The Claimant FCA-registered payment services institution (“GCEN”) provides foreign exchange payment services to its clients. It held funds (“the Funds”) in an account referable to one of its clients, the Defendant (“Osage”). Osage used GCEN’s services to receive funds from investors (“the Investors”), convert those funds to US dollars and transfer them for investment, via Osage, in an oil drilling venture in Osage, California. GCEN’s bank accounts were frozen in 2015 and, in September 2016, GCEN obtained from Osage’s solicitors a copy of what appears to have been an intended application by the Metropolitan Police under section 295 of the Proceeds of Crime Act 2002 (“POCA”) for the continued detention of cash stated to have been seized including the funds, naming Osage and others as persons likely to be affected by detention of those funds (“the CDA document”). The CDA document had been issued in error by the metropolitan police and was never pursued. Osage had requested payment of the Funds. In light of the contents of the CDA document, GCEN performed its own analysis on transactions relating to the Funds and these appeared consistent with some of the concerns raised in the CDA document. GCEN therefore issued CPR part 86 interpleader proceedings for directions from the court as to where it should pay the Funds; in particular, whether it should pay the Funds to Osage or to Investors in Osage that GCEN had identified as being responsible for paying in the Funds.
Osage argued that the interpleader proceedings should be dismissed on the basis that GCEN had received no indication from any Investors of any potential competing claims to the funds in the 3 ½ years since Osage’s accounts were frozen. Osage argued that there was no plausible legal basis on which any Investor could have a competing proprietary claim to the Funds and that GCEN was seeking, via its CPR part 86 application, an indemnity to which it was not entitled.
Andrew Henshaw QC (sitting as a judge of the High Court)
Held:
(1) GCEN was justified, on the basis of the evidence and inadequate responses from Osage, in being concerned that Investors had been misled as to the nature of their investment since only about 19% of £3.28 m raised from Investors had been paid to US based oil drilling companies; Osage’s transactions appeared to display some Ponzi scheme characteristics; and, a very high proportion of funds raised from Investors had been paid to individuals operating the scheme.
(2) There was a real foundation for an expectation that Investors would rescind their investment agreements with Osage and bring rival proprietary claims to the Funds held by GCEN if those investors were made aware of relevant knowledge that GCEN had acquired. This was sufficient for there to be an expected competing claim within the meaning of CPR r 86.1(1)(b): Watson v Park Royal (Caterers) Ltd [1961] 1 W.L.R. 727 applied. It did not matter that the proprietary claim could only be brought by the relevant Investor against the Funds if they had taken the prior legal step of rescinding the investment contract they had concluded with Osage.
(3) Further, it was accepted by Osage that GCEN received and held the payments made by each prospective investor on a Quistclose trust. This involved GCEN holding the funds on behalf of the Investors until anti money laundering checks had been satisfactorily completed and, thereafter, paying those funds to Osage to enable the Investor to become a non-voting shareholder in Osage. In light of GCEN’s knowledge of the facts set out in the CDA document and as a result of its own corroborative analyses, GCEN was unable to fulfil the purpose of the Quistclose trust insofar as it required GCEN to pay the funds in accordance with Osage’s instructions. The knowledge GCEN had acquired would have given grounds for GCEN to suspect criminal conduct and it could not therefore have safely paid the Funds over to Osage without committing a criminal offence pursuant to s 327 and/or s 328 Proceeds of Crime Act 2000. There was, additionally, therefore an expected competing proprietary claim from Investors to the Funds on the basis that they were held on a resulting trust: Twinsectra v. Yardley [2002] UKHL 12 applied.
(4) The exception to the need to rescind for fraudulent misrepresentation where the contract was itself an instrument of fraud in Halley v Law Society [2003] EWCA Civ 97 remained binding notwithstanding caution expressed in Crown Holdings (London) Limited (in Liquidation) [2015] EWHC 1876 (Ch). The evidence before the court, however, did not go far enough to support a conclusion that the subscription contract with and issue of shares by Osage, or the purported investment in oil drilling interests, were a mere charade that entitled the Investors to a competing claim over the Funds without the need for prior rescission.
(5) There was insufficient evidence to conclude that Osage had necessarily entered into a transaction at an undervalue with particular investors who had paid the Funds to GCEN and, accordingly, reliance on s423 Insolvency Act 1986 to found a competing claim on behalf of the Investors to the Funds pursuant to s425 Insolvency Act 1986 would not assist GCEN any further than the aforementioned bases for competing claims advanced.
(6) The principle in Guardian Trust and Executors Company of New Zealand v Public Trustee of New Zealand[1942] AC 115(PC) that a fiduciary might be liable if it disregarded circumstances that might give rise to a claim unless such a claim was “almost indisputably a bad one” did not itself give rise to a head of claim as there was still a need to establish that GCEN was a fiduciary. Further analysis was not required as it did not add to the other bases upon which it might be said that the Investors might have competing claims to the Funds.
(7) The Investors identified by GCEN should be notified pursuant to the Court’s powers under CPR Part 86 and directed to indicate within a specified period whether they claimed any part of the Funds and, if so, on what grounds.
(8) The ‘mere equity’ of the right to set aside the voidable contract (‘the equity of rescission’) as noted by Potter LJ in the Court of Appeal in Twinsectra v. Yardley [1999] Ll Rep Bank might also affect GCEN’s ability to pay the monies at Osage’s request although this was per curiam on the basis there had not been full argument on this point.
Judgment for the Claimant and directions accordingly.
George Hilton (instructed by Howard Kennedy LLP) for the Claimant
