Keywords: Fiduciary Duty; Bribes; Secret Commissions; Constructive Trusts; Proprietary Remedy; Insolvency; Fraud; Ponzi Schemes


In my case note ([2014] Conv 518) on FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45, [2015] AC 250, I said (at p 522) that:

If one reads the many judgments in the Sinclair litigation, a rather unattractive picture of a very undeserving claimant appears to whom it was right to deny priority over Versailles’ creditors.

I was referring to the extensive litigation up to and including the most famous Sinclair case, Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, [2012] Ch 453. That is the most famous case in the series, where the claimants, Sinclair Investments, lost before the Court of Appeal on their claim that they should have a proprietary remedy over the applicable breach of fiduciary duty. That case has now been overruled and a proprietary remedy is always available for unauthorised profits made by a breach of fiduciary duty: FHR v Cedar.

So, it should be expected that, if similar facts are presented to the courts again, another Sinclair would win. The amount of money at stake was huge, some £28.7m. So why is it that I was so concerned? I had planned to use the reconstructed backstory of Sinclair v Versailles that follows in my thesis, but thanks to the Supreme Court in FHR v Cedar my sub-thesis that the decision and formulation Sinclair was right is, putting it mildly, heavily obsolete. I have no formal use for the backstory. But it does demonstrate my point, and is an interesting read; it is even ‘somewhat racy’ according to Professor TT Arvind. Hence it is made available here.

The Issues at Stake

The issues at stake are explained in full detail in my note, and in much other literature. The bare minimum needed to understand the context in which the story played out is provided here. The question of law is essentially: is there a proprietary, or merely personal, remedy against a fiduciary who takes a bribe or secret commission? The main consequence relevant for present purposes is that a proprietary remedy gives the claimant priority over the fiduciary’s general creditors in the case of the fiduciary’s bankruptcy.

The cases of Lister & Co v Stubbs (1890) 45 Ch D 1 (CA) and Metropolitan Bank v Heiron (1880) 5 Ex D 319 (CA) said the remedy was personal. The case of A-G for Hong Kong v Reid [1994] AC 324 (PC) said the remedy was proprietary. For the general case of breach of fiduciary duty, the remedy has long been said to be proprietary: Keech v Sandford (1726) Sel Cas Ch 61, 25 ER 223; Regal (Hastings) Ltd v Gulliver [1967] AC 134, [1942] 1 All ER 378 (HL); Boardman v Phipps [1967] AC 46 (HL). Lister and Heiron were thus thought to have been anomalies. Sinclair attempted to square the circle by laying down a test (now overruled) to distinguish between the results. A proprietary remedy would only be available, according to Lord Neuberger at [88]:

1. where an asset taken is or was the property of the beneficiary; or

2. where the fiduciary took advantage of an opportunity properly that of the beneficiary; otherwise

3. in all other cases, only a personal remedy is available.

So why was it necessary to reach such a formulation to deny Sinclair their desired remedy and, consequently, give the banks priority to the monies sought?

The Backstory of Sinclair v Versailles

Sinclair fought a long and vigorous campaign against Versailles, of which unfortunately only part can be discovered from the public judgments because there were settlements and even when there were not the trials were generally on liability only. While it is easy to sense from the last, most famous instalment of the Sinclair litigation, that Sinclair were trying to upset the ordinary ordering of claims in insolvency, that is just one part of the story.

The masterminds of the Versailles fraud were Carlton Ellington Cushnie and Frederick Clough, although the civil litigation was concerned mostly with Cushnie for reasons that will become clear. Indeed, the principal shareholder of Versailles Group plc (‘VGP’) was originally Cushnie via his alter ego, a company called Marrlist (save that Cushnie’s wife held 1% of the shares in Marrlist). Versailles Trade Finance Ltd (‘VTFL’) was a de facto subsidiary of VGP. In fact, VTFL was owned by WCW Nominees Ltd, of which the beneficial owner was one Sam Lopez, Cushnie’s daughter. However, Cushnie and Clough were both sole directors of both VGP and VTFL.[1]

VGP was for the most part a holding company[2] and VTFL carried on the day-to-day activities of the Ponzi scheme. The business Versailles presented to the world was one of factoring. Essentially this means short term lending to small manufacturers or distributors who could not wait for payment for goods from their customers.[3] Clearly, factoring requires a great deal of capital. The capital came from two classes of person, banks and wealthy individuals or investors, called ‘traders’.[4]

VTFL took loans to the value of some £70.5m from three banks, National Westminster Bank plc, Royal Bank of Scotland plc and Barclays Bank plc (‘the banks’).[5] While the banks did take charges over VTFL’s assets, these consisted principally of its book debts.[6] Given its book debts, ostensibly some £100m,[7] were in fact non-existent,[8] these charges were to prove useless and in essence the banks were in the position of unsecured creditors.

