I’m always interested in what people who are not totally devoted to a particular area of law think about certain cases. At the moment I’m working on the issue of proprietary remedies over bribes taken in breach of fiduciary duty. I’m going to put two scenarios to you (derived from the cases) and ask you what you’d do if you were the judge in that case. I don’t care if you’re not a lawyer – in fact I’d love to hear your thoughts.
Scenario One (derived from Attorney-General for Hong Kong v Reid [1994] 1 AC 324)
R is a Crown Prosecutor for the Hong Kong government, and, among other things, he’s employed to prosecute corrupt criminal organisations. Instead of doing so, R accepts large bribes from said criminal organisations to desist from prosecuting them. He uses the bribes to purchase properties in New Zealand, which he places in his own name, and also in the names of his wife and his solicitor. R is caught, gaoled and ordered to pay the government HK$12.4m. R does not pay the Hong Kong government, but the Hong Kong government becomes aware of the properties. The Hong Kong government wants to stop R from selling the properties, and claim the properties for itself, but in order to do so, it has to establish that it has some kind of “ownership” over the bribes, which it then follows through into the properties. R and R’s wife and the solicitor attempt to resist the action.
Would you award the Hong Kong government a property right over the bribe? Why or why not?
Scenario Two (derived from Sinclair Investments (UK) Ltd v Versailles Trade Finance Limited [2011] EWCA Civ 347)
Some investors invest in a fantastic investment scheme. No matter what happens to the market, the investors keep getting excellent returns on their investments, and the investment scheme is described in glowing terms in financial and investor media. The scheme is doing so well that a public company which is related to the investment company has a massive increase in the value of its shares. The same person is director of both companies. He sells his shares in the public company for a profit of £28.69m, and uses them to buy a property in Kensington and to pay off bank loans. Unfortunately, everyone has forgotten the cardinal rule of investment, which is: if it sounds too good to be true, it is. The investment scheme is a ‘Ponzi scheme’ and the ‘dividends’ the investors are receiving are in fact investment funds from later investors. Eventually the scheme collapses. The director is declared insolvent and gaoled. The investors have lost their money. They try to say that the profit from the sale of the shares in the public company should belong to them, because it is ultimately derived from the director’s fraud against them. If they succeed in establishing a property right over the bribe, they remove the profit from the pool of assets available for distribution to other unsecured creditors. The other creditors, secured and unsecured, resist the action.
Would you award the investors a property right over the bribe? Why or why not?
19 Comments
Longtime reader here. Not a lawyer, so I’ll give it a bite.
Sc. 1) Yes, I mean you’ve established that the bribe is at that point in time the property of R. So can’t you demand assets based on due payment of the fine, take whatever action is needed based on a due debt. Is it possible to go through civil court? i.e do something like this: http://buswk.co/Uqnu1u (the debt must be paid, therefore do this to make sure you can) In this case, just try to establish that the properties are worth more to the Hong Kong government as an investment than they are sold immediately?
Sc. 2) I would say No, because what they owned shares in was purely speculative and didn’t really exist, so the value of all those shares is Null. As in, not even a number.
Well, that will most likely give you either a smile or a facepalm. Keep up the good work 🙂
Waistless, as it happens your own instincts accord precisely with the instincts of the court in each case. R lost, the investors also lost. Interestingly the court in the first case said that the wronged person should always get a property interest; the court in the second case seems to suggest the wronged person should never get a proprietary interest. My own argument (which I think accords with your own reasoning) is that it should depend on the circumstances. But you’re right – the court in the first case is essentially using equity as de facto proceeds of crime legislation. I need to look more into why they didn’t use proceeds of crime legislation in that case – did it not have extra-territorial operation?
1) Yes. The bribe seems to me to be effectively be a payment for (unauthorised) service (non-prosecution). Given the service is supplied on behalf of the government, I see it as having ownership of the bribe. An analogy would be an employee selling off company assets and pocketing the money for themselves. At the end of the day the company had rights over the assets and if these are unrecoverable then the rights would reside with the money or wherever it had been invested.
