A$8,961.11 were paid into the Australian
Dollar Account of McCullen
and Suarez Ltd which were funds from:
Carlson - $4,000.00
: 0">
Brunton - $ 2,544.34
Faulkner - $ 508.86
Macquarie Investment Management Ltd - $ 1,908.25
------------
$ 8,961.11
On the same day Mr Sinclair instructed the ANZ Bo
effect transfer of $8,000.00 to ANZ Bank in Sydney for collection by One
Penu Penutt Paea. (Exhibit 1 pp. 61-66 inclusive and p. 493).
This is just one of the many nces and yet it did not
cause concern or suspicion to the Defendants that moneys were were being
misapplied or misappropriated. They were simply indifferent to it all. An
honest and reasonable man in the position of
the Defendants would have had
suspicions and asked why this was happening. Here the Defendants were simply
indifferent
to it all. This explains why the Defendants chose not to call
the First Defendant as a witness and other employees of the Defendants
Partnership Firm including Mr Jonathan Law, Janet Feast and others. I accept
Mr. White’s submission that to do so would
have seriously affected the
Defendant’s case.
Therefore for the foregoing reasons and other admitted
evidence on record which is overwhelming, I conclude that the Defendants
knew that they were participating in a fraudulent scheme and I so rule.
5. Capital Gains Tax
This is not an issue that this Court should be concerned
with. It is a matter for the Australian Courts.
6. Whether or not the Plaintiff contributed to his ow loss?
<0">
/p>
This is not a relevant issue for consideration having
found that the Defendants are liable as constructive trustees for
dishonestly assisting a breach of trust.
7. Liability
I come now to the question of lity. The Defendants
are partners in a Partnership Firm. The relevant law is the Part Partnership
Act
[CAP. 92].
Section 9 reads:
“Every partner in a firm is liable with the other
partner all debts and obligationstions of the firm incurred while he is a
partner, and after his death his estate is also severally liable in a due
course of administration for such debts and
obligations, so far as they
remain unsatisfied, but subject to the prior payment of his separate debts.”
Section 10 reads:
&
“Where by any wrongful act or omission of any partner
acting in the ordinary course of the business of the firm, or with authority
of his co-partners, loss or injury is caused to any person not being a
partner in the firm, or any penalty is incurred
the firm is liable therefore
to the same extent as the partner so acting or omitting to act.”
Section 12 reads:
“Every partners is liable jointly with his co-partners
also severally or everything for which the firm while he i he is a partner
therein becomes liable under either Section 10 and 11.”
Section 11 reads:
“In the following cases, namely -
(a) Where one partner actithin the scope of his
apparent authority receives the money or property of a third pird person and
misapplies it;
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(b) Where a firthe course of its business
receives money or property of a third person, and the mone money or property so
received is misapplied by one or more of the partners while it is in the
custody of the firm,
the firm shall be liable to makd the loss.”
>
By virtue of these provisions I rule that first and
foremost the Partnership Firm of Barrett and Sinclair Chartered Accountant
are liable to make good the Plaintiff’s loss in this action. Secondly Mr
Lindsay Barrett and Mr Adrian Sinclair are jointly
and severally liable to
make good the Plaintiff’s loss in this action.
And the Court makes the following orders:
&nbs>
(1) Judgment is entered for the Plaintiff for the sum of
US$130.0 or its equivalent in Vatu Vatu currency to be paid to the
Plaintiff
by the Partnership Firm of Barrett and Sinclair and Mr Barrett and Mr
Sinclair jointly and severally.
(2) There will be no order as to interest.
(3) The Defendants and their Partnership Firm will pay
jointly and severally the Piff’s costs of and incidentidental to this
action
to be taxed if not agreed.
Dated at Port Vila, this 2nd day of October, 1998.
BY THE COURT
Oliver A.AK
Judge.
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