Tracing Claims & Unjust Enrichment in Company Liquidation: Relfo Ltd. v Varsani Case | Lecture notes Remedies

Case: Relfo Limited (in liquidation) v Varsani [2014] EWCA Civ 360, CA, 28 March 2014

Synopsis: A tracing claim was not defeated by the claimant’s inability to show a direct

chain of substitution of the original asset. In addition, obiter, there was a sufficiently strong

connection to found a claim for unjust enrichment.

Topics covered: liquidation; equitable remedies; tracing; unjust

enrichment

The Facts

G was a director of Relfo Limited (the Company) and also had close business links with

the Varsani family.

In May 2004, when the Company owed some £1.4m to HMRC, G caused £500,000 to be

paid from the Company’s bank account in London to the account of M in Latvia. This left

the Company insolvent and it went into CVL a couple of months later. On the same day as

the transfer to M, another company, I, transferred an amount from its account in Lithuania

to the account of the appellant, V, in Singapore. The payment equalled the £500,000 less

1.3%.

The Company (acting by its liquidator) accepted at trial that it could not point to specific

transactions passing between the M and I accounts to show how the payment to M was

translated into the payment by I to V. There had been no transfer from M to I in advance of

the payment by I to V which could have funded it.

Having found that G had been motivated to make good losses that his investment advice

to V’s family had caused , the judge held that, on the facts, he could draw an inference that

the payment by I to V was to be identified with the payment by the Company to M so as to

enable the court to conclude on the balance of probabilities that I’s payment into V’s

account represented the traceable proceeds of the payment from the Company to M .

Although the court had insufficient information to be able to map each step in the process,

it was a fair inference that the payment by I was the product of a series of transactions

between a number of entities and across a number of bank accounts designed to produce

the result that funds paid to M were paid on to V (subject to the 1.3% deduction in the

nature of a commission). The judge also found that V had the requisite knowledge.

Accordingly the judge held that the Company was entitled to trace the payment to M into

the payment by I to V. The judge also held that if he was wrong in drawing the inference,

so that the tracing claim failed, V had been unjustly enriched at the expense of the

Company.

V appealed.

The Decision

Relfo Limited (in liquidation) v Varsani - tracing and unjust

enrichment of an indirect recipient

Technical Bulletin No: 557

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Case: Relfo Limited (in liquidation) v Varsani [2014] EWCA Civ 360, CA, 28 March 2014 Synopsis: A tracing claim was not defeated by the claimant’s inability to show a direct chain of substitution of the original asset. In addition, obiter, there was a sufficiently strong connection to found a claim for unjust enrichment.

Topics covered: liquidation; equitable remedies; tracing; unjust

enrichment

The Facts G was a director of Relfo Limited (the Company) and also had close business links with the Varsani family. In May 2004, when the Company owed some £1.4m to HMRC, G caused £500,000 to be paid from the Company’s bank account in London to the account of M in Latvia. This left the Company insolvent and it went into CVL a couple of months later. On the same day as the transfer to M, another company, I, transferred an amount from its account in Lithuania to the account of the appellant, V, in Singapore. The payment equalled the £500,000 less 1.3%. The Company (acting by its liquidator) accepted at trial that it could not point to specific transactions passing between the M and I accounts to show how the payment to M was translated into the payment by I to V. There had been no transfer from M to I in advance of the payment by I to V which could have funded it. Having found that G had been motivated to make good losses that his investment advice to V’s family had caused , the judge held that, on the facts, he could draw an inference that the payment by I to V was to be identified with the payment by the Company to M so as to enable the court to conclude on the balance of probabilities that I’s payment into V’s account represented the traceable proceeds of the payment from the Company to M. Although the court had insufficient information to be able to map each step in the process, it was a fair inference that the payment by I was the product of a series of transactions between a number of entities and across a number of bank accounts designed to produce the result that funds paid to M were paid on to V (subject to the 1.3% deduction in the nature of a commission). The judge also found that V had the requisite knowledge. Accordingly the judge held that the Company was entitled to trace the payment to M into the payment by I to V. The judge also held that if he was wrong in drawing the inference, so that the tracing claim failed, V had been unjustly enriched at the expense of the Company. V appealed. The Decision Relfo Limited (in liquidation) v Varsani - tracing and unjust enrichment of an indirect recipient Technical Bulletin No: 557

