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England and Wales High Court (Commercial Court) Decisions |
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You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Global Currency Exchange Network Ltd v Osage 1 Ltd [2019] EWHC 1375 (Comm) (04 June 2019) URL: http://www.bailii.org/ew/cases/EWHC/Comm/2019/1375.html Cite as: [2019] WLR(D) 413, [2019] WLR 5865, [2019] EWHC 1375 (Comm), [2019] 1 WLR 5865 |
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[New search] [Printable PDF version] [View ICLR summary: [2019] WLR(D) 413] [Buy ICLR report: [2019] 1 WLR 5865] [Help]
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
LONDON CIRCUIT COMMERCIAL COURT (QBD)
Fetter Lane, London, EC4A 1NL |
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B e f o r e :
(sitting as a Judge of the High Court)
____________________
| GLOBAL CURRENCY EXCHANGE NETWORK LIMITED |
Claimant |
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- and – |
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| OSAGE 1 LIMITED |
Defendant |
____________________
David Warner (instructed by Meaby & Co Solicitors LLP) for the Defendant
Hearing date: 8 March 2019
Draft judgment circulated 6 May 2019
____________________
HTML VERSION OF JUDGMENT APPROVED
Crown Copyright ©
Mr Andrew Henshaw QC :
(B) BACKGROUND FACTS AND EVIDENCE
(1) Percentage of investor funds paid to operating companies
(2) Alleged Ponzi scheme characteristics
(3) Payments made to individuals from investor funds
(C) APPLICABILITY OF CPR PART 86
(D) LEGAL BASIS FOR PROSPECTIVE INVESTOR CLAIMS
(1) Claim based on fraud by Osage
(2) Investors' right to rescind and claim the Funds
(3) Osage holding on constructive trust based on unconscionability
(4) Breach of fiduciary duties owed by GCEN itself
(6) Claims under Insolvency Act 1986
(E) WHETHER COMPETING CLAIMS ARE EXPECTED
(A) INTRODUCTION
i) Osage claims the Funds and has previously threatened an injunction and proceedings to recover them, and
ii) if investors were made aware of the details of Osage's investment scheme, GCEN expects that they too would make claims against it for the return of the Funds.
GCEN at this stage seeks directions for the service of its application and evidence on various investors to allow them the opportunity to make legal claims to the Funds.
"(a) Determine whether the stakeholder claim ought to be dismissed on grounds that there exist no competing or potential competing claims to the balance standing in the Claimant's account relating to the Defendant or on the ground that any such competing claims or potential claims are not expected to be made.
(b) In the event that the stakeholder claim is not dismissed, for the court to give such directions as it deems fit, to include:
(i) Who, if anyone, should be notified of and/or joined as Defendant to the claim in accordance with CPR Part 19 or other power of the Court;
(ii) If anyone is to be joined as a Defendant or notified, the method of service and/or notification that should be ordered.
(iii) Fixing a date for a further hearing for directions."
(B) BACKGROUND FACTS AND EVIDENCE
i) to operate an escrow account of behalf of Osage;
ii) to receive funds paid by prospective shareholders in Osage, and carry out money laundering checks on them on Osage's behalf;
iii) to return such funds to the prospective shareholder if the money laundering checks were not satisfactorily completed;
iv) to transfer the funds to Osage's main account with GCEN if those checks were satisfactorily completed; and
v) to transfer funds in US dollars to operating partners in the US on behalf of Osage when required.
