CONSTRUCTIVE TRUSTS

There is two type of constructive trust

1. constructive trust
2. constructive trustee

Constructive trust
a. A person who have lawfully assumed fiduciary obligation in trust property without format
appointment (secret trust/ Rocherfoculd v Boustead)
b. Trustee under
1. A constructive trust is a device invented by the Court of Chancery whereby the owner or acquirer
of the legal or beneficial interest in movable or immovable property is required by equity to hold
it beneficially for a third person on the ground that it would be unconscionable for the former to
assert beneficial ownership.

2. A constructive trust is an equitable remedy resembling a trust imposed by a court to benefit a

party that has been wrongfully deprived of its rights due to either a person obtaining or holding
legal right to property which they should not possess due to unjust enrichment or interference
 Carl Zeiss Stiftung v Herbert Smith
“A CT is a trust which is imposed by equity to satisfy justice and good conscience, without
reference to any express or presumed intention of the parties.”
 Re Montagu Settlement’s Trust
“The fundamental question is whether the conscience of the recipient is bound in such a
way as to justify equity imposing a trust upon him.”
 Paragon Finance v D B Thakerar & Co.
LJ Millet: “A CT arises by operation of law whenever the circumstances are such that it
would be unconscionable for the owner of property to assert his own beneficial interest in
the property and deny the beneficial interest of another.”

3. Features:
i) Come into existence through operation of law.
ii) It does not depend for its existence upon the intention of the parties to it.
iii) Declaration of trust

4. Depends almost entirely upon the conduct of the owner of acquirer of the equity. There are
certain facts which the law has identified as being cases of constructive trust.

5. Situation whereby CT arises:

 i) Vendor and purchaser
- Where there is a contract for the sale of immoveable property, the vendor becomes in
equity a constructive trustee for purchaser.
- Wong Siew Chong v Anvest Corporation
ii) Fully secret trust
- No name of beneficiary will appear, prevent trustee abuse using.
- Mc Cormick v Grogan
iii) Donatio mortis causa
- Until the donar’s death, the gift is held upon a constructive trust by the donee for thedonor.
Cosnahan v Elizabeth Grice
Lady kept all her money inside her stays and stuffs the money into it she was very stingy.
Impossible she would have given the money to someone else.
Evidence must be clear and convincing.
Court found that the money was never given.
iv) Failure of formalities
Milroy v Lord
- Equity does not assist a volunteer.

Differences between RT and CT

Intention is not a factor
Takoko Sakao v Ng Pek Yuen
“A CT is imposed by law irrespectively of the intention of the parties. And it is imposed
only under certain circumstances…what equity does in those circumstances is to fasten up
the conscience of the holder of the property a trust in favour of another in respect of the
whole or part thereof”.

RT focuses on creation of a legal and equitable interest in correlation with the financial
contribution especially with regard to presumed RT and serve to impute or infer intention
in cases of automatic RT where certain circumstances arises. CT looks to the conduct of a
party and is imposed to prevent unconscionability.

Types of CT
Institutional CT
- Came into existence with the occurrence of a specified event – the court does not