Knowing receipt, constructive trustees and the effectiveness of traceability through multiple recipients form the basis of this Appeal Court hearing when the chief accountant of an oil drilling company systematically defrauded his employer of over $10m during a period of just two years.
This was carried out through a network of directors and business partners acting as authorised signatories for the sham companies, and who once a small number of deposits were made, closed the accounts, before opening new accounts that would then transfer the funds to a central account held in France.
This account belonged to a company that presented itself as a jewellery supplier, and which was owned by a French lawyer, who was the head of the fraudulent operation.
Party to this, was the manager of Lloyd’s Bank Holborn Street, whose role it was to receive funds from the chief accountant through his employer’s bank on a regular basis, before awaiting instructions as to which of the seven accounts the funds were to be transferred.
It was only after a money order destined for a shipping container firm was fraudulently altered, that the scheme became apparent and proceedings commenced.
In the first hearing, the respondent firm sued for payment under mistake of fact, and claimed that recovery was due either by the bank, or the account holders, who themselves took receipt of the funds under knowing deceit.
While relying upon the traceability of the monies paid out, it was held by the court that there had been too many displacements in both time and transactions to establish a clear path, therefore recovery under common law was too remote; however, when turning to equity the issue took an another form altogether.
While tracing through equity requires evidence of a fiduciary relationship, the chief accountant had by extension, held a fiduciary role; and so, it fell to the Court of Appeal to first explore knowing receipt and knowing assistance.
Here, it was held that while the appellants received the funds on behalf of their clients, they did so in the knowledge that the money had been obtained through fraud, and so for that reason were liable as constructive trustees for the respondent; particularly as no real effort was made to return the money once notification had been made by the issuing bank, while the court reminded the parties that:
“A person may be liable, even though he does not himself receive the trust property, if he knowingly assists in a fraudulent design on the part of a trustee (including a constructive trustee). Liability under this head is not related to the receipt of trust property by the person sought to be made liable…”