Loan induced by fraud - money not held on constructive trust for lender but instigation of claim effecting implied rescission so lender could trace in equity - settlement not sham absent common intention

Shalson and others v Russo and others: ChD (Mr Justice Rimer): 11 July 2003

The two part 20 claimants brought a claim to trace money they had lent the first defendant into a valuable yacht.

They also sought a declaration that a settlement of which the second defendant was a trustee was a sham.

Anthony Trace QC, Michael Green, Louise Hutton and Oliver Michell (instructed by Allen & Overy) for the claimants; Stephen Smith QC and Graham Shipley (instructed by Withers) for the part 20 claimants; Russo did not appear and was not represented; Michael Pooles QC and Francis Bacon (instructed by Vizards Wyeth) for the second to fifth defendants.

Held, dismissing the tracing and declaration claims, that where a party was fraudulently induced by another to lend money, the lender could not be regarded as benefiting from a constructive trust in his favour and, since the contract was voidable, the lender could not advance a proprietary claim to the money entitling him to trace it into other assets into which it might have been applied before the contract was rescinded; that by bringing proceedings to recover the money, the lender, by implication, rescinded the contract, which gave him sufficient proprietary title to trace the money in equity; that it was not possible to consolidate current and deposit accounts for tracing purposes, and only those funds which put a current account into credit could be traced; that on the facts, it was not possible for the part 20 claimants to trace their money; that in order to establish that a settlement was a sham, it had to be shown that both the settlor and the trustee intended it to be so and, on the facts, there had been no intention on the part of the trustee to create a sham settlement; but that the part 20 claimants were entitled to judgment against the first defendant in respect of money lent and for damages.