V’s appeal was unanimously dismissed by all three judges, although the lead judgment was given by Arden LJ. The tracing claim V argued that there must be a direct chain of substitution and the substituted property derived from the misappropriated property, and must be identified as the claimant’s property at each stage of the chain. The Company could not show an unbroken chain of direct substitution of the money taken from its account into V’s account. The judge was not entitled to draw the inference that the payment by I was the substituted product of the payment to M because no transactional link was identified. The Company submitted that even gaps in the evidence about tracing of this kind can be filled by inference. M’s bank statements clearly showed the Company’s money eventually leaving M’s account as part of the process of dissipation. The CA accepted that the judge was entitled to draw the inferences that the Company’s money had passed into I’s account and that monies were the source of monies paid to V. Once the judge had made the inference that the Company’s money was substituted by payments used ultimately by I to make payment to V, it was an inevitable conclusion that the payment to M and the payment by I to V were causally and transactionally linked. The CA also accepted that when funds flow through the banking system, what matters is that there has been an exchange of value of the claimant’s property for the substituted product, and so on down the chain of substitutions. The fact that M did not reimburse anyone for the payment by I until after that payment had been made did not matter. On the judge’s finding, the payment by I and the other payments made in the chain of substitutions were made on the faith of the arrangement that M would provide reimbursement. Agip (Africa) Ltd v Jackson [1990] 1Ch 265 was authority that it is unnecessary that the payments should occur in any particular order, let alone chronologically. Trust monies can be traced into other assets, even if those other assets are passed on before the trust monies are paid to the person transferring them. The CA also held that there was no logical reason why the substituted product of a claimant’s money cannot be traced through any number of accounts, without limit on the number of substitutions that can take place. However, the number of substitutions and the fact that they do not occur in chronological sequence can make it harder to substitute one asset for another. Unjust enrichment As the CA had found in favour of the Company on the tracing claim, there was no need to decide on unjust enrichment. As the point had been fully argued however, and on the hypothesis that tracing was not available, the CA also considered the issue. The key point was whether, for a claim to succeed, the defendant must be enriched directly by the claimant (the “direct providers only” rule, or DPR), or whether a claimant can succeed on his claim for unjust enrichment against an indirect recipient. Arden LJ referred to the judgment of Henderson J in Investment Trust Companies v HMRC [2012] STC 1150 where the judge had held that it was preferable to think in terms of a general requirement of direct enrichment, to which there are limited exceptions. Whilst no exhaustive list of criteria for the recognition of exceptions had by then been put forward, the judge listed a number of relevant exceptions, including the need for a close

interim order had been made. However, given the creation of the Family Court as distinct from the Family Division of the High Court, the result for family proceedings may not be the same, although it should be noted that the Crime and Courts Act 2013 has introduced s.31E into the Matrimonial and Family Proceedings Act 1984, which provides that in any proceedings in the Family Court, the court may make any order “(a) which could be made by the High Court if the proceedings were in the High Court”. This issue may well be unlikely to arise, but it is difficult to see how a validation order could be made without the petitioning creditor being given the opportunity to attend as was the case in Gallagher. There is also clear guidance contained in the Practice Direction for Insolvency Proceedings – Para. 11.8.

Tracing Claims & Unjust Enrichment in Company Liquidation: Relfo Ltd. v Varsani Case, Lecture notes of Remedies

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Topics covered: liquidation; equitable remedies; tracing; unjust

enrichment