Trading Partners Ltd (‘TPL’) was a British Virgin Islands (‘BVI’) registered company.[9] Cushnie and Clough were directors although it was not part of the Versailles Group. It did enter into a ‘management agreement’ with VTFL whereby VTFL took exclusive responsibility for ‘the management and administration of the business activities of’[10] it. However, it was TPL who solicited money from ‘traders’, investors who wished to invest money in what was ostensibly a very successful factoring business. The traders were unsecured creditors.

One of those traders was Sinclair Investment Holdings SA (‘Sinclair’). Sinclair was another BVI incorporated company and Sinclair Investments (UK) Ltd (‘Sinclair (UK)’) was a subsidiary which became involved only in the last round of litigation.[11] Sinclair was owned by the Falcon Trust, which was thought to be a discretionary trust based in Ireland.[12] The Falcon Trust had a single corporate director, First Directors Ltd (FDL). FDL was based in the Isle of Man. The representatives of FDL took orders informally from one Daniel Hill, a beneficiary of the Falcon Trust.[13] Thus the controlling mind of Sinclair was thought to be Hill.

Sinclair borrowed £2.5m for investment from First Hemisphere Corporation (‘FHC’). FHC was owned by the Condor Trust.[14] The Condor Trust was funding Sinclair’s claims, and its beneficiaries were Daniel Hill, other Hill family members and charities.[15] Indeed, Sinclair appeared to be insolvent, and no evidence as to the financial standing of FHC was adduced when Cushnie demanded additional security for costs,[16] which is quite suspicious.

Sinclair was described as ‘a relative minnow’ in the grand scheme of things; the total sum taken from traders by TPL was £23m but Sinclair had only advanced £2.35m.[17]

This may be represented diagrammatically:

Versailles Diagram

There were in fact two frauds carried on by Versailles. The first, the ‘Versailles fraud’ was a process called ‘cross-firing’ whereby the monies advanced were transferred to and from VTFL in order to give the impression of a high turnover. The scale of the cross-firing was phenomenal, nearly £500m in total.[18] Accordingly, the share price of VTFL’s listed holding company, VGP, soared to a falsely inflated level. Given there was no real business, their true value was zero.[19]

The second, the ‘Traders fraud’ was the Ponzi scheme itself. Instead of paying out returns on the ‘investments’ to traders (at a spectacular rate of 15% per annum),[20] VTFL paid out capital. Of course, all Ponzi schemes collapse when the capital runs out, which is inevitable and occurs when the receipts from investors is outstripped by the false ‘returns’. Versailles had intensified the usual run of things by adding bank loans to the process, drawing it out yet further and increasing the losses sustained.

The Versailles group collapsed in January 2000[21] during investigations by the Department of Trade and Industry and the Serious Fraud Office.[22] At the time of the collapse, VTFL was indebted to the banks to the value of £70m, trade creditors to the value of £1.8m and the traders to the value of £22.6m. Stock market investors had bought £100m of VGP shares which had become worthless.[23] Versailles had only £23m of TPL’s funds and little else at the time of the collapse.[24] TPL also collapsed in January 2000 with just £1.3m in its bank account which was consumed in the insolvency process.[25] However, Cushnie sold 13.9m shares in VGP personally realising some £28.7m in November 1999 – just before the collapse.[26] Versailles’ joint receivers described this as ‘superbly timed’.[27]

It turned out that Sinclair did not lose very much money. They had received £1.2m back (ostensibly as returns, but in fact capital). In June 2005 they were allocated £1.1m from the criminal confiscation proceedings against Cushnie.[28] In January 2006 they obtained summary judgment against Cushnie personally in conspiracy to injure and dishonest assistance in the sum of £1.3m[29] (there was also a deceit claim which would have attracted the same or a similar quantum). In respect of these two claims, they were paid £1.1m, leaving a nominal loss of only £127,567.[30] However, this wasn’t good enough for them.

The scene is therefore set for what Sinclair was apparently trying to do. It became apparent that TPL was not merely a debtor, but a potential source of recovery by July 2001 when TPL’s liquidator put Versailles’ liquidator on notice of a proprietary claim.[31] Sinclair (UK) took an assignment of TPL’s relevant claims from the receivers in September 2006.[32] Sinclair and their backers were apparently determined not to waste a good crisis and instead decided to use it as an opportunity to make as much money as possible.