i) "Information was received on the 24/12/2015 that a company called Parish Eastway had cold called a Pensioner to invest in an oil well Investment called Osage oil (Martin Finch is the director). This type of investment is considered a Collective Investment Scheme under the Financial Conduct Authority guidelines, and there are strict rules which must be adhered to when selling this type of investment."ii) "Any business selling this type of business must be an appointed representative of a FCA authorised firm, which Parish Eastway are not. … This type of investment is high risk, and should not be offered to ordinary members of the public. Mr David Hyman (Business partner of Glenn King) is accredited by the FCA … to sell this type of investment however he is not the only person who has been selling …"
iii) "A witness informed the police that he is a retired pensioner; he was cold called by a company called Parish Eastway, asking him to invest in an oil well investment called Osage 1. He paid £5,000 for the investment and was informed that 25% of his money would pay brokerage and other costs, he believed that 75% of his money would be invested in the oil well. On reviewing his paperwork, he was not considered a person the investment was suitable for and his money was returned. A few weeks later with no apparent substantial change in circumstances, his status had changed to a person who was considered a sophisticated investor and his investment went through. This person was spoken to by police on the phone, who sounded confused and was not able to coherently explain what they had invested in, nor explain what fees were to be taken out of their investment, who had called them, and who was dealing with their investment. Since this initial investment the witness has been contacted by other brokerages offering similar investment, despite not giving permission for their details to be passed on to other brokerages …"
iv) "Monies for the Oil Investments were paid into [GCEN] … Enquiries show the account the monies were paid into are owned and controlled by Oakmount and Partners Limited, where Glenn King is the director, Kansas B2 Project and Osage 1 where Martin Finch is the director. Approximately £3 million has been paid into the Osage account from investors between the 18th March 2015 to 2nd October 2015. Glenn King has been paid £394,087.44, Monarch Asset management Ltd (Director David Hyman) has been paid, £195,761.41, and Mr Martin Finch has been paid £27,724.98. This totals £617,573.83. Total monies readily identifiable as relating to oil well investments amounts to $828,887.43 when exchanged amount to £585,453.10. This is less than a quarter of the monies paid by the investors. These figures do not include payments made to brokerages selling the Oil Well investments. On the face of it, it appears that a large percentage of the investor's monies are being paid to Glenn King, David Hyman and Martin Finch and Brokerages, this would mean that approximately 19% of investors monies are actually being invested in the Oil wells. …"
v) "It would also appear that dividends are being paid to investors from this account, from the actual monies being invested, yet there are no deposits from the oil well companies that would reconcile these payments. …"
vi) "Glenn King has had all his Business and Private UK bank accounts closed by the separate banking institutes, Duncan Lawrie Private Banking, Lloyds, and NatWest and Santander and also one with First Gulf Bank in Dubai."
vii) "Other documents taken from the computers from Kings Offices show that Martin Finch is an Employee of Oakmount and partners Ltd. It would appear that he is a figure head director only in relation to Kansas MB Project and Osage 1 Projects. The payments from the [GCEN] account would justify that assumption. Mr Finch has contacted prosecution witnesses on behalf of King informing them that their investments in the Illinois Oil wells was to be transferred to the Kansas MB Project, at no cost to them. Many people did not sign the papers, but their shares were transferred regardless of their wishes, knowledge or consent. Mr King had bail conditions not to contact directly or indirectly with 30 named prosecution witnesses, but say, to pay dividends."
viii) "Mr King was arrested and interviewed on 2 occasions relating to the oil well investment in Illinois and answered no comment to all questions regarding his business and brokers selling products that directly belonged to Glenn King and David Hyman. …"
ix) "A restraint application was considered, and withdrawn by CPS in relation to the current investigation. This has no bearing on this cash seizure as it relates to Oil wells in another region (Oaklahoma) [sic]."
x) "At this time I have reasonable grounds to suspect that all of the cash seized from the respondent is recoverable property and that proceeds of fraudulently sold oil well investments targeted at ordinary members of the public, in breach of the FCA guidelines or is intended for use in unlawful conduct and its continued detention is necessary to enable its derivation to be further investigated or considered given to bringing proceedings against any person for an offence with which the cash is connected."
i) following Mr King's arrest in January 2015 and release from bail in April 2017, the Metropolitan Police confirmed in October 2018 following a comprehensive investigation that no further action was to be taken;
ii) Mr Finch, Osage's director, had never been a suspect in a police investigation;
iii) there was no ongoing police investigation into any of Mr King, Mr Finch or Osage, and
iv) Mr King did not at any time breach his bail conditions.
(1) Percentage of investor funds paid to operating companies
"GCEN goes on to parrot the Metropolitan Police draft cash seizure and detention application and contend (submission para 4(d)) that only a small proportion of the investor funds paid in have been invested in the oil wells of Oklahoma. This is an entirely baseless assertion with no evidence to support it. It relies on Ms Hinds' unsubstantiated contentions and the untested and unproven comments in the draft seizure application.
