A recent English case Relfo Ltd v Jadvavarsani [2012] EWHC 2168 (Ch) illustrates how a liquidator may make use of common law and equitable claims to recover the company’s diverted funds from third parties.

Introduction

In this case, Devji Ramji Gorecia (“Gorecia”), the director and controller of an insolvent U.K. company, Relfo Limited (“Relfo”), was alleged to have acted in breach of fiduciary duty by diverting Relfo’s funds to the defendant through a series of transactions between different offshore companies across different overseas bank accounts.

The suspicious payments

From 2001 to 2004, the balance in Relfo’s account fell from £2.2m to only £507k due to Gorecia’s decision to engage in loss-making trading activities. Relfo had not paid for its tax liability that fell due in 2002. In 2004, the U.K. Inland Revenue demanded payment for the above tax liability. No payment was made. Instead, Gorecia paid away £500K (i.e. around US$890K) to the Latvian bank account of Mirren Limited (“Mirren”), a company with a business address in the BVI (the “Relfo/Mirren payment”). The next day, a U.S. company, Intertrade Group LLC, paid around US$878K from its bank account in Lithuania to the defendant’s account in Singapore (the “Intertrade payment”). Soon afterwards, US$100K was paid from the defendant’s account to Gorecia’s account. Around 2 months later, Relfo was wound up.

The liquidator’s action

The liquidator held the view that the funds received by the defendant from the Intertrade payment were funds diverted from and belonging to Relfo under the Relfo/Mirren payment. First, the Relfo/Mirren payment and the Intertrade payment to the defendant were linked and indeed the Intertrade payment was exactly equal to the Relfo/Mirren payment less 1.3%. Second, the US$100K paid to Gorecia was a reward to Gorecia for diverting Relfo’s funds for the defendant’s benefit.

Based on the above, the liquidator first commenced legal proceedings against the defendant in Singapore where the Intertrade payment was received and obtained a freezing order on the defendant’s bank account. However, the Singaporean court subsequently dismissed the liquidator’s claim and discharged the freezing order on the ground that the court should not enforce foreign revenue law in relation to Relfo’s U.K. tax liability. The liquidator then turned to the High Court in England and maintained three distinct claims against the defendant:-

1. Proprietary claim by tracing

The liquidator claimed that Relfo had a superior title in equity to the funds received by the defendant from the Intertrade payment. This is a claim of the company’s equitable title in the diverted assets which are held by the third party as a constructive trustee and involves tracing the value of the diverted assets into its proceeds and the persons who has handled or received them.

To succeed on this claim, the liquidator must identify the property that represented Relfo’s diverted funds. Since the freezing order issued by the Singaporean court was discharged in 2009, it is likely that the funds had been paid out and spent. Unfortunately, the liquidator failed to show that the defendant had retained any part of the funds from the Intertrade payment and still held it. Therefore, the court dismissed the proprietary claim.

2. Knowing receipt

Despite failure under the proprietary claim, the liquidator succeeded in his claim of knowing receipt. This is a claim of third party’s personal liability for receiving the company’s assets under a breach of fiduciary knowing the circumstances relating to the breach of fiduciary duty.

It is obvious that Gorecia had acted in breach of fiduciary duty and without proper authority from Relfo by causing Relfo to make the Relfo/Mirren with a view to benefiting the defendant unduly. As to receipt, although the liquidator could not directly show how the Relfo/Mirren payment was converted into the Intertrade payment by pointing out specific transactions, there was strong circumstantial evidence for inferring that the Intertrade payment was indeed the direct product of the Relfo/Mirren payment and was designed to produce the result that the funds paid under the Relfo/Mirren payment were paid on to the defendant.

As the two payments were closely related in time and amount, and there was no other reason for the Intertrade payment to be made to the defendant, the court held that the surrounding circumstances sufficed for inferring the defendant’s receipt of funds belonging to Relfo. Also, the court found that the defendant was aware that the money was improperly derived from Relfo in breach of duty by Gorecia that he had the requisite knowledge for knowing receipt. Accordingly, the defendant was held personally liable to account to the liquidator for the full amount of the Intertrade payment he received.

3. Unjust enrichment

Since the liquidator had succeeded in his claim in knowing receipt, he did not need to rely on the claim based on unjust enrichment. As obiter, Sales J observed that even if the Intertrade payment could not be traced from the Relfo/Mirren payment, there was sufficient nexus between the two payments that the defendant had clearly been enriched by it at Relfo's expense. Also, unjust enrichment was a strict liability that it did not depend on the recipient’s state of knowledge. If this claim was successfully relied on, the defendant would have been liable for restitution of the enrichment.

With the benefit of hindsight, the liquidator could have requested the defendant to disclose his bank statements to show the whereabouts of the diverted funds. By this, the proprietary claim could have been successful, and the liquidator could have more effectively recovered the company’s assets, as a proprietary claim protects the company’s assets in the event of the defendant’s bankruptcy, and make it easier for the liquidator to obtain necessary Mareva injunction to protect their claim(s).

Conclusion

This case is useful that first, it sheds light on the multiple forums involved in cross-border insolvency. Most importantly, it illustrates the use of three common and inter-related equitable claims for asset recovery. While proprietary claim offers effective asset recovery, it requires identification of the traceable assets under the claim; knowing receipt allows inference as to receipt of the assets but only give rise to personal liability; unjust enrichment does not require receipt but only gives rise to personal liability subject to certain defences (notably the change of position defence). This case illustrates how these three claims could be pleaded together to optimize assets recovery by the liquidator.