SFO v Litigation Capital & Others: Guidance as to Equitable Principles

21 May, 2021

Judgment in SFO & Anr v Litigation Capital Ltd & 46 Ors (In re Gerald Martin Smith) was handed down by Mr Justice Foxton on 18 May 2021 (the “Trial Judgment”) following a seven week fully remote trial which took place between January and March 2021. Foxton J also handed down a substantial judgment on strike out/summary judgment in SFO & Anr v Hotel Portfolio II UK Limited & Ors (the “Strike Out Judgment”) at the same time, following a three day hearing in March 2021, relating to matters which did not fall for determination in the Trial Judgment and which were otherwise reserved for a Phase 2 trial.

The case concerned the competing proprietary claims of a variety of parties to a range of assets held in onshore and offshore structures, including shares in BVI, Manx, and Marshall Island companies, four properties in Jersey, a number of flats in Central London, loans, jewellery and £2m secured by a freezing injunction.

As Foxton J explained “The disputes before the Court originate in dealings between two entrepreneurs who amply merit the traditional epithet of colourful”, namely the twice convicted fraudster, Dr Gerald Smith, and the businessman Mr Andrew Ruhan, and “[t]he litigants before the court are principally parties who dealt with, and in some shape or form claim to derive entitlements through, one of Dr Smith or Mr Ruhan, or those associated with them.” However, “[m]any of the relevant transactions were undertaken either with a view to obscuring their true nature, or negating the apparent effect of other transactions. The result has been a dispute of labyrinthine complexity, in which matters are rarely what they appear to be, and which has offered a near-infinite possibility for disputation.

A number of the parties, namely the Serious Fraud Office and the Enforcement Receivers (in relation to Dr Smith’s criminal confiscation order following his fraud), the Viscount of the Royal Court of Jersey (as the administrator of the bankruptcy estates of Dr Smith’s ex wife and the holding company of Dr Smith’s property empire), Harbour Fund II LLP (which funded the Commercial Court litigation between Dr Smith and Mr Ruhan between 2013-2016 (the “Orb Claim”)), Stewarts Law (which had conduct of those proceedings) and the Joint Liquidators of several BVI companies, came to a settlement between one another in 2019 and then ran their cases together (the “Settlement Parties”).

Their interests were opposed, either wholly or in part, by Messrs Thomas & Taylor (two co-claimants in the Orb Claim), Phoenix & Minardi (who claimed to have rights flowing from the settlement of the Orb Claim in 2016), Hotel Portfolio II UK Limited (which, via insolvency practitioners, claimed that Mr Ruhan had acted in breach of fiduciary duty and that the relevant proceeds had passed into the control of Dr Smith and then on into the assets which were the subject of the trial) and Mr Ulrich Pelz (who claimed an entitlement to proceeds of profits said to have been made by Mr Ruhan’s investments in Qatar and then used, in part, to acquire the assets which were the subject of the trial). Various parties connected to Dr Smith settled during the trial, shortly before the cross examination of those parties was due to commence.

The class of interested parties was determined following earlier judgments of Popplewell J (as he then was) and later Foxton J, which utilised the procedure in CPR 19.8A to make orders binding non-parties in claims concerned with trusts (including constructive trusts). The consideration of these procedures for managing complex equitable claims with multiple competing parties, and in particular the provisions concerning advertisement of the proceedings and a guillotine for participation, formed part of a prior fully reasoned judgment by Foxton J (the “Advertisement and Guillotine Judgment”). That judgment is itself likely to be of practical interest, in particular to fraud practitioners.

The Trial Judgment, which reflects the fact that the Settlement Parties were successful in relation to the key issues in the case, will be of broad interest to litigation funders, solicitors, insolvency practitioners and officeholders, Jersey lawyers and those who are otherwise involved in chancery/commercial, offshore, fraud and proceeds of crime work. It contains extensive discussion and application of numerous equitable principles, the most important of which are set out below, with references to the relevant paragraphs:

  • Express trusts in Litigation Funding Agreements / Trusts of future property: [152]-[154]; [294]-[306]
  • The nature of a ‘beneficial Interest’ under a trust / Equitable obligations under a trust: [272]-[293]
  • The termination of discretionary trusts by the invocation of the rule in Saunders v Vautier: [195]-[207]
  • The operation of the ‘Bona Fide Purchaser’ / ‘Equity’s Darling’ defence to equitable claims, including tracing aspects of such claims: [130]-[151]; [318]-[325]; [423]-[475]
  • Equitable Assignment: [257]-[269]
  • The ‘Unclean Hands’ defence / Potential effect of conduct on equitable priority: [308]-[317]
  • Subrogation to the trustee’s right of indemnity: [331]-[372]
  • Solicitors’ Liens (including in relation to non-client parties): [374]-[417]
  • Relief under the Court’s Berkeley Applegate jurisdiction: [476]-[483]
  • Constructive trusts over Jersey immoveable property: [505]-[533]
  • Insolvency Practitioners’ position during trial as regards their s236 powers and potentially privileged material: [21]-[31]
  • The treatment of nominees in Confiscation / Proceeds of Crime proceedings: [597]-[610]

Foxton J also took the opportunity to commemorate the late Edmund King QC and his last published essay, commenting in the course of the Trial Judgment that “Edmund King QC, one of the most talented and popular advocates at the Commercial Bar before his tragically early death on 24 December last year, wrote an essay entitled “How to Lose A Case”, which is essential reading for any litigator (young or old)…”: [50]. That essay can be found here.

The Strike Out Judgment dismissed a number of Hotel Portfolio II UK Limited’s attempts to trace into the assets which were the subject of the Trial Judgment in relation to the period prior to that being considered at the trial, and required that the surviving analysis now be pleaded by HPII.

The Strike Out Judgment will be of interest for its discussion of:

  • The limits of the principles of backward tracing following a breach of fiduciary duty: [21]-[48]
  • Election in the context of alternative tracing claims: [49]-[52]
  • Tracing through a repaid loan: [84]-[86]

Daniel Saoul QC (of 4 New Square Chambers), Tim Akkouh and Richard Hoyle acted for the Settlement Parties at trial and in the strike out / summary judgment application, and Nathan Pillow QC, Tim Akkouh and Richard Hoyle acted for Harbour on the advertisement and guillotine application, at both stages instructed by Adam Zoubir at Harcus Parker Limited.

Jeremy Brier acted for Mr Ulrich Pelz in his closing arguments at trial, instructed by Advocate through the Advocate / COMBAR Commercial Court and London Circuit Commercial Court Pro Bono Scheme.

The Trial Judgment can be found here and the Strike Out Judgment can be found here. The Advertisement and Guillotine Judgment can be found here.