One may speculate as to what else might have motivated Sinclair’s actions. Sinclair emphasised Cushnie’s personal involvement in the selling of the scheme to them, detailing how there had been a series of meetings over the years, how Cushnie was personally dealt with them and how they were told that their funds were ring-fenced and separate from VTFL’s. Indeed, a ‘personal relationship’ had developed between Cushnie and the principal adviser of Sinclair.[33] It is unfortunately unclear who the principal adviser was. One suspects it was Daniel Hill. Cushnie had assured Sinclair repeatedly that he personally monitored each investment; accordingly, the principal adviser ‘felt that Mr Cushnie was a person upon whom he and therefore [Sinclair] could rely.’[34]

The background to these allegations of espousal of trust and fidelity was that both Sinclair and TPL were secretive offshore companies with complex arrangements. Crucially, this includes the need to have the ‘right people’ as trustees in order to operate the discretionary part of the arrangements in accordance with informal orders – consider the way the discretionary family trusts of which Sinclair was intimately connected were arranged. The element of discretion is essential in these trusts, for an absolute beneficial interest would not avoid tax liability; on the other hand, a trustee with discretionary powers must be trusted to do what the beneficiary wants, wants for their cannot be legal compulsion outside of very narrow grounds. Moreover, the agreement between TPL and Sinclair provided that monies held by TPL and not used in the factoring business would be held in trust.[35] Not only does this suggest a proprietary remedy and priority in any insolvency, it adds to the air of personal fidelity Cushnie projected; that he was one of them and committed an act of betrayal.

Cushnie fought Sinclair’s claims with chutzpah and ill will. Cushnie submitted an argument that Sinclair should fortify their security for costs because he would not be able to use his assets (frozen in the proceedings requiring that security) to invest in a business project. The applications judge criticised his ‘business plan’ as ‘thin’ on detail, appearing unexplainedly late in the day and with a particularly striking absence, namely what Cushnie’s participation would be.[36] Even as the judge did not say so, an air of fabrication surrounded the plan. There was an allegation that Cushnie said he would ensure that Hill would be ‘buried in costs’.[37] If true, it shows Cushnie’s methods to be bitter and personal, and if false, Sinclair’s, to be the same.  Similarly, when resisting an application for summary judgment, Cushnie claimed that Sinclair’s agreement with TPL (for the £2.35m ‘investment’) was a forgery, something the applications judge was very sceptical of.[38] The allegation was made even though a finding of forgery would simply have revived an earlier, unchallenged agreement and thus would have had no substantive effect on the claim.[39] Moreover, Cushnie had accepted that the ‘investment’ monies had been paid by Sinclair.[40] This further suggests a bitter, personal dispute.

Perhaps unsurprisingly, Sinclair acted first against Cushnie personally, on the basis of deceit, dishonest assistance and conspiracy to injure, as detailed above. Sinclair also attempted to claim directly against Cushnie in a claim for breach of fiduciary duty alleging that the sale of his shares in VGP amounted to an unauthorised secret profit which would have been held on proprietary constructive trust for them. However, Sinclair’s application to amend their claim against a number of his co-defendants, those who participated as agents in the dishonest assistance in that sale, was dismissed as being made too late, requiring a second adjournment also due to the fault of Sinclair. Sinclair then settled these claims, no doubt encouraged by the applications judge, who thundered against the ‘apparent ignorance on Sinclair’s part of Chancery Division procedure’ and ‘Sinclair’s incompetence in its trial preparation’.[41] No doubt the direct claim would have been doomed to fail, for the same reasons a similar descendant claim did, which we come onto next.

Sinclair then revived the breach of fiduciary duty claim, claiming against VTFL and the receivers (into whose hands the share sale profits could be traced). The idea that what was, despite all the affectations of trust and fidelity, in fact an arm’s-length deal could raise a fiduciary duty is implausible on current thinking on fiduciary duties[42] and that claim was finally rejected at trial.[43] The only surprise was that neither the chancery master, the deputy judge at first appeal[44] nor the Court of Appeal[45] accepted the invitation to strike it out at the interim stage. In the claim against VTFL Sinclair also alleged that the action in dishonest assistance extended to the profits of the breach of trust in addition to the trust monies. This radical claim was also rejected at trial.[46]

During those proceedings, Sinclair’s subsidiary, Sinclair (UK) took that fateful assignment of the claims of the other traders and of TPL against the proceeds of the sale of the shares from TPL’s liquidators. That led to the last, most famous, round of litigation. Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd actually comprised two proprietary claims,[47] although it is the first, concerning the proceeds of the share sales, that has been extensively discussed in the literature. The second sets the context for the principled discussion of when a proprietary remedy should be imposed and since it is simpler and less controversial, it is convenient to consider it first.

