Law 3711 - 05C Strangers as Constructive trustee PDF

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05 Strangers As Constructive Trustee Law 3711 – Equity & Trust IIWho Is A Stranger? Third party who is not appointed as trustee.  May incur liability if they receive or deal with trust property with actual/constructive notice.  The trust property is transferred in breach of trust.Three ...

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05 Strangers As Constructive Trustee Who Is A Stranger?  Third party who is not appointed as trustee.   May incur liability if they receive or deal with trust property with actual/constructive notice.   The trust property is transferred in breach of trust. Three types of strangers 1. Stranger under no liability (BFPWOWN) 2. Innocent volunteer 3. Liable as constructive trustee @ trustee de son tort - Knowing receipt or dealing - Knowing assistance Trustee De Son Tort   Where a person knows that the property which he has received is trust property then he will be liable as constructive trustee.   It is also known as trustee de son tort. Mara v Browne [1896] 1 Ch 199 Al  Al Smith LJ: “What constitutes a ‘trustee de son tort.’ It appears to me if one, not being a trustee and not having authority from a trustee take upon himself to intermeddle with trust matters or to do acts characteristic of the office of trustee, he may thereby make himself what is called in law a trustee of his own wrong (trustee de son tort) Halsbury Law of Malaysia   A person who, not being a trustee and not having authority from a trustee takes upon himself to intermeddle with trust matters or to do acts characteristic of the office of trustee makes himself a trustee de son tort that is a trustee by virtue of his own wrongdoing, or, as such person is also called, a constructive trustee. The responsibility which attaches to a trustee may extend in equity to a person who is not properly a trustee, if he either makes himself as a trustee de son tort or actually participates in any fraudulent conduct of a trustee to the injury of the beneficiaries.

Law 3711 – Equity & Trust II Ungoed- Thomas J in Selangor United Rubber Estates v Cradock (No 3) [1968] 2 All ER 1073 at 1095.  Two different kinds of so-called constructive trustee: 1. Person though not appointed trustee, take on themselves to act as such and to possess and administer trust property for the beneficiaries, trustees de son tort. 2. Person whom a court of equity will treat as trustee by reason of their action, of which complaint is made. Dictum of Lord Selbourne in Barnes v Addy [1874] LR 9 CH App 244  The liability is divided to two categories: 1. Knowing receipt or dealing (Recipient liability) 2. Knowing assistance (Accessory Liability).   “…Strangers are not to be made constructive trustees merely because they act as agents of trustees in transactions within their legal powers, transactions, perhaps, of which a court of equity may disapprove, unless those agents:  A) receive and become chargeable with some part of the trust property  B) they assist with knowledge in a dishonest or fraudulent design on part of trustee. Knowing Assistance   A stranger may be liable to make good when he fraudulently participates with the trustee in the breach of trust He already know  Sometimes known as accessory liability / dishonest assistants. Soar v Ashwell (1893) 2 QB 390   Bowen LJ:  “A person not nominated as trustee may be bound to liability as if he were a nominated trustee, namely where he has knowingly assisted a nominated trustee in fraudulent/dishonest disposition of trust.”

Barnes v Addy (1879) 9 Ch App 244  Trust fund was misapplied by sole trustee.  The defendant is a solicitor who has advised on the appointment of trustee.  Beneficiary sued the solicitor  Held: Not liable.  Lord Selbourne’s formula: They assisted with knowledge in a dishonest and fraudulent design on the part of the trustee. But …  Strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a court of equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.” Privy Council Decisions   Lord Nicholls in Royal Brunei Airlines Sdn. Bhd. v Tan [1995] 2 AC 378 at 385 declined to apply Lord Selbourne’s rule: claimant did need not to show that the breach of trust assisted by the defendant had been a dishonest breach.  Affirmed by HOL Twinsectra Ltd. v Yardley [2002] 2 A.C 164 State of mind   Changes in courts’ attitude towards the defendant’s state of mind. Compare the two cases.   Peter Gibson in Baden Delvaux and Lecuit v Sociėtė Generale (1983)   Privy Council decision in Royal Brunei Airlines Sdn Bhd v. Tan [1995] 3 WLR 64 Baden Delvux Nd Lecuit Societe Generle [1983] BCLC 325  Knowledge comprises 5 different mental states: 1. Actual knowledge 2. Wilfully shutting one’ eyes to the obvious Nelsonian Knowledge 3. Wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make 1