2) No. I would think the people who bought the overpriced shares based on (presumably) fraudulent information provided by the director would have the most direct claim on the profits. Either way I don’t see that as a justification for privileging either group over other people who are owed money.
In the first scenario, based only upon the facts as stated, I can’t see any particular significance in the action to ‘stop the selling’ you mention? It seems as if the HK government would be entitled to either the properties, or their net proceeds, as being assets of R being gained from the proceeds of crime. But your example facts don’t go far enough: if the NZ properties were themselves subject to secured or unsecured creditor charges (i.e. ‘bleeding’ into your second scenario) then I’d hope that the HK govt would get only the net proceeds after those charges were settled.
In your second scenario I think you need to tidy up the mention of ‘bribe’ towards the end? Can’t see where that reference arose given the facts you state. That aside, and thinking only of the parties you mention, it would be wrong to place the interests of the investors above the interests of the various secured and unsecured creditors (much as in case 1). The second case is more interesting, but you’d need more facts to understand why the investors even considered that they might have a prior right.
LE, I see in the paper this a.m. that two Woolies executives are involved receiving inducements from suppliers. A bit like your first case, so maybe Woolworths can grab their holiday cottages? Or somebody should 🙂
Thank you desipis! Again your instincts follow the actual results and I think this is instructive. Your reasoning in the case of R is actually very close to that of the court, relying on Lord Millett’s extra judicial writings. I have a slightly different view – the court is retrospectively redistributing ownership because no one else is deserving. By contrast I agree with you that the investors assumed the risk of insolvency and that there is no reason for them to be privileged over other creditors. I would rely on the principle of pari passu or equality inherent in bankruptcy. But I still have to exercise more thought on matter. Watch this space – I’ll tell you when I publish on the matter.
Thanks KVD. Your point as to third party creditors in the Reid case is perceptive. The court says that the government should only get the proceeds of the properties insofar as it was purchased using the bribe. It also says that some account should be taken of R’s wife’s potential spousal claim. But unfortunately (to my mind) the court is totally dismissive of the problems any third party creditors face, and says the HK govt trumps them all. On the facts of the case it’s not clear there are any, but in other circumstances there might be.
My reference to bribe in the second case is sloppy. It’s more in the nature of a secret commission made in breach of duty to the investors, if it’s anything.
That Woolies case is bang on target! One of the early of this kind, Lister v Stubbs was exactly of that nature, where a supplier received inducements and ripped off his employer. The court declined to award a property right in the inducement, and it was this case which was approved by the English Court of Appeal in the investor case.
Mr & Mrs HongKong R and their counsel have such a nerve to resist the fine for their crime.
no on Scenario 2: get-rich-quick investments, in my opinion, are equivalent to putting the rent on Race 5. let all the whiners whine.
Ann, again your sentiment about Mr and Mrs R totally echoes the court’s. In the last paragraph of the judgment Lord Templeman says R and associates can have no honest reason for resisting the action, and surely their aim is to sell the houses and spirit the proceeds off to some “Shangri La” with numbered bank accounts.
With the investors – you’d be amazed as to what otherwise intelligent people can be conned into believing with investments! It’s greed but it’s also wish for security in the future…produces the opposite outcome. I have sat through trials of failed investment schemes and actually many of the investors were quite pitiable – had lost their houses and working full time in old age because of these failed investments. Still – there is always a sense in which an investment is a gamble, as you point out. And with gambles, you win some you lose some.
(Background: corporate crank sitting law qualifications, but haven’t done property/proprietary remedies yet!)
Having read the previous comments, I wonder whether it is relevant that scenario 1’s agitator is the State (or its equivalent in HK), whereas that in scenario 2 is the people.
There are provisions for proceeds of crime to be confiscated by the State (eg. Proceeds of Crime Act) but not for non-govt victims?
Therefore I wonder if the lack of remedy for Scenario 2 merely stems from the fact that the victims were non-government, rather than the facts of the case itself?