The second claim was to the traders’ monies which were passed to VTFL via TPL. While the assertion that Cushnie personally owed Sinclair fiduciary duties was risible, TPL owed VTFL fiduciary duties due to the management agreement. Therefore, TPL has a proprietary interest in the misapplied funds, which had found their way into the hands of the banks on the basis that they were TPL’s property.[48] Since the banks had had notice of the proprietary claim from September 2001, Sinclair (through TPL), could trace into these sums and recover them. The trial (and appeal) was on liability only, so we do not have the exact figure Sinclair retrieved from the banks. Moreover, since there was a certain amount of mixing and some monies were definitely not traceable, it cannot be calculated with great certainty from what is in the judgments. However, it is possible to say this much: VTFL held £23m at the time of the collapse; £1.75m came from the share sale so was not traceable to this particular breach of fiduciary duty so this could not be reached; moreover, the net loss was £10.1m and this operated as an upper limit.[49] Quite possibly a very large sum was retrieved. Whether it was a good bargain for Sinclair clearly depends upon the price they paid for the assignment, which, again, is unknown. But it was certainly a good result in principle, because Sinclair got what it bargained for when it took the assignment. While third parties – the banks – were affected, the doctrine of bona fide purchase acts as safeguard against unfair claims. Since the banks had notice, it is a fair and principled result that this claim against them succeeded in part.

Regarding the first claim, it is clear that Cushnie owed TPL fiduciary duties because he was a director of it. While Sinclair could not sue Cushnie in its own right, it was now in the shoes of TPL and thus had standing. Accordingly, Sinclair claimed that the proceeds of the share sale were an unauthorised profit and therefore subject to disgorgement. Some £5.2m traced through the valuable Kensington house Cushnie had bought was at stake, which had been handed over to the joint liquidators of VGP and VTFL as part of a settlement agreement with Cushnie. A personal remedy would have been ineffective against the banks and was therefore worthless, but a successful proprietary claim would have been effective (subject to the defence of bona fide purchase). Again, we know that Sinclair had bargained for this claim, at least as against the receivers and traders.[50] However, the legal strength of this claim was clearly smaller than that of the second; the continuing potential validity (at the time) of Lister v Stubbs and Metropolitan Bank v Heiron cast doubt over whether a proprietary remedy is available where the unauthorised monies received were not traceable to the breach of fiduciary duty despite A-G for Hong Kong v Reid.[51]

Moreover, as Lord Neuberger noted, this first claim had been ‘targeted initially at Mr Cushnie and his breach of fiduciary duties as a director of TPL, and effectively [sought] to undermine the benefit to the defendants of the settlement agreement’ with Cushnie.[52] No such accusation could be made of the second claim, for which TPL’s liquidator had been compensated. Here the banks – whose claims Sinclair did not buy out – stood to pay out and get nothing in return. Unlike in the first claim, it was not TPL’s money, or even TPL’s opportunity being sought – it was the illicit gain from an act related by possibility, but little else.


What this exposition has sought to demonstrate is the enormously disruptive power of the proprietary remedy in the delicate balance of bargains that took place during the insolvency process. It also has sought to show the importance of taking an even-handed approach in determining these claims, especially when both parties have spectacularly failed to acquit themselves of sharp practice.

Richard Nolan noted that in Reid that ‘[a] reappraisal and restructuring of the law … is unlikely to have commended it to their Lordships, and the moral culpability of the respondents … must have encouraged their Lordships to impose a constructive trust [i.e. proprietary remedy] on them.’[53] Reid had taken bribes from organised crime to frustrate their prosecution.[54] Awarding a proprietary remedy had made it considerably easier for the Crown to recover the traceable proceeds of those bribes.[55] Conversely, in Sinclair, a proprietary remedy would have rewarded the undeserving claimant. This much surely have encouraged the Court of Appeal to find a way to deny the claimant a proprietary remedy.

Indeed, Lord Neuberger had formulated a test which successfully distinguished between remoter acts such as the share sale and other breaches, where only the second kind attracted a proprietary remedy. But now, following FHR v Cedar, there is always a proprietary remedy for breach of fiduciary duty. It seems that for these hard cases, rough justice will be done. I would echo, modifying only slightly, Nolan’s words (originally written before the debate had been settled). We have a rule that is right because it is final, not one that is final because it is right.[56]


[1] Sinclair Investment Holdings SA v Versailles Trade Finance Ltd [2007] EWHC 915 (Ch), [2007] 2 All ER (Comm) 993 [14].

