Strangers as Constructive Trustee


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Strangers as Constructive Trustee

  2. 2. WHO IS A STRANGER Third party who is not appointed as trustee. May incur liability if they receive or dealwith trust property with actual/constructivenotice. The trust property is transferred in breach oftrust.
  3. 3. 3 TYPES OF STRANGERS1) Stranger under no liability (BFPWOWN)2) Innocent volunteer3)Liable as constructive trustee @ trustee deson tort- Knowing receipt or dealing- Knowing assistance
  4. 4. TRUSTEE DE SON TORT Where a person knows that the propertywhich he has received is trust property thenhe will be liable as constructive trustee. It is also known as trustee de son tort.
  5. 5. MARA V BROWNE [1896] 1 Ch199 Al Smith LJ “What constitutes a ‘trustee de son tort.’ Itappears to me if one, not being a trustee and nothaving authority from a trustee take uponhimself to intermeddle with trust matters or to doacts characteristic of the office of trustee, he maythereby make himself what is called in law atrustee of his own wrong (trustee de son tort)
  6. 6. Halsbury Law of Malaysia A person who, not being a trustee and not havingauthority from a trustee takes upon himself tointermeddle with trust matters or to do actscharacteristic of the office of trustee makes himselfa trustee de son tort that is a trustee by virtue of hisown wrongdoing, or, as such person is also called, aconstructive trustee. The responsibility whichattaches to a trustee may extend in equity to aperson who is not properly a trustee, if he eithermakes himself as a trustee de son tort or actuallyparticipates in any fraudulent conduct of a trustee tothe injury of the beneficiaries
  7. 7. Ungoed- Thomas J in Selangor United Rubber Estatesv Cradock (No 3) [1968] 2 All ER 1073 at 1095.Two different kinds of so-called constructive trustee.1) Person though notappointed trustee,take on themselvesto act as such andto possess andadminister trust propertyfor the beneficiaries,- trustees de son tort.2) Person whoma court of equitywill treat astrustee by reason oftheir action,of which complaintis made.
  8. 8. 1 )Knowing receipt or dealing(Recipient liability)2) Knowing assistance (AccessoryLiability) The liability is divided to two categories above. Based on the dictum of Lord Selbourne inBARNES v ADDY [1874] LR 9 CH App 244
  9. 9.  “…Strangers are notto be madeconstructive trusteesmerely because theyact as agents oftrustees intransactions withintheir legal powers,transactions, perhaps,of which a court ofequity maydisapprove, unlessthose agents: A) receive and becomechargeable with somepart of the trustproperty B) they assist withknowledge in adishonest or fraudulentdesign on part oftrustee.
  10. 10. Knowing Assistance A stranger may be liable to make good whenhe fraudulently participates with the trusteein the breach of trust- Sometimes known as accessory liability /dishonest assistants.
  11. 11. Soar v Ashwell (1893) 2 QB390 Bowen LJ; “A person not nominated as trustee may bebound to liability as if he were a nominatedtrustee, namely where he has knowinglyassisted a nominated trustee infraudulent/dishonest disposition of trust.”
  12. 12. Trust funds was misappliedby sole trustee.The defendant isa solicitorwho has advisedon the appointmentof trustee.Beneficiary suedthe solicitorHeld : Not liableLord Selbourne’sformula :They assisted withknowledgein a dishonestand fraudulentdesign on thepart of the trustee.Barnes v Addy (1879) 9 Ch App 244
  13. 13. Privy Council Decisions Lord Nicholls in Royal Brunei Airlines Sdn.Bhd. v Tan [1995] 2 AC 378 at 385 declinedto apply Lord Selbourne’s rule : claimant didneed not to show that the breach of trustassisted by the defendant had been adishonest breach. Affirmed by HOL Twinsectra Ltd. v Yardley[2002] 2 A.C 164
  14. 14. State of mind Changes in courts’ attitude towards thedefendant’s state of mind. Compare the twocases. Peter Gibson in Baden Delvaux and Lecuit vSociėtė Generale (1983) Privy Council decision in Royal BruneiAirlines Sdn Bhd v. Tan [1995] 3 WLR 64
  15. 15. BADEN DELVUX ND LECUIT SOCIETE GENERLE[1983] BCLC 325 : Knowledge comprises5 different mental states1) Actual knowledge3) Wilfully and recklessly failing to make such inquiriesas an honest and reasonable man would make4) Knowledge of circumstances whichwould indicate the facts to an honest and reasonable man2) Wilfully shutting one’ eyesto the obvious- Nelsonian Knowledge5)Knowledge of circumstances whichwould put an honest and reasonable man on inquiry
  16. 16.  Peter Gibson : Type (ii)- (v) = imputed orconstructive knowledge His classifications formed the starting pointfor discussions Cases after Baden Delvaux.ppt
  17. 17. Baden Delvaux and Lecuit v SociėtėGenerale (1983) Peter Gibson stated that there are four elements toliability for ’knowing assistance’: 1) existence of a trust 2) existence of a dishonest and fraudulent designon part of the trustee of that trust 3) the assistance by the stranger in that design and 4) the knowledge of the stranger.
