LS Systems v Scott [2015] EWHC 1335 (Ch).

Where an employer is faced with a misappropriation of funds or other fraud, the first objective of a Civil Fraud Asset Recovery process is to ensure that the steps taken by the employer at the outset, whether in the initial investigation or the disciplinary proceedings, maximise the prospects of any subsequent legal action to recover losses. For example by ensuring that all relevant evidence is obtained and preserved and, where appropriate, immediate steps are taken to recover or secure assets, by injunction if necessary.

At the very least, if the correct action is taken at the outset the employer gives itself the option to properly assess what legal action it can take to recover its losses in the future.

A good example of this is the LS Systems case. Here the employers/claimants were able to demonstrate their financial controller had systematically misused company funds in breach of fiduciary duty. More importantly they could show that those funds had then been used to purchase and improve certain properties. The Judge summarised the claimants’ position in the following terms:-

The claimants rely upon the principle that, where a fiduciary [in this case the employee] obtains a benefit in breach of his fiduciary duty and the benefit is an asset belonging beneficially to the principal, for example as here where the fiduciary has gained the benefit by misappropriating or misapplying the principal’s property, this gives rise to a constructive trust over the benefit in favour of the principal.”

The Judge agreed the employers had made out a proprietary claim to the properties the employee has expended the misappropriated money upon, all of which appeared to have significant amounts of equity. To that extent at least the employers would be able to make civil recovery of their losses from the former employee.

If you have any questions or wish to discuss any issues raised in this blog please contact Simon Lockley. Simon is a Director with our Dispute Management team and a member of the firm’s Civil Fraud Asset Recovery Unit which provides specialist loss recovery and employment advice to corporate victims of workplace fraud.

Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.

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