the Thornycroft 1862 fraud. This is examined amid the Global EPP
The underlying principle upon which the UK finance industry is
based is that of trust and measured risk. The finance house gives
possession of assets to customers, and trusts the customers not to
part with possession of those assets “out of trust” to third
Sadly for the industry, that does not always hold true. The
finance industry is, therefore, vulnerable by its very nature to
fraud, based on the abuse of the trust which underlies all finance
To counter this risk, the finance industry and related laws have
developed strategies to reduce fraud and to seek recompense if it
Naturally, the finance industry builds in contractual
requirements in agreements with customers to prevent them from
wrongfully selling the goods financed, and to seek contractual
damages in circumstances if they do.
But what if the customer is insolvent, or cannot be traced, and
before becoming insolvent sold the goods to a third party and
pocketed the sale proceeds?
The contractual provisions in the agreement would be
commercially worthless and do not bind any third party purchaser,
given they were not party to any contract with the finance
The law of conversion steps into the gap. Conversion is dealing
with another’s property in an inconsistent way with the true
owner’s rights. Merely finding or keeping goods of
another's without more is not a conversion.
There must be some positive act or conduct inconsistent with the
true owner’s rights. The best example of this is selling the goods,
or commissioning them for use, and putting them to use.
Generally an agent cannot be sued but conversion is an exception
to this rule and it is possible to sue agents for conversion where
there has been a sale of the goods through or by the agent.
Thus, it is possible to sue auction houses when they conduct
auctions of finance houses’ goods when their customer wrongfully
offers such goods for sale, or a third party buyer from a customer
under a finance agreement does so.
This fact has been used by some finance houses in the
Thornycroft 1862 Ltd fraud to sue auction houses which sold on the
goods, both in the UK and in other jurisdictions. By the same
principle it is theoretically possible to sue administrators who
sell on a finance house’s goods to a new buying company.
The law of conversion can be used in creative ways to recover
damages from third party handlers of a finance company’s equipment,
often many times removed from the original customer. The law, in
part, also bridges the gap in this jurisdiction caused by the
absence of a compulsory statutory asset registration scheme.
Unlike real estate, which is governed by a statutory scheme of
compulsory registration and, with registration, notice to all the
world of interests, no equivalent scheme for assets exists in this
The HPI scheme is an industry attempt to develop voluntarily a
scheme, but it is not compulsory, not negligent to not register
interests, and registration of interests does not constitute notice
to all of the world.
Other jurisdictions, including North America, do have asset
registration schemes. Often US legal practitioners are amazed to
learn that the UK does not have one. It can come as quite a shock
to US converters that they had no way of finding out if they were
dealing with a third party-owned asset when selling for or buying
from their customers.
The old adage ‘Buyer Beware’ still has much weight and can be
exploited by finance houses seeking to recover losses caused by
fraudulent customers selling its goods ‘out of trust’.
The author is a partner at the law firm HBJ Gateley