  18. 18. Royal Brunei Airlines Sdn. Bhd vTan Lord Nicholls : Courts were led into tortuousconvolutions in their efforts to investigate thesort of knowledge possessed by thedefendants. Determined a fresh start and the best way isto avoid knowledge as a defining ingredientof liability
  19. 19. Law adopted by PC in RoyalBrunei Dishonesty on the part of the third party is aprerequisite for liability Dishonesty is also a sufficient ingredient The breach of trust by the trustee need notitself be dishonest and fraudulent.
  20. 20. Lord Nicholls “…dishonestly is a necessary ingredient of accessoryliability. It is also a sufficient ingredient. A liability inequity to make good resulting loss attaches to a person whodishonestly procures or assists in a breach of trust orfiduciary obligation. It is not necessary that, in addition, thetrustee or fiduciary was acting honestly, although this willusually be so where the third party who is assisting him isacting dishonestly, “Knowingly” is better avoided as adefining ingredient of the principle, and in the contest of thisprinciple the Baden scale of knowledge is best forgotten
  21. 21.  Adopted by James Fong in IndustrialConcreate Products Bhd v ConcreteEngineering Products Bhd [2001] 2 AMR2151 HOL in Twinsectra v Yardley [2002] 2 AC164 followed th PC decision in Royal Bruneicase
  22. 22. Knowing Receipt or Dealing-Where stranger receives trust property knowing that hispossession is in breach of trust or where he receives trustproperty without knowledge of any breach of trust butsubsequently he becomes aware of the trust but acts in amanner inconsistent with it.
  23. 23. Three situations He receives trust property with theknowledge that it is in breach of trust. He receives trust property without theknowledge and subsequently becomesaware of the trust and act in aninconsistent manner He receives trust property knowing it to besuch but without breach of trust andsubsequently deals with it in a mannerinconsistent with the trust
  24. 24. Essentials of knowing receiptliability 1. A disposal of the plaintiff’s assets inbreach of fiduciary duty 2. The beneficial receipt by the defendant ofassets which are traceable as representing theassets of the plaintiff; and 3.The defendant’s knowledge that the saidassets are traceable to the breach of fiduciaryduty
  25. 25. Requirement of Knowledge. Cases on receipt have adopted the five foldclassification of Peter Gibson. As to whether it falls under either categoriesi-v : there is no clear allignment.
  26. 26. Cases Selangor United Rubber Estate v Craddock(1968) 1 WLR 1555 – constructive as well asactual knowledge could suffice.
  27. 27. Belmont Finance Corporation Ltd vWilliams Furniture Ltd (1979) 1 All ER 118 Requirement for actual knowledge. Buckley LJ: The knowledge of that design on the partof the parties sought to make liable may beactual knowledge. If he wilfully shuts hiseyes to dishonesty or wilfully or recklesslyfails to make such inquiries, he may befound to have involved himself in thefraudulent character of the design.
  28. 28. Developing Law B.C.C.I (Overseas) Ltd v Akindale [2001] Ch 437,Nourse L.J sought classification by Peter J:dishonesty will suffice but is not required to makethe defendant liable where he has received and dealtwith misapplied trust property for his own benefit. General rule: defendant will be liable whenever hisstate of knowledge is … such as to make itunconscionable for him to retain the benefit of thereceipt