As well as being unsubstantiated, these allegations also run contrary to the evidence relied on elsewhere by Ms Hinds. This shows that over a period of 3 months Osage received (into its account with GCEN) a total of US$160,408.77. At 2015 exchange rates, annualised this would have been the equivalent of over £400,000 in income. That is a healthy return on investor payments of £3.2m but would be a stratospheric one if it were the case that only £638,337 had in fact been paid to the US operating partners as alleged."
(2) Alleged Ponzi scheme characteristics
i) in some cases, these purported dividend payments occurred before any commensurate credits to the account other than credit attributable to investor funds;
ii) there is no correspondence between non-investor fund credits and payments out of purported dividend payments;
iii) some of the purported dividend payments refer to the names of operating companies other than Osage, such as "Kansas MB", "KMB", "KB2" or "Sooner", noting that Mr Finch was also a director of companies named Kansas B2 Investments Limited and Sooner Energy Limited; and
iv) Osage registered four investors as shareholders and even paid them purported dividends even though it does not appear to have been notified that they had cleared GCEN's money laundering checks.
(3) Payments made to individuals from investor funds
"Osage's case is that these were payments of fees and for back office services provided to the Company. This is 18.8% of the totals received. It is not a significant proportion of the shareholder funds received and certainly cannot be said to evidence a fraud."
(C) APPLICABILITY OF CPR PART 86
"This Part contains rules which apply where –
(a) a person is under a liability in respect of a debt or in respect of any money, goods or chattels; and(b) competing claims are made or expected to be made against that person in respect of that debt or money or for those goods or chattels by two or more persons."
i) even if the allegations set out in the CDA document, and arising from GCEN's analysis, were true, there is no legal basis on which they could give investors a proprietary claim to the Funds; and
ii) in any event, given that well over three years have elapsed since the Funds were frozen, there is no reasonable basis on which to expecting competing claims to be made to the Funds.
(D) LEGAL BASIS FOR PROSPECTIVE INVESTOR CLAIMS
i) that the Funds still belong in equity to investors because Osage obtained them by fraud;
ii) that investors are entitled to rescind their contracts with Osage, and then claim the Funds in equity, because Osage induced them to contract and pay over the Funds by fraud;
iii) that Osage (through its agent GCEN) holds the Funds on trust for investors because it would be unconscionable for Osage – knowing that it is operating a fraudulent scheme – to assert beneficial ownership of them and deny the investors' beneficial interest;
iv) that GCEN itself owes fiduciary duties to investors and, knowing what it now knows about Osage's conduct, would risk being be in breach of those duties were it now to pay the Funds to Osage, alternatively in breach of POCA section 327 or 328 or a Quincecare duty of care owed to investors, or liable for dishonest assistance or another basis set out in this paragraph;
v) that GCEN received the Funds subject to a Quistclose trust, for the purpose of paying them to Osage once money laundering checks were complete; however, it cannot now pay the Funds to Osage without risking being in breach of POCA section 327 or 328 or a Quincecare duty of care, or liable on some other basis set out in this paragraph;
vi) that Osage's scheme involves transactions at an undervalue within section 423 of the Insolvency Act 1986, and investors would be entitled to obtain an order under the Act to protect their interests; or
vii) that GCEN would be liable to investors were it to deal with the Fund in disregard of circumstances that could give rise to a claim from them unless any such claim would be an "almost indisputably bad one" (Lewin on Trusts, 19th edn, § 26-031 citing Guardian Trust and Executors Company of New Zealand v Public Trustee of New Zealand [1942] AC 115).
