UK: Caught In The Tangled Web

Last Updated: 28 April 2015
Article by Richard Caird and Alexandra Doucas

This is a case in which the claimant alleged that a bank held money on constructive trust for her. The bank said that it was a bona fide purchaser for value, with no notice which would suggest the existence of a prior proprietary claim. The bank failed. However, the Privy Council's judgment acknowledges the difficulty of formulating the appropriate test for such cases, and may perhaps serve to make it rather easier to understand what that test is.

Factual background

The factual background to the issue before the court was complex, and what follows below is necessarily an abbreviated summary.

The architect of what the Privy Council described as a "fraudulent scheme" was Robin Symes, a dealer in art and antiquities. Mr Symes was the partner for many years of Christo Michailidis, whose parents had built up a collection of art deco furniture (the Collection). On the death of Mr Michailidis, and unknown to his family, Mr Symes sold the Collection for $15 million in spring 2000.

The proceeds of sale were paid to two Panamanian companies, and the greater part ($10.3 million) was then paid to an account at the Gibraltar branch of the defendant (the Bank) through a Liechtenstein foundation. It was then credited to the account of a company, Lombardi Corporation, incorporated in the BVI. The Bank's KYC documents recorded that Mr Symes was the beneficial owner of the money. The money in Lombardi's account was used as a guarantee for a loan advanced by the Bank's London branch to Robin Symes Limited (RSL), in order to repay an existing loan from Citibank.

These transactions took place in summer 2000. In 2001, Mr Michailidis' family came to know of the sale of the Collection, and first his mother and, after her death, his sister, made claims against the Bank. The judgment records that it was common ground that the proceeds of sale of the Collection were in the hands of the Bank, that Mrs Papadimitriou (Mr Michailidis' sister) could trace the proceeds of sale into the hands of the Bank, and that her claim would succeed unless the Bank could prove that it was a bona fide purchaser without notice.

Question before the Privy Council

At first instance, Mrs Papadimitriou failed to establish claims based on dishonest assistance and knowing receipt, and did not appeal those findings. She did, however, appeal the first instance judge's decision that the Bank was a bona fide purchaser without notice of the proceeds of sale of the Collection, and that this defeated her proprietary claim to the money. She succeeded on appeal, and the Bank in turn appealed to the Privy Council.

The task for the Privy Council was to decide whether the Bank was on constructive notice of impropriety.

Lord Clarke's analysis

The judgment of the Board of the Privy Council was delivered by Lord Clarke, and much of it consists of an analysis of the decision of the Court of Appeal in Sinclair Investments (UK) Ltd v. Versailles Trade Finance1. It is an interesting reminder of the difficulty of the law in this area that the judgment in Sinclair to which Lord Clarke referred was delivered by Lord Neuberger MR. Last year, aspects of Sinclair were overruled in FHR European Ventures and others v. Cedar Capital Partners LLC2, by seven judges of the Supreme Court, four of whom (including Lord Neuberger) formed part of the five-man Board in this case.

(a) The relevant test

In Sinclair, Lord Neuberger considered the previous authorities, including the speech of Lord Browne-Wilkinson in Barclays Bank plc v. O'Brien3, and Millett J in Macmillan Inc v. Bishopsgate Investment Trust (No 3)4. Lord Neuberger concluded by saying that the question was whether: "a reasonable person with their attributes (i.e. those of a responsible large bank with the benefit of highly experienced insolvency practitioners as their appointed administrative receivers) should either have appreciated that a proprietary claim probably existed or should have made inquiries or sought advice, which would have revealed the probable existence of such a claim".

Lord Clarke said that it was important for the purpose of this case to distinguish between three different circumstances:

  1. where the bank in fact appreciates that another person probably has a proprietary right to the property, and therefore has actual notice of such a right;
  2. where a reasonable person with the attributes of the bank should have appreciated on the basis of facts already available to it that a proprietary right probably existed, in which case the bank had constructive notice; and
  3. where the bank should have made inquiries or sought advice which would have revealed the probable existence of the proprietary right, in which case the bank would also have constructive notice.

Lord Clarke's judgment goes on to consider when circumstances are such that a bank should make inquiries, in the context of the earlier authorities referred to above. Lord Browne-Wilkinson suggested that a bank must make inquiries if it was on notice as to the possible existence of such a right. The Board held that this would set the bar too high, and that Lord Browne-Wilkinson cannot have meant that the mere possibility of the existence of a proprietary right would oblige a bank to investigate. On the other hand, Millett J had set the bar too low, if he was understood to have suggested that a bank need only investigate where it was obvious that, absent inquiries, the transaction was probably improper. If that were the case, the bank would be on notice already, without the need for further investigation.

