#3123 - Liability Of Strangers - GDL Equity and Trusts

• Introduction

  - Stranger: someone not appointed a trustee.

  - 1. Trustee de son tort (constructive trustee).

  • Mara v Browne [1895]: [Smith LJ]: intermeddles with trust matters or does acts characteristic of trustee treated as expressly appointed trustee.

  • not breach of trust per se: does not purport to act on own behalf with trust property assumes office to act on behalf of beneficiaries.

  - 2. Stranger personally liable to account to beneficiary for breach of trust.

  • a. knowing receipt: knowingly receives or deals with property traceable to breach of trust.

    • personal claim needed: dissipation prevents tracing.

  • b. dishonest/knowing assistance: dishonestly assists or procures breach of trust. (‘accessory liability’ – Royal Brunei Airlines v Philip Tan Kok Ming [1995]: [Ld Nicholls]).

    • personal claim needed: no receipt – cannot trace.

  - Personal liability of recipients + accessories.

  • proprietary liability: recipient of property misappropriated from trust obliged to return property/proceeds (unless bona fine purchaser for value without notice) – but: liability ends when property/proceeds dissipated.

  • personal liability: recipient must account to bs. for loss to trust – even after property dissipated.

    • + dishonest assistance: personal liability even thought may never have received trust property.

  • ds. liable as ‘constructive trustees’: but N.B. not actually ts. – just treated as ts. liable for losses.

    • [Lionel Smith]: ‘liable as a constructive trustee = liable even though he is not actually a trustee’.

  - Background to classification of strangers’ liability: Barnes v Addy [1874]: [Ld Selborne LC]: 2 types of liability.

  • 1. d. receives + becomes chargeable with some part of trust property.

  • 2. d. assists with knowledge in a dishonest + fraudulent design of ts.

  • debate: level of ‘knowledge’ required + whether dishonestly necessary.

- Levels of knowledge: the ‘Baden’ scale – Baden v Société Générale SA [1983]: [Peter Gibson J].

• now less relevant: complicated + difficult to use.

Knowing Receipt

- 2 situations where recipient may be liable as constructive trustee – Agip (Africa) Ltd v Jackson [1990]: [Millet J]:

• 1. d. receives trust property in breach of trust for own benefit – with actual or constructive notice.

• 2. d. receives trust property lawfully + not for own benefit (e.g. agent of ts.), then misappropriates it.

• - Elements of knowing receipt – El Ajou v Dollar Land Holdings [1993; CoA]: [Hoffman LJ]:

  • facts: investor’s property misappropriated fraudulently; some proceeds to d.; d. purchases property in Nine Elms; c. sues to recover property.

  • elements:

    • 1. disposal in breach of fiduciary duty.

    • 2. d. receives b’s traceable assets.

    • 3. d. has knowledge of breach: debate – level of knowledge required.

  - Level of knowledge/dishonesty required: conflicting case law.

  • Belmont v Williams (No. 2) [1980]: constructive knowledge sufficient (not dishonesty).

    • facts: company directors received property in breach of fiduciary duty; knew facts giving rise to trust but did not act fraudulently liable as constructive trustees.

  • Re Montagu’s Settlement [1987]: need actual knowledge – Baden (i), (ii) or (iii).

    • facts: 10^th Duke disposed of some trust property in honest mistake; 11^th Duke sued executors, claiming 10^th Duke constructive trustee [Megarry VC]: not liable - no dishonesty.

    • [Megarry VC] obiter: basic question – whether the conscience of the recipient sufficiently affected to justify the imposition of a CT: require ‘lack of probity’ – NOT just carelessness.

  • BCCI Ltd v Akindele [2000; CoA]: [Nourse LJ]: does d’s knowledge make it ‘unconscionable’ for him to retain the benefit? – dishonestly NOT necessary.

    • facts: A. transferred $10m to BCCI (bank) for shares + option to sell back at higher price in 3 years; after 3 years paid $16.7m; BCCI then insolvent; creditors sued A. claiming loan ‘artificial’ + return ‘abnormally high’ not liable: unusual but no ev. that A. knew bank illegitimate at time of investment.

    • application problematic: unconscionability intended to be objective, but open to interpretation.

      • Pulvers v Chan [2007]: knowingly participating in a fraudulent scheme.

      • Starglade v Nash [2010; HC]: actual knowledge putting reasonable man on inquiry.

        • [N Strauss QC]: flexible test – lower standard than dishonest assistance.

      • Armstrong v WInnington [2012]: making enquiries + not following through.

  - Possible future reform: move away from fault-based liability?

