Beyond The Brown Envelope

Introduction

For over 150 years, it has been a principle of English law that if an agent takes a bribe or a secret commission, he is liable to account to his principal for the amount received. However, there has been conflicting authority and academic debate as to whether the principal merely has a personal claim against the agent or whether he can assert a proprietary claim to the monies received and any profits made therefrom.

In an insolvency context, the point may be very significant. Can an administrator be wholly comfortable that what appear to be company assets are not vulnerable to a claim by a third party? Will a secured lender's security be trumped by a proprietary claim?

In FHR European Ventures LLP and others v. Cedar Capital Partners LLC [2014] UKSC 45, the Supreme Court has clarified - and arguably extended - the law as to the ownership of assets derived from a bribe or secret commission. It held that a bribe or secret commission received by an agent is held on constructive trust for his principal, and as such the principal has a proprietary claim to the bribe itself (and therefore to any assets acquired with the proceeds of the bribe). In doing so the Supreme Court overruled its own decision (in its previous guise as the House of Lords) in Tyrell v. Bank of London (1862) 10 HL Cas 26 and(1862) and the subsequent cases that had followed it. Few of those cases were decided in an insolvency context, but the most recent before FHR, the case of Sinclair Investments Ltd v. Versailles Trade Ltd [2012] Ch 453, had been. The outcome in Sinclair provided important guidance to insolvency practitioners and banks in determining whether or not they have been put 'on notice' of proprietary claims.

The FHR decision

In December 2004, FHR purchased a company that owned the long lease of the Monte Carlo Grand Hotel for €211.5m. Cedar had acted as FHR's purchase agent, and in this capacity owed fiduciary duties to FHR. Cedar had also entered into an exclusive brokerage agreement with the seller, which had paid Cedar a €10m brokerage fee on completion of the sale in January 2005.

FHR alleged that Cedar had not disclosed the exclusive brokerage agreement to it, and brought proceedings against Cedar for recovery of the fee. The primary issue was whether such disclosure had been given, and the judge at first instance concluded that it had not been. After a further hearing, the judge declared that Cedar's non-disclosure was a breach of its fiduciary duty as FHR's agent, and ordered Cedar to compensate FHR for the €10m it had received. However, the judge refused to grant FHR a proprietary remedy in respect of that sum. On FHR's appeal, the Court of Appeal declared that Cedar had received the fee on constructive trust, holding it for FHR absolutely. Therefore, FHR had a proprietary right to the €10m.

On Cedar's further appeal, the sole point in issue before the Supreme Court...