Lord Clarke therefore concluded that the test was "... somewhere in between. It may be formulated in this way. The bank must make inquiries if there is a serious possibility of a third party having such a right, or put another way, if the facts known to the bank would give a reasonable banker in the position of the particular banker serious cause to question the propriety of the transaction". This formulation of the relevant test is arguably quite close to that articulated by Millett J, of which the Board did not approve. It is hard to see the real distinction in the wording and, taken in isolation, Lord Clarke's formulation might not clarify the position greatly in practice. However, the application of the test to the facts of this case is instructive, as is the very short additional judgment of Lord Sumption. We refer to both below.

Lord Clarke also referred to Lewin on Trusts, and its commentary that a purchaser would be fixed with knowledge in the absence of actual notice where: "... in the particular commercial contract involved he has failed to draw inferences which ought reasonably to have been drawn in that context or has been put on inquiry by knowledge of suspicious circumstances indicative of wrongdoing on the part of the transferor, but has failed to make inquiries that are reasonable in the circumstances".

(b) Application to this case

At first instance, the judge considered (rightly, in the view of the Board) what further inquiries should have been made by the Bank (if any), and whether, following such inquiries, it would have become apparent that the transaction was improper. However, he concluded in dismissing Mrs Papadimitriou's proprietary claim that the most serious criticism that could be made of the Bank was its failure to make further inquiries as to the source of funds it received. However, he held that had it done so, it would effectively have hit a brick wall. It would only have learned that the money came from a Liechtenstein foundation, of which Mr Symes was the beneficiary.

The Court of Appeal and the Privy Council agreed with Mrs Papadimitriou's argument that the focus of the Bank's inquiry should not have been confined to the source of the funds, it should have extended to the commercial purpose of the transaction. The Court of Appeal held (and the Privy Council agreed) that had it done so, it would have become obvious that the transaction was improper.

That begs, of course, the question of what is understood by commercial purpose. The Bank argued that the commercial purpose of the transaction was obvious and in no way suspicious− it was to refinance an existing loan from Citibank. It is clear from the judgment, however, that this is not how the court looks at this question.

The crucial factor from the perspective of both the Court of Appeal and the Privy Council's perspective was the "web of companies" used by Mr Symes to launder the proceeds of sale of the Collection, when Mr Symes could have achieved the result he ostensibly wanted in terms of the refinancing of his loan by much simpler means. The route he chose was complicated and costly (not least by reference to the fees charged by the Bank), and the Court of Appeal found that it could not have had any commercial purpose other than money laundering. While the Privy Council noted that the Court of Appeal had overstated the facts, it nonetheless agreed with its reasoning and conclusion.

On this basis, it is clear that the court will consider that the scheme and arrangement, as well as the stated aim of a transaction, are part of its commercial purpose. If the form of the transaction looks odd, then the bank is put on notice and must make further inquiries.

The final word

Lord Sumption added a (lengthy) paragraph of his own to the end of the judgment, although he agreed with Lord Clarke. That paragraph is a very helpful summary of the law in this area, which Lord Sumption acknowledges has taxed judges for many years. In particular, he refers to the question of the circumstances in which a person is under a duty to make inquiries before he can claim to be without notice of a prior interest in assets he acquires. Lord Sumption's view is that "there is little to be gained from a fine analysis of the precise turns of phrase which judges have employed in answering these questions".

His articulation of the underlying principle, which he states in the judgment to be clear, is that: "There must be something which the defendant actually knows (or would actually know if he had a reasonable appreciation of the meaning of the information in his hands) which calls for inquiry. The rule is that the defendant in this position cannot say that there might well have been an honest explanation, if he has not made the inquiries suggested by the facts at his disposal with a view to ascertaining whether there really is. ... In the present case, on the facts actually known to the bank, there was no apparent explanation of the interposition of the Panamanian and Liechtenstein entities unless it was to conceal the origin of funds derived from third parties. That was why the bank had to make inquiries before proceeding as if there were an innocent explanation."

Conclusions

The answer to the question of when banks need to make inquiries in order to avoid being fixed with constructive notice is probably as simple as "if something about the transaction feels wrong". Such an answer would hardly pass muster as a legal test, but as a matter of practice, that seems to be what the court means. The test has historically been difficult to articulate, and it is likely to continue to be so in future. It might, perhaps, be less difficult to apply, and the Privy Council's decision certainly provides helpful guidance as to how a court will do so.

Footnotes

1 [2011] EWCA Civ 347

2 [2014] UKSC 45

3 [1994] 1 AC 180

4 [1995] 1 WLR 978

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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