(1) Claim based on fraud by Osage
"It appears that where a sale is rescinded for fraudulent misrepresentation the buyer will be held to be a trustee for the seller, but not until the representee elects to avoid the contract. It is the element of fraud which causes equity to impose a constructive trust in such circumstances, and so there is no trust when a contract is rescinded for a non-fraudulent misrepresentation. The representor cannot retrospectively be subjected to fiduciary obligations as a constructive trustee, since until the representee has elected to avoid the contract, the representor is not a constructive trustee of the property transferred and no fiduciary relationship exists between them. … The representee may of course choose to affirm the contract despite the misrepresentation. Someone with the right to rectify or rescind a document, whether because of a fraud or otherwise, and thereby to recover property, has for some purposes an equitable interest in the property, but in the present context is treated as having a "mere equity". It would therefore be going too far to say that the legal owner of the property was a trustee for him, at least before rectification or rescission was ordered." (footnotes omitted)
"44. … Apart from the finding of fraud, it is difficult to see why the elaborate bundle of documents provided in return of the advance payment, which was precisely what was contracted for, was incapable of satisfying the minimal requirements for "adequate consideration" (see Chitty on Contracts, 27th Ed, para 3–013ff; and cf Haigh v Brooks (1839) 10 A&E 309). If that is so, there was no "total failure", because that consideration was duly provided. Furthermore, it seems clear that the parties "intended" to create legal relations; the applicant was to be under a legal obligation to pay the fee, and Tidal under a legal obligation to produce the documents.
45. The submission, as I understand it, is that this is not simply a case of a valid contract being induced by fraud; but that the fraud so infected the whole transaction that it had no legal effect at all. The "contracts" were in reality no more than devices to extract money by fraud; in Mr Dutton's words—
"The "agreements" were fictitious contracts. They were as the judge found merely part of an elaborate charade (or mechanism) by which the loser was persuaded to part with his money."
The position, accordingly, is said to be "akin to theft". Where property is stolen, no beneficial interest passes to the thief. Mr Dutton submits that the same applies where money is extracted by fraud, otherwise than under a legally enforceable contract. He relies on Westdeutsche Bank v. Islington LBC [1996] AC 669 at 705C–D, 715H–716D (per Lord Browne-Wilkinson).
"I agree that the stolen moneys are traceable in equity. But the proprietary interest which equity is enforcing in such circumstances arises under a constructive, not a resulting, trust. Although it is difficult to find clear authority for the proposition, when property is obtained by fraud equity imposes a constructive trust on the fraudulent recipient: the property is recoverable and traceable in equity. Thus, an infant who has obtained property by fraud is bound in equity to restore it: Stocks v. Wilson [1913] 2 KB 235, 244; R. Leslie Ltd. v. Sheill [1914] 3 KB 607. Moneys stolen from a bank account can be traced in equity: Bankers Trust Co. v. Shapira [1980] 1 W.L.R. 1274, 1282C–E: see also McCormick v. Grogan (1869) L.R. 4 H.L. 82, 97."" (§§ 44-45), [1869] UKHL 1
"It seems to me that, whatever the legal distinctions between 'theft' and 'fraud' in other areas of the law, the distinction of importance here is that between non-consensual transfers and transfers pursuant to contracts which are voidable for misrepresentation. In the latter case, the transferor may elect whether to avoid or affirm the transaction and, until he elects to avoid it, there is no constructive (resulting) trust; in the former case the constructive trust arises from the moment of transfer. The result, so far as third parties are concerned, is that, before rescission, the owner has no proprietary interest in the original property; all he has is the 'mere equity' of his right to set aside the voidable contract. That equity binds volunteers and those taking with notice of the equity, but not purchasers for value without notice; see generally Worthington: Proprietary Interests in Commercial Transactions (1996) Clarendon Press at pp 163-165 and 167. Despite dicta of Lord Mustill in Re Goldcorp (a case in which the purchase monies sought to be traced were unidentifiable), which, if generally applied beyond the context of the facts in that case, would suggest that equitable title does not (or in appropriate circumstances may not) revest on rescission, the general position seems to me that summarised in Underhill and Hayton (15 Ed) at p.372(f). It is there stated that equity imposes a constructive trust on property where a transferor's legal and equitable title to his property has passed to the transferee according to basic principles of property law but in circumstances (eg involving fraud and misrepresentation) where the transferor has an equitable right (ie mere equity) to recover the property by having the transfer set aside, and the court declares that from the outset the transferee has held the property to transferor's order, though nowadays it seems better to regard a restitutionary resulting trust as arising." (§ 99)
The Court of Appeal's decision in Twinsectra was reversed in the House of Lords ([2002] UKHL 12) though not on grounds directly relevant to the present case.
