AHAB v SICL & Ors: Significant developments in the law on tracing and illegality
Published: Friday 1 June 2018
The Grand Court of the Cayman Islands has this week given its landmark judgment in Ahmad Hamad Algosaibi & Brothers v Saad Investment Finance Corporation Ltd and Others. The emphatic dismissal of one of the largest fraud claims ever litigated has far-reaching consequences for all fraud claims as well as for the law of tracing and illegality.
The facts of this claim were extraordinary. The Plaintiffs (“AHAB”), the Algosaibi family, alleged that their brother in law (Maan Al Sanea) had been given a small Money Exchange operation to run in Saudi Arabia’s Eastern Province. AHAB claimed unbeknownst to them he had run up debts of US$33bn and stolen $9bn for himself, using deception and forgery on “an industrial scale”. The Plaintiffs claimed to be able to trace the proceeds of Mr Al Sanea’s misappropriations into the hands of the Defendants who were all formerly Mr Al Sanea’s companies and were by this stage in liquidation. Following a trial lasting over a year (involving over 5 million disclosed documents) the Court rejected AHAB’s claims in emphatic fashion. In a judgment spanning over a thousand pages, the Court found not only that AHAB had known of and approved Mr Al Sanea’s activities, AHAB had in fact acted in concert with Mr Al Sanea to defraud lending banks of over US$330bn through the promulgation of fraudulent financial statements in what was described as “one of the largest Ponzi Schemes in history”.
Despite having found on the facts that there was no misappropriation, the Court went on to give useful guidance on how the court should approach the tracing exercise and on the application of the illegality defence.
Given the sheer number of transactions involved, AHAB argued that it was unnecessary to show an unbroken chain of transactional links in order to ground a tracing claim. Instead AHAB sought to argue that (a) the modern authorities (in particular, Relfo Limited (in liquidation) v Varsani  EWCA Civ 360 and Federal Republic of Brazil and another v Durant International Corp  UKPC 35) established that it is open to the Court to infer that funds were the traceable property of AHAB and (b) given that Mr Al Sanea was a defaulting fiduciary, AHAB could elect to follow its beneficial interest into the hands of the Defendants who were then required to give an account of how they acquired it. By failing to do so, the Defendants had failed to give a proper account and AHAB could thus locate its beneficial interest in the property presently held by each Defendant.
The Grand Court rejected both arguments. The Court held that the effect of Relfo and Durant was that the law may infer the necessary transactional links to give rise to a tracing claim where there is a scheme “specifically designed” to subvert the ability of creditors to recover misappropriated funds. However, this position does not affect the general rule that it is necessary to establish a chain of transactions in order to trace.
The Court rejected AHAB’s second argument noting that while a defaulting trustee or fiduciary is required to account for what has become of the trust funds under their hands that did not absolve AHAB of the burden of demonstrating that particular funds were trust assets. The duty of a trustee is to account for what has become of the trust fund, not to account for what funds formed part of the trust fund in the first place.
The Court then went on to make a number of other important observations for the law of tracing:
- Jurisdiction: Given that the alleged misappropriations took place in Saudi Arabia, the proper law governing AHAB’s equitable claims was Saudi law. Given that Saudi law did not recognise a proprietary remedy in these circumstances it was not possible for AHAB to establish a proprietary base on which to establish its tracing claim.
- Attribution: The attribution of a director’s knowledge to any of his companies in the capacity of agent, can be justified only on the basis and in the context of his respective relationship with each company. The knowledge which he has acquired as officer of the one company will not be imputed to the other company, unless he owes a duty to the first company to communicate his knowledge, and also a duty to the second company to receive the notice
- Bona fide purchase: The bona fide purchase is a matter of substance and not form. The Court held that SIFCO 5, a company established as part of a refinancing transaction whereby Barclays bank obtained preferential shares in SIFCO 5 in return for financing capital contributions, could nonetheless take advantage of the defence because in substance Barclays was the purchaser of SIFCO 5’s assets and therefore (there being no question of Barclays’ bona fides) a proprietary claim was barred through the application of the defence.
The Court then went on to consider whether, given AHAB’s involvement in a scheme to defraud lending banks, AHAB’s claim would be barred by application of the illegality defence. In a detailed consideration of the factors set out by Lord Toulson in Patel v Mirza  UKSC 42, the Court found that AHAB’s claim was “indistinguishable” from that of highwaymen arguing over the proceeds of theft and therefore that AHAB’s claim ought to have been barred in any event, through the application of the court’s policy that it will not enforce an illegal arrangement and/or because AHAB lacks clean hands and so is not entitled to invoke the equitable remedies.
In particular, the Court emphasised that paragraphs  and  of Lord Toulson’s speech in Patel ought to be read as articulating the well-known proposition (stemming from the highwayman’s case of Everett v Williams) that parties to a fraudulent partnership or enterprise will not be entitled to invoke the powers of the court to recover the proceeds of their fraudulent partnership from their fellow criminal so as to profit from it.