It is a basic rule of common law that a court will not
uphold a claim founded on an illegal act. This rule is
important for internal and external counsel acting for
financial service providers to keep in mind. Financial service
providers operate in a highly regulated environment. Even
exercising all due diligence, and with highly resourced
compliance systems, mistakes and errors of judgement occur.
Applying the strict common law approach can result in unjust
and disproportionate results, particularly in cases of
Fortunately, the highest courts in the UK and Ireland have
now signalled a policy-based approach which recognises the
impact of regulation in today's trading environment.
On July 20 2016, the UK Supreme Court handed down a judgment
in Patel v. Mirza. Patel claimed restitution of
£620, 000 paid by him to Mirza to carry out a trade to be
based on insider information – which never
materialised. Mirza defended the claim for restitution on the
basis that the money was paid over for an illegal purpose. The
UK Supreme Court held that Patel was entitled to restitution.
The policy of the insider dealing legislation would not have
been harmed by ordering Mirza to pay back the money. Mirza
should not be allowed a windfall gain.
In 2015, the Irish Supreme Court took a similar approach in
Quinn v. Irish Bank Resolution Corporation (IBRC).
There, IBRC sought enforcement of security allegedly provided
by the Quinns. The Quinns defended the claim (among other
things) on the basis that the security was given to enable IBRC
illegally to support its share price on the stock exchange.
This would have breached Irish company and market abuse law.
The Quinns argued that permitting IBRC to enforce its security
would promote illegality. This was rejected. The Irish Supreme
Court held that the policy of the legislation would not be
infringed by allowing IBRC to enforce its security. The
legislation already provided penalties and it would be
disproportionate for the court to impose additional sanctions
that could impact innocent third parties.
The old common law approach had arbitrary and
disproportionate effects, and was blind to the legislative
context. The new approach is more rational and proportionate.
It also leads to more predictable results and takes into
account the highly regulated environment in which financial
service providers operate.