"In my view, however, there are important distinctions between that case and the present. In that case, there was a straightforward contract of loan, under which legal and beneficial interest in the money passed to Mr Yardley (subject only to a "purpose" trust, which does not affect the present argument). The contract may have been induced by the fraud, but it was not itself the instrument of fraud. In this case, the contract has been held to be the instrument of fraud, and nothing else. The elaborate documentation was, in the words of the judge, "no more than a vehicle for obtaining money … by false pretences" (para 119). ...
In such a case, it is meaningless to impose a requirement for the fraudster to be notified of "rescission". From the fraudster's point of view there is nothing to rescind; for practical purposes, he has parted with nothing of value and incurred no obligations; the victim is left with some documents which, from the outset, were known and intended by the other party to be worthless. The "election" to which Potter LJ referred is not a real option. Although the case does not fit neatly into Potter LJ's binary classification, he was not dealing with these facts. Subject to any direct authority, I see no reason why it should not be regarded as a simple case of "property obtained by fraud", in Lord Browne-Wilkinson's terms." (§§ 47-48)
(2) Investors' right to rescind and claim the Funds
"Unless and until relevant investors (that is, those 11 investors whose payments comprise the funds held by GCEN) rescind their contracts with Osage (and they have had 3 years to do so but have not and cannot), those monies belong beneficially to Osage and GCEN are contractually bound to pay them over. If it does so before any rescission is communicated, it can have no liability to the investors. Those investors have no proprietary interest in the funds of which GCEN claims to be the constructive trustee."
(3) Osage holding on constructive trust based on unconscionability
i) statements in Lewin §§ 7-016 and 7-019, dealing with situations where a person has taken on a fiduciary duty in circumstances where it would be unconscionable for him to assert a beneficial interest in the relevant property, and
ii) Millett LJ's statement in Paragon Financial v DB Thakerar [1999] 1 All ER 400 that "A constructive trust arises by operation of law whenever the circumstances are such that it would be unconscionable for the owner of property (usually but not necessarily the legal estate) to assert his own beneficial interest in the property and deny the beneficial interest of another."
"Regrettably, however, the expressions "constructive trust" and "constructive trustee" have been used by equity lawyers to describe two entirely different situations. The first covers those cases already mentioned, where the defendant, though not expressly appointed as trustee, has assumed the duties of a trustee by a lawful transaction which was independent of and preceded the breach of trust and is not impeached by the plaintiff. The second covers those cases where the trust obligation arises as a direct consequence of the unlawful transaction which is impeached by the plaintiff.
A constructive trust arises by operation of law whenever the circumstances are such that it would be unconscionable for the owner of property (usually but not necessarily the legal estate) to assert his own beneficial interest in the property and deny the beneficial interest of another. In the first class of case, however, the constructive trustee really is a trustee. He does not receive the trust property in his own right but by a transaction by which both parties intend to create a trust from the outset and which is not impugned by the plaintiff. His possession of the property is coloured from the first by the trust and confidence by means of which he obtained it, and his subsequent appropriation of the property to his own use is a breach of that trust. Well known examples of such a constructive trust are McCormick v Grogan (1869) 4 App.Cas. 82 (a case of a secret trust) and Rochefoucald v Boustead [1897] 1 Ch 196 (where the defendant agreed to buy property for the plaintiff but the trust was imperfectly recorded). Pallant v Morgan [1953] Ch. 43 (where the defendant sought to keep for himself property which the plaintiff trusted him to buy for both parties) is another. In these cases the plaintiff does not impugn the transaction by which the defendant obtained control of the property. He alleges that the circumstances in which the defendant obtained control make it unconscionable for him thereafter to assert a beneficial interest in the property.