Alex, I think it does make a difference, but it’s not the only factor. In a recent Full Federal Court case called Grimaldi v Chameleon Mining, Finn J, speaking for the court, said it was particularly important to deter bribery of government officials, and accordingly, he preferred the reasoning of the Court in the Crown Prosecutor case, Reid. But it was in a sense lucky happenstance the bribed person in that case was a fiduciary – why should it depend on that status in particular?
I’m an insolvency specialist, not a lawyer.
My response to scenario one is:- Yes, based on the ancient common law principle that one should not be able to profit from one’s crime; e.g.; a man who murders his father does not inherit his estate.
Scenario two. No. The investors took their risk, as did the unsecured creditors. Pari passu should apply
Allan, how I’d love to speak to you. I’m a property/equity/contract lawyer, not an insolvency specialist. I want to really delve down into what would happen to priorities if, variously a personal remedy, a lien and a constructive trust were awarded. I had thought that a lien is a good middle road, if the court feels it must award something proprietary, but I guess it depends on the timing? And then how does the fact that I think a court imposed lien is unregisterable under the PPSA play into priorities now?
Very, very interesting that all commenters have had exactly the same instincts as the outcomes in the cases. Also heartening for me, because my instinct is exactly the same, so I’m trying to argue both cases are right but that the first one is has wrong-headed reasoning to get to the right result.
LE, not to butt in, but that’s an interesting comment. Made me think (re liens) of James Hardie. Would that be correct?
Hi, LE.
I’d have thought that a constructive trust either exists, ab initio, or it doesn’t. In the event of doubt as to its existence, it would be for a Court to determine.
Assuming that the trust exists, any lien would be subordinate and subject to the “terms of the trust”. A personal remedy would be “third cab off the rank”.
I’m not familiar with the term “PPSA” so I can’t comment.
By all means, give me a call if you wish:- 0410747691 or email [email protected]
Cheers,
Allan
The key factor that I see is whether the liability was voluntary. In the first case, the government never intended for the prosecutor to receive payment for what was essentially a government provided service. While in the second case the investor had voluntarily handed over their money.
LE
Reid was of course familiar to me but I had to have a look at the second case. Apart from the “bribe” misnomer, I think that there are some other aspects of case which need to be recounted more specifically: from your version it is almost impossible to see why the investors thought they might have a proprietary remedy at all.
I suspect the reason why you get the answers you do from other commenters may have something to do with the way you tell the facts: it’s a bit like when one asks one’s friends or colleagues for advice. Often one ends up receiving confirmation instead because the conclusion is inherent in the way the tale is told.
Allan: as LE will doubtless tell you, PPSA is the relatively recently enacted Personal Properties Securities Act.
Marcellous, the argument was: director only made the profit by selling the shares in the public company because he breached his fiduciary duty to the investment company. This was analogous to a bribe or a secret commission, as it proceeded out of wrongdoing. Fiduciaries must not profit in breach of their duty, the sale of the shares was a profit which flowed out of the breach, ergo they were entitled to it. Reid said that whenever a fiduciary makes a profit from a bribe there should be an immediate CT, and it doesn’t matter that they had no ownership in the proceeds of the shares or the public company – no more did the HK govt in the bribe.
The other creditors were…banks. Many of them were secured (mortgages, charges) and had used the proceeds of the securities to pay off debts. The investors then sought to trace into the banks’ accounts on the basis of the purported CT or to get the banks for knowing receipt on the basis of the CT. All a very long shot. It was an effort to say their right trumped the banks.
I basically paraphrased the judgments, so perhaps my descriptions of the facts reflect the judicial decisions – they emphasise different things which naturally lend support to the conclusions to which the judges come. Reid doesn’t even say much about unsecured creditors. Sinclair emphasises it. I wish I knew more about who else was involved in Reid – were there banks or the like?
Allan, thanks so much. I’m in the UK right now so might email you rather than call.
The vexing question is: when do CTs come into existence? It could be the date of the wrongdoing, it could be the date of court order or somewhere in between. This is so of CTs in particular (at least in Australia). It is very irritating. This is why we need some guidelines. How is someone like you to do his job if some hitherto unknown interest emerges out of the woodwork?
It would be interesting to see what happens if the Hong Kong prosecutor and his wife separated…