Background
Where innocent third parties have been in receipt of funds that were misappropriated by an individual from a company, it may be lawful for them to retain the funds if they can demonstrate that they have changed their position in good faith following receipt of the funds. Otherwise, the company may be able to recover the funds if it can show that the third party has been enriched (or received another benefit) at its expense and that such enrichment was unjust. The remedy in such cases is an order for restitution (i.e. that the unjustly enriched party must return the funds/benefit). The court in this case has drawn a distinction where an otherwise “innocent” recipient defendant may have grounds to suspect that the funds they have received have been misappropriated.
Key Facts
In the case of Hampton Capital Limited v Elite Performance Cars Limited & Ors [2015] EWHC 1905 (Ch), Hampton Capital Ltd (“Hampton”) offered funding to a property developer, Tolent Construction Ltd (“Tolent”). Tolent loaned £1.4million to Hampton for the anticipated funding, but the property development fell through and the funding was never provided. Tolent’s loan was not repaid, so it procured the appointment of administrators over Hampton to try to recover the funds it had previously paid to Hampton.
The administrators ascertained that a de facto director of Hampton, Mr Mayweather, had influenced Hampton’s de jure directors into making payments from the monies provided by Tolent that benefited only himself. These payments were made whilst Hampton was insolvent and included £335,000 paid to a sports car dealer, Elite Performance Cars Ltd (“Elite”), for cars for Mr Mayweather, and £282,000 paid in various installments to a Mr Kanzira to ultimately purchase gambling chips for Mr Mayweather. Hampton’s de jure directors claimed to have been told by Mr Mayweather that the payments were in connection with the redevelopment project.
Both Hampton and the administrators sought recovery of the monies paid out on Mr Mayweather’s instructions. Hampton’s claim was based in restitution: that the money had been stolen from it and so had to be returned on the basis that Elite and Mr Kanzira had been unjustly enriched. This claim was advanced on the basis that Mr Mayweather’s instruction to the de jure directors to make payments to Elite and Mr Kanzira “brought about the misappropriation of the Company’s [Hampton’s] money”.
The administrators’ claim was that all of the money had been paid out and Hampton received no consideration and therefore the payments were all transactions at an undervalue for the purposes of section 238 of the Insolvency Act 1986 (“IA 1986”). Please see our earlier article at https://www.howespercival.com/resources-and-events/case-studies/insolvency-when-is-a-gift-not-a-gift for a consideration of the administrators’ argument advanced in relation to section 238 IA 1986 and the court’s decision in this regard.
Judgment
The Judge held that both Elite and Mr Kanzira had been unjustly enriched by the payments made to them by Hampton under the instruction of Mr Mayweather. The case against both parties was that they had been “unjustly enriched at the expense of [Hampton] by an amount equal to the payments and, absent any change of position defence, [they are] liable to repay to [Hampton] the full amount of the claims”. This was on the basis that Mr Mayweather essentially procured the theft of the money paid to Hampton by Tolent by instructing the de jure directors to make the payments to Elite and Mr Kanzira. As such, Elite and Mr Kanzira had been in receipt of stolen money.
The Judge then went on to consider the defence of “change of position”. As set out above, this defence is available to an innocent recipient of stolen money where that party has changed their position as a result of the receipt of such stolen money in good faith. Elite was not represented at trial and had made no application to adjourn the trial, meaning no submissions were made on its behalf regarding such a defence. As such, Elite was ordered to pay the sum of £335,000 to Hampton.
Mr Kanzira, however, represented himself at trial and made submissions as to the change of position defence available to him. As such, the court’s conclusion was somewhat different.
In considering the change of position defence, the Judge first questioned whether the necessary causal link was in existence: would Mr Mayweather have made the payments to Mr Kanzira had he not first received the money from Hampton? It was found that the causal link did exist, and that Mr Mayweather only made such payments because he had been put in funds by Hampton for the purpose of the onward payments to the casino.
Having established the causal link, the Judge referred to the case of Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 and stated that “the only remaining question is whether nevertheless Mr Kanzira is unable to show that it would be unjust, or inequitable, to allow restitution”.
A distinction was drawn between monies paid to Mr Kanzira prior to a telephone conversation between himself, Mr Mayweather and one of the de jure directors of Hampton, and monies paid thereafter. At the time of receipt of the first payment of £125,000 (which Mr Kanzira then paid onto a casino), Mr Kanzira did not know that the money had come from Hampton. However, after the above mentioned conversation Mr Kanzira was aware that the money paid to him was originating from Hampton and he had not been provided with sufficient reasons as to why Hampton’s money was being paid to a casino for Mr Mayweather’s benefit. As such, the Court held that Mr Kanzira had reasonable grounds for suspecting the money paid to him after the first £125,000 was stolen and he was therefore unable to rely on the change of position defence in relation to the £157,000 paid out after the phone call.
Conclusion
The court has clarified that the change of position defence is unavailable where the recipient had “reasonable grounds” to believe that the property had been stolen, even where this was not known for certain. As such, it is not necessary to show that the recipient was acting in bad faith or had actual knowledge of the stolen nature of the property in order to succeed in a claim of unjust enrichment. Instead, the court will consider the circumstances surrounding the recipient’s specific knowledge of the source of the funds and the purpose of the payment.
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