  • fault-based liability criticised: resulting trust instead?

    • 1. [Ld Nicholls] (extra-judicial article): strict restitutionary liability – from fact of receipt, not fault.

      • available defence: change of position.

    • 2. [Birks]: resulting trust – presumption that property held by recipient (except bona fide purchaser for valuable consideration) on RT for transferor.

      • no need to prove fault: transferor’s intention key, not recipient’s state of mind.

      • but problematic: when purchaser for valuable consideration NOT bona fide state of mind of recipient considered again.

  • concurrent liability: both fault-based + restitutionary liability together (but no double recovery).

    • Dubai Aluminium Co Ltd v Salaam [2003]: [Ld Millett]: claim can be based on d’s dishonesty (based on d’s participation in breach of fiduciary duty) … but it can also be based simply on the receipt (restitutionary claim independent of any wrongdoing).

  - Ministerial receipt: agent receiving trust property in course of delegation not liable as constructive trustee.

  • rationale: agent receives money in ministerial capacity, not for own benefit.

  • e.g. misappropriated trust money paid into bank account bank’s receipt ministerial (unless used to pay off payer’s overdraft: for bank’s benefit).

  - Summary – recipient’s liability.

  • 1. if recipient had knowledge that assets received traceable to breach of fiduciary duty unconscionable for him to retain benefit.

    • personally liable to account as constructive trustee: whether still has property or dissipated.

    • proprietary remedy: if still has trust property/proceeds.

  • 2. if recipient did NOT have knowledge of breach of trust:

    • not personally liable: bs. cannot recover dissipated property/proceeds.

      • (unless Re Diplock (MOH v Simpson) applies).

    • proprietary remedy only: for property/proceeds recipient still has.

  Dishonest (or Knowing) Assistance (Accessory Liability)

  Dishonesty

  - Dishonesty key (not knowledge) – Royal Brunei Airlines v Tan [1995; PC]: [Ld Nicholls]:

  • facts: customers paid money to travel agency (on trust: for tickets); d. (MD of travel co.) allows money to be used to pay off general expenses, but intends to pay back; travel agent bankrupt liable: dishonest.

  • dishonesty necessary: ‘liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust of fiduciary obligation’.

    • fault-based liability: d’s state of mind key (but trustee’s irrelevant).

    • dishonesty: ‘conspicuous impropriety’ NOT carelessness.

  • 2-stage test for dishonesty – mainly objective:

    • 1. not acting as honest + reasonable man would (objective).

    • 2. having regard to d’s experience, intelligence + reasons (subjective element).

  • knowledge supplanted as criterion:

    • previous confusion: level of ‘knowledge’ + ‘dishonesty’ required – from Barnes v Addy definition.

    • [Ld Nicholls]: ‘knowingly’ – inapt criterion Baden scale should not used in this context.

  - Debate: subjective element of dishonesty.

  • Twinsectra v Yardley [2002; HoL]: more subjective – but dubious judgment.

    • facts: T. lends money to Y. on condition of undertaking from Y’s solicitor (S) that money will only be used for purpose stated; S pays money to previous solicitor (L); L gives oral reassurance but then hands money over to Y to use without restriction; T. sue L for dishonest assistance.

    • majority: subjective test (from R v Ghosh criminal test of MR for theft) – [Ld Hutton]:

      • 1. objective action: action would be considered dishonest by ordinary right-thinking people.

      • 2. subjective: did d. realise that by ordinary standards he had been dishonest?

        • d. not liable: L. did not realise actions dishonest – acting in interests of client.

    • BUT DUBIOUS: substitutes objective for subjective test; applies criminal standard to civil law.

  • Barlow Clowes Int’l v Eurotrust Int’l Ltd [2006; PC]: attempt to rectify Twinsectra.

    • facts: investors pay money to fraudulent investment co. (BC) through intermediary (H., director of ITC); investors sue H. for dishonest assistance (paying money to BC); H. had strong suspicions but made no enquiries liable.

    • objective test: as laid out in Royal Brunei Airlines v Tan – [Ld Hoffman].

  • Abou-Rahmah v Abacha [2006; CoA]:

    • facts: c. pays money to Nigerian scammer; scammer disappears; c. sues recipient bank not liable.

    • objective test confirmed: [Arden LJ]: Barlow Clowes valid interpretation of Twinsectra.

      • + subsequently applied: e.g. Att-Gen of Zambia v Meer Care [2008; CoA]; Pulvers v Chan [2007; HC]; Statek Corp v Alford [2008].

  - Dishonesty: positive action – distinct from negligence/carelessness.

  • Att-Gen of...