4. Knowledge of circumstances which would indicate the facts to an honest and reasonable man 5. Knowledge of circumstances which would put an honest and reasonable man on inquiry

05 Strangers As Constructive Trustee  Peter Gibson: Type (ii) - (v) = imputed or constructive knowledge   His classifications formed the starting point for discussions   Cases after Baden Delvaux.ppt Baden Delvaux and Lecuit v Sociėtė Generale (1983)  Peter Gibson stated that there are four elements to liability for ’knowing assistance’:  1. existence of a trust  2. existence of a dishonest and fraudulent design on part of the trustee of that trust  3. the assistance by the stranger in that design and 4. the knowledge of the stranger. Royal Brunei Airlines Sdn. Bhd v Tan   Lord Nicholls: Courts were led into tortuous convolutions in their efforts to investigate the sort of knowledge possessed by the defendants.   Determined a fresh start and the best way is to avoid knowledge as a defining ingredient of liability. Law adopted by PC in Royal Brunei   Dishonesty on the part of the third party is a prerequisite for liability   Dishonesty is also a sufficient ingredient   The breach of trust by the trustee need not itself be dishonest and fraudulent.  Lord Nicholls: “…dishonestly is a necessary ingredient of accessory liability. It is also a sufficient ingredient. A liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust or fiduciary obligation. It is not necessary that, in addition, the trustee or fiduciary was acting honestly, although this will usually be so

Law 3711 – Equity & Trust II  Adopted by James Fong in Industrial Concreate Products Bhd v Concrete Engineering Products Bhd [2001] 2 AMR 2151   HOL in Twinsectra v Yardley [2002] 2 AC 164 followed the Privy Council decision in Royal Brunei case.  Knowing Receipt or Dealing - Where stranger receives trust property knowing that his possession is in breach of trust or where he receives trust property without knowledge of any breach of trust but subsequently he becomes aware of the trust but acts in a manner inconsistent with it. Three situations   He receives trust property with the knowledge that it is in breach of trust.   He receives trust property without the knowledge and subsequently becomes aware of the trust and act in an inconsistent manner   He receives trust property knowing it to be such but without breach of trust and subsequently deals with it in a manner inconsistent with the trust.  Essentials of knowing receipt liability  1. A disposal of the plaintiff’s assets in breach of fiduciary duty  2. The beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff; and  3. The defendant’s knowledge that the said assets are traceable to the breach of fiduciary duty.

Selangor United Rubber Estate v Craddock (1968) 1 WLR 1555  constructive as well as actual knowledge could suffice. Belmont Finance Corporation Ltd v Williams Furniture Ltd (1979) 1 All ER 118   Requirement for actual knowledge.   Buckley LJ:  The knowledge of that design on the part of the parties sought to make liable may be actual knowledge. If he wilfully shuts his eyes to dishonesty or wilfully or recklessly fails to make such inquiries, he may be found to have involved himself in the fraudulent character of the design.  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 make the defendant liable where he has received and dealt with misapplied trust property for his own benefit.   General rule: defendant will be liable whenever his state of knowledge is … such as to make it unconscionable for him to retain the benefit of the receipt.

Requirement of Knowledge.   Cases on receipt have adopted the five-fold classification of Peter Gibson.   As to whether it falls under either categories i-v: 2

where the third party who is assisting him is acting dishonestly, “Knowingly” is better avoided as a defining ingredient of the principle, and in the contest of this principle the Baden scale of knowledge is best forgotten.”

there is no clear alignment.

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