[2] Ibid [9].

[3] See Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2010] EWHC 1614, [2011] 1 BCLC 202 (Ch) [3] for more details.

[4] Ibid [4].

[5] Sinclair Investment Holdings SA v Versailles Trade Finance Ltd (n 1) [24].

[6] Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (n 3) [10].

[7] Sinclair Investment Holdings SA v Versailles Trade Finance Ltd (n 1) [24].

[8] Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (n 3) [116].

[9] Sinclair Investment Holdings SA v Versailles Trade Finance Ltd (n 1) [13].

[10] Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, [2012] Ch 453 [7].

[11] Sinclair Investment Holdings SA v Versailles Trade Finance Ltd (n 1) [39].

[12] Sinclair Investment Holdings SA v Cushnie [2004] EWHC 218 (Ch) [10]; Sinclair Investment Holdings SA v Versailles Trade Finance Ltd (n 1) [56].

[13] Sinclair Investment Holdings SA v Versailles Trade Finance Ltd (n 1) [42].

[14] Sinclair Investment Holdings SA v Cushnie (n 12) [10].

[15] Sinclair Investment Holdings SA v Versailles Trade Finance Ltd (n 1) [56].

[16] Sinclair Investment Holdings SA v Cushnie (n 12) [11], [33], [4].

[17] Sinclair Investment Holdings SA v Versailles Trade Finance Ltd (n 1) [74].

[18] Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (n 3) [8].

[19] This taxonomy is taken from R v Cushnie & Clough [2005] EWCA Crim 962.

[20] Sinclair Investment Holdings SA v Cushnie [2006] EWHC 219 (Ch), [2006] All ER (D) 202 (Jan) [4].

[21] Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (n 3) [1].

[22] Ibid [5].

[23] Sinclair Investment Holdings SA v Versailles Trade Finance Ltd (n 1) [24].

[24] Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (n 3) [165].

[25] Sinclair Investment Holdings SA v Versailles Trade Finance Ltd (n 1) [24].

[26] Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (n 3) [15].

[27] Sinclair v Versailles (n 10) [111].

[28] Sinclair Investment Holdings SA v Versailles Trade Finance Ltd (n 1) [33].

[29] Sinclair Investment Holdings SA v Cushnie (n 20); see also Sinclair Investment Holdings SA v Versailles Trade Finance Ltd (n 1) [36].

[30] Sinclair Investment Holdings SA v Versailles Trade Finance Ltd (n 1) [33], [34].

[31] Ibid [68];

[32] Ibid [39]; Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (n 3) [164] aff’d Sinclair v Versailles (n 10) [131]–[148].

[33] Sinclair Investment Holdings SA v Versailles Trade Finance Ltd [2005] EWCA Civ 722, [2006] 1 BCLC 60 [6].

[34] Ibid [6].

[35] Sinclair Investment Holdings SA v Versailles Trade Finance Ltd (n 33) [5].

[36] Sinclair Investment Holdings SA v Cushnie (n 12).

[37] Ibid [40] point (vii).

[38] Sinclair Investment Holdings SA v Cushnie (n 20) [31]–[46].

[39] Ibid [41].

[40] Ibid [15].

[41] Sinclair Investment Holdings SA v Cushnie [2006] EWHC 573 (Ch), [2006] All ER (D) 298 (Mar) [14]–[15].

[42] See Bristol and West Building Society v Mothew [1998] Ch 1 (CA) 18.

[43] Sinclair Investment Holdings SA v Versailles Trade Finance Ltd (n 1) [124].

[44] Sinclair Investment Holdings SA v Versailles Trade Finance Ltd [2004] EWHC 2169 (Ch).

[45] Sinclair Investment Holdings SA v Versailles Trade Finance Ltd (n 33).

[46] Sinclair Investment Holdings SA v Versailles Trade Finance Ltd (n 1) [129]. See Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch) [1597].

[47] Sinclair v Versailles (n 10) [24].

[48] Ibid [30].

[49] Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (n 3) [165].

[50] Sinclair v Versailles (n 10) [23].

[51] A-G for Hong Kong v Reid [1994] AC 324 (PC).

[52] Sinclair v Versailles (n 10) [24].

[53] Richard C Nolan, ‘The wages of sin: iniquity in equity following A-G for Hong Kong v Reid’ (1994) Co Law 3, 9.

[54] Reid (n 51).

[55] Nolan (n 53) 4 n 15.

[56] Richard Nolan, ‘Bribes: a reprise’ (2010) 127 LQR 19.