Fraud

Breach of trust - Constructive trust - Claimant employing first defendant

Glen Dimplex Home Appliances Ltd v Smith and others: Queen's Bench Division, Commercial Court (Judge Hirst QC sitting as a deputy judge of the High Court): 20 December 2011

The first defendant was employed by the claimant company as a purchase ledger supervisor. The first defendant's husband (the second defendant) had also been employed by the claimant. In March 2005, the second defendant retired following a serious back injury sustained at work, for which a claim was settled by payment of approximately £230,000 (the compensation).

The third defendant was the daughter of the first and second defendants and was married to the fourth defendant. Between June 2005 and October 2010, the first defendant stole approximately £2.8m from the claimant (the fraud) by manipulating BACS payments due to suppliers to divert funds and concealing her actions by falsifying creditor listings and forging bank statements.

The fraud started on 3 June 2005, when the first defendant arranged for approximately £29,000 to be paid from the claimant to the first and second defendants' joint bank account. From 22 June, the first defendant arranged for large payments to be made to the third defendant's bank account. The proceeds of the fraud received into the first and second defendants' joint bank accounts (the joint accounts) were used in a number of significant capital purchases.

In July 2007, a property was purchased in the names of the third and fourth defendants at a cost of £225,000 (the property) using funds received from the claimant. In October 2010, the fraud was discovered whilst the first defendant was away from work. In November, the first defendant was summarily dismissed by the claimant. The claims brought by the claimant against the first defendant were put in breach of contract, deceit, breach of fiduciary duty as a constructive trustee of the misappropriated funds, money had and received and unlawful means conspiracy.

In June 2011, the first defendant submitted to judgment for £2.8m plus costs. In relation to the second and third defendants, the claimant alleged, inter alia, that they had assisted the first defendant to breach her fiduciary duties and to breach the constructive trust by allowing their bank accounts to be used to receive and retain the monies paid into those accounts and to pay out monies.

Further, that they had received funds belonging to the claimant into their bank accounts knowing that they belonged to the claimant (the dishonest assistance and knowing receipt claims). As against the third and fourth defendants, the claimant brought, inter alia, a tracing claim in respect of the property on the basis that it was purchased with sums misappropriated by the first defendant from the claimant (the tracing claim). The claimant alleged that, as a result, the property was held by the third and fourth defendants on constructive or resulting trust for it. The claimant applied for summary judgment: (i) against the second and third defendants in relation to the dishonest assistance and knowing receipt claims; and (ii) against the third and fourth defendants in relation to the tracing claim.

The principle issue to be determined was whether the defendants had a real prospect of succeeding in their defence of the claims. In relation to the dishonest assistance and knowing receipt claims, the second and third defendants submitted that the first time that they became aware of the allegation that the first claimant had been involved in the fraud was when the claimant's solicitors executed a search order at the first defendant's home.

They further submitted, inter alia, that, like the claimant, they had been duped by the first defendant. The third defendant submitted that she was led to believe that the second defendant's claim against the claimant had been settled for over £1m and that the monies paid to her were gifts from her parents from the compensation. The claimant contended that the second defendant's own expenditure was such that he must have realised that they could not afford that expenditure out of their income. In relation to the tracing claim, the fourth defendant denied that he acted dishonestly or that he received any money or assisted anyone. The third and fourth defendants submitted that good consideration had been given for the monies by an agreement to sell a different property (the other property) to the first defendant for £190,000.

The application would succeed in part.

(1) It was settled law that summary judgment ought to be granted in fraud cases only where it was plain and obvious that there had been dishonesty (see [43], [44] of the judgment). Wrexham Association Football Club Ltd v Crucialmove Ltd [2008] 1 BCLC 508 applied; Antonio Gramsci Shipping Corporation v Recoletos Ltd [2010] All ER (D) 241 (May) applied.

(2) It was settled law that a deliberate closing of eyes and a deliberate failure to ask blatantly obvious questions for fear of what would be learned amounted to dishonesty (see [48] of the judgment). Royal Brunei Airlines Sdn Bhd v Tan [1995] 3 All ER 97 applied.

(3) On the facts, it was not sufficiently clearly established that the third defendant had known that the monies she had received from the claimant had been the result of a fraud committed by the first defendant. In circumstances where the third defendant might not have known the true state of her parents' financial affairs and might have been misled by the first defendant as to the extent of the compensation, it would have been inappropriate to enter summary judgment on the dishonest assistance and knowing receipt claims against her (see [47] of the judgment).

The dishonest assistance and knowing receipt claims against the third defendant would have to go to trial (see [47] of the judgment).

(4) On the facts, the second defendant had no real prospect of succeeding in his defence of the claims in relation to the joint accounts. At the very least, he had to have strongly suspected that the first defendant had been stealing from her employer and to have deliberately closed his eyes and ears and to have deliberately not asked questions in case he learned something he would rather not know. The court was satisfied that it was clearly established against the second defendant that he had known of the first defendant's fraud from the outset (see [47], [50] of the judgment).

(5) On the facts, the third and fourth defendants had no real prospect of succeeding in their defence of the tracing claim in relation to the property (see [56] of the judgment). A declaration would be made by the court that the property was held by the third and fourth defendants on trust for the claimant absolutely (see [56] of the judgment).

Derek Sweeting QC and Timothy J Walker (instructed by Gordons LLP) for the claimant; Mark E G Harper (instructed by Brabners Chaffe Street LLP) for the second and third defendants; The fourth defendant appeared in person.