Blunting the Sword of Justice

Citation

Rider, B. (2012), "Blunting the Sword of Justice", Journal of Financial Crime, Vol. 19 No. 4. https://doi.org/10.1108/jfc.2012.30919daa.001

Blunting the Sword of Justice

Article Type: Editorial From: Journal of Financial Crime, Volume 19, Issue 4

While it behoves us in the pages of this journal to adopt as scholarly and accurate view of the law as is possible (without becoming so cloistered as to be irrelevant), it is not incompatible with such a virtue, to also applaud interpretations of and developments in the law, that make it more difficult for fraudsters and the like to escape justice. Consequently, many who have written not least in this publication, welcomed the robust opinion in the Privy Council of Lord Templeman in the Attorney General of Hong Kong v. Reid [1994] 1 All ER 1 that the traditional approach of the Court of Appeal in the case of Lister v. Stubbs [1890] Ch D 1 was too restrictive and was unjust in that it allowed dishonest fiduciaries to retain, in some cases, the benefits of their wrongdoing and denied plaintiffs the important ability to trace bribes into other property particularly in the hands of third parties. In other words, while corrupt agents and the like could and should be held personally liable to account for their ill gotten gains, the constructive trust was not available as there was no proprietary nexus.

The Reid case was egregious. As Lord Templeman stated:

[…] bribery is an evil practice which threatens the foundations of any civilised society. In particular, bribery of policemen and prosecutors brings the administration of justice into disrepute […] In the present case the amount of harm caused to the administration of justice in Hong Kong by Mr Reid in return for bribes cannot be quantified.

Indeed, as head of the Colony’s equivalent of the SFO Reid by his deplorable conduct had undone so much than had been achieved in fighting corruption and misconduct. Consequently, Lord Templeman was keen to ensure that the courts could award a remedy that prevented the property in which Reid had invested his ill gotten gains being sold and “the proceeds whisked away to some Shangri-La which hides bribes and other corrupt monies in numbered bank accounts.” The ability to impose a constructive trust where a fiduciary had abused his office by taking a secret profit or bribe greatly strengthened the power of the courts to pursue the proceeds of fraud and abuse and while there have not been a great many subsequent decisions, there have been many cases where the defence as rolled over.

Indeed, the availability of tracing and the imposition of proprietary orders have rendered viable claims that would otherwise have ended in the importunity of the offender. Of course, many commercial lawyers have voiced concern as to the uncertainty that all this brings, particularly to the rights of third parties in an insolvency of the wrongdoer – or more likely his corporate vehicle. Indeed, some have criticised Lord Templeman’s reasoning, which appears pragmatic, but in fairness had the support of several leading restitution lawyers and perhaps common sense. Having said this, probably the weight of academic opinion was against such a practical device. Indeed, in the recent case of Sinclair Investments (UK) Ltd v. Versailles Trade Finance Ltd [2011] EWCA Civ 347, Lord Neuberger MR appears to have given considerable weight to the views of such commentators and in adopting what is a relatively conservative approach both to the law and the significance of earlier lateral precedence returned English law at a stroke to the pre-Reid position. The Master of the Rolls stated:

[…] 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.

So back to the distinction in, for example, the company law cases on directors’ duties between diversion of a corporate opportunity and the taking of a mere secret profit. Query the impact of a claim based upon the misuse of information?

Of course, in practical terms if the fraudster or corrupt agent is amenable to suit and is in sufficient funds then there may not be a great problem. However, on the whole the more successful crooks are not so easily discovered and pursued – and the inability, at least before the English courts, to invoke the constructive trust – with all that it entails, is a blow for those who chase tainted assets. Having said this, it is worth noting that the Reid decision followed cases in Singapore and Australia and Lord Templeman’s law is still good in those jurisdictions looking to the Privy Council. Sadly it does not seem as if the Supreme Court is going to have an opportunity to pass on this – in near future.

Barry Rider30 May 2012