The second class of case is different. It arises when the defendant is implicated in a fraud. Equity has always given relief against fraud by making any person sufficiently implicated in the fraud accountable in equity. In such a case he is traditionally though I think unfortunately described as a constructive trustee and said to be "liable to account as constructive trustee." Such a person is not in fact a trustee at all, even though he may be liable to account as if he were. He never assumes the position of a trustee, and if he receives the trust property at all it is adversely to the plaintiff by an unlawful transaction which is impugned by the plaintiff. In such a case the expressions "constructive trust" and "constructive trustee" are misleading, for there is no trust and usually no possibility of a proprietary remedy; they are "nothing more than a formula for equitable relief": Selangor United Rubber Estates Ltd. v Cradock [1968] 1 WLR 1555 at p. 1582 per Ungoed-Thomas J."
(4) Breach of fiduciary duties owed by GCEN itself
(5) Quistclose trust
i) put GCEN at risk of committing a criminal offence contrary to POCA section 327 or 328;
ii) breach GCEN's Quincecare duty of care (see Singularis Holdings (in liquidation) v Daiwa Capital Markets Europe [2018] EWCA Civ 84); and/or
iii) give rise to liability on one of the other basis of claim GCEN has identified.
"(1) A person commits an offence if he—
…
(c) converts criminal property;
(d) transfers criminal property;
…
(2) But a person does not commit such an offence if—
(a) he makes an authorised disclosure under section 338 and (if the disclosure is made before he does the act mentioned in subsection (1)) he has the appropriate consent;
(b) he intended to make such a disclosure but had a reasonable excuse for not doing so; …"
section 328(1) and (2) provide that:
"(1) A person commits an offence if he enters into or becomes concerned in an arrangement which he knows or suspects facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person.
(2) But a person does not commit such an offence if—
(a) he makes an authorised disclosure under section 338 and (if the disclosure is made before he does the act mentioned in subsection (1)) he has the appropriate consent;
(b) he intended to make such a disclosure but had a reasonable excuse for not doing so; …"
"(2) Criminal conduct is conduct which—
(a) constitutes an offence in any part of the United Kingdom, or
(b) would constitute an offence in any part of the United Kingdom if it occurred there.
(3) Property is criminal property if—
(a) it constitutes a person's benefit from criminal conduct or it represents such a benefit (in whole or part and whether directly or indirectly), and
(b) the alleged offender knows or suspects that it constitutes or represents such a benefit.
(4) It is immaterial—
(a) who carried out the conduct;
(b) who benefited from it;
(c) whether the conduct occurred before or after the passing of this Act.
(5) A person benefits from conduct if he obtains property as a result of or in connection with the conduct.
…
(9) Property is all property wherever situated and includes—
(a) money;
(b) all forms of property, real or personal, heritable or moveable;
(c) things in action and other intangible or incorporeal property.
(10) The following rules apply in relation to property—
(a) property is obtained by a person if he obtains an interest in it;
…
(d) references to an interest, in relation to property other than land, include references to a right (including a right to possession)."
"It is the practice of the court not generally to permit a trustee to distribute without notice to a claimant. But the court has jurisdiction to permit or direct a trustee to distribute notwithstanding the existence of claims or potential claims from third parties. That will not have the effect of destroying any proprietary rights of third parties, but may afford protection against personal claims against the trustees from third parties. For example, if a trustee becomes aware after taking office that the trust may be part of a money laundering operation instigated by the settlor, the trustee will be concerned that if he distributes the trust fund to the beneficiaries in accordance with the trust, the third party may claim against him that the distribution amounted to dishonest assistance in a breach of fiduciary duty on the part of the settlor. If in such circumstances the trustee acts in accordance with the directions of the court, having made full disclosure to the court, it could hardly be suggested by the third party that the trustee had acted dishonestly in making the distribution, being one permitted by the court after the trustee had taken such steps as the court considered appropriate in the circumstances. Hence a claim by the third party based on dishonest assistance would be bound to fail. But the trustee could not in our view be protected by order of the court against receipt-based personal claims unless the third party was made a party or given notice of the proceedings. Even so, it appears that the court may order distribution if the possibility of a claim appears to be remote or speculative, not founded on firm evidence." (§ 26-033, footnotes omitted)
(6) Claims under Insolvency Act 1986
"(1) This section relates to transactions entered into at an undervalue; and a person enters into such a transaction with another person if—
(a) he makes a gift to the other person or he otherwise enters into a transaction with the other on terms that provide for him to receive no consideration;
… or
(c) he enters into a transaction with the other for a consideration the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the consideration provided by himself.
(2) Where a person has entered into such a transaction, the court may, if satisfied under the next subsection, make such order as it thinks fit for—
(a) restoring the position to what it would have been if the transaction had not been entered into, and
(b) protecting the interests of persons who are victims of the transaction.
(3) In the case of a person entering into such a transaction, an order shall only be made if the court is satisfied that it was entered into by him for the purpose—
(a) of putting assets beyond the reach of a person who is making, or may at some time make, a claim against him, or
(b) of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make.
…
(5) In relation to a transaction at an undervalue, references here and below to a victim of the transaction are to a person who is, or is capable of being, prejudiced by it; and in the following two sections the person entering into the transaction is referred to as "the debtor" ."
(7) Guardian Trust claim
"[I]f a trustee or other person in a fiduciary capacity has received notice that a fund in his possession is, or may be, claimed by A, he will be liable to A if he deals with the fund in disregard of that notice should the claim subsequently prove to be well founded." (p127)
"It has proved awkward to reconcile the Guardian Trust principle with the decision in Carl-Zeiss Stiftung v Herbert Smith & Co. (No.2), that solicitors were not liable for receiving payments for fees and disbursements out of funds which, to their knowledge, were being claimed by the plaintiff in proceedings against the solicitors' client. It is true that Carl Zeiss turned on the scope of liability for knowing receipt of property transferred in breach of trust and Guardian Trust did not; but it would be unsatisfactory if the rules applied were different when in each case the effect of notice of a claim is in issue. Where liability for knowing receipt is alleged, it seems that the principal claim must be sufficiently clear to have justified the court in preventing the person against whom the claim is made from dealing with the property and the claimant must give some good reason why he had not sought such an order before proceedings against the present defendant, neither criterion being satisfied in Carl Zeiss. Our view is that the same limitation should apply to the Guardian Trust principle, though it may then be that in cases falling within it, as in cases of knowing receipt, the court will be readier to impose liability on a recipient who is a volunteer. It has indeed been said that the Guardian Trust principle is meant to apply to a "reasonably arguable claim" and not to one which is specious, with no arguable foundation. Even so, trustees will not be able to distribute safely on their own authority once they have notice of a claim, or of circumstances which could give rise to a claim, unless they are able to take the view that the claim is almost indisputably a bad one. ..." (footnotes omitted)
(8) Conclusion on this issue
(E) WHETHER COMPETING CLAIMS ARE EXPECTED
"There is ample authority for the proposition that the discretionary relief of interpleader will not be granted unless there appears to be some real foundation for the expectation of a rival claim: see Isaac v. Spilsbury; Harrison v. Payne; and Sharpe v. Redman. The fact that these are, in the words of the district registrar, "somewhat elderly authorities" I think adds to their weight rather than diminishes it. Applying them, in my judgment, while there were intimations of a sort that Wood and Waite were entitled to the £918, no sufficient claim had been advanced on their behalf until the letters of April 7 and July 22, 1960, already referred to. From the receipt of the earlier letter, however, although the defendants had not actually been sued by Waite's trustee, there was a real foundation for the expectation that they would be sued (Morgan v. Marsack). Accordingly, while the matter becomes academic in the light of the decision I have come to on the section 8 point, it is obviously convenient to the parties that I should now state that, had the defendants applied for interpleader relief on receipt of the letter of April 7, 1960, or say within twenty-eight days thereafter, they would, in my judgment, have acted with reasonable promptitude, and I should in any event have awarded them their costs of action up to that date." (p734, footnotes omitted)
(F) CONCLUSIONS
i) there are at least some legally viable bases on which investors may be entitled to the Funds;
ii) there is a real foundation for expecting competing claims in fact to be made to the Funds; and
iii) notification should be given of the proceedings to the 11 investors who GCEN has identified as having paid in the Funds, and they should be directed to indicate within a specified period whether they claim any part of the Funds and, if so, on what grounds.
