Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (in Administration) Court of Appeal [2011] EWCA Civ 347

Abstract

THE PURSUIT OF PROPRIETARY REMEDIES FOR BREACH OF FIDUCIARY DUTYThere is an old adage that if an opportunity looks too good to be true, then it almost certainly is. Despite this, the law reports are filled with examples of people seeking redress for the fallout from “get rich quick” schemes that have gone wrong. One type of scam, exemplified by the fraudulent investment scheme run by Bernard Madoff from the United States and which collapsed in 2008, is known as a “Ponzi1 scheme”.2 The wrongdoer in such a scheme invites “investments” promising a high rate of return. The funds subscribed are not in fact invested (or if they are, they are invested in vehicles which produce a lower rate of return than that promised). Instead, the money from new subscribers is used to pay the rewards to earlier subscribers. In due course the scheme is bound to collapse, because there will be a point at which the new funds coming in are insufficient to make the payments to existing subscribers, and the bubble of new investment can continue only for as long as there is confidence on the part of subscribers, encouraging fresh deposits. When the scheme begins to unravel, it falls apart very quickly, since the assets held by the wrongdoer are inevitably inadequate to reimburse all of the subscribers in full. In the ensuing insolvent liquidation, subscribers stand to recover only a small fraction of their subscription as unsecured creditors unless they can demonstrate that they have a proprietary interest in some of the remaining assets. Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd is a case involving what the judge at first instance called a “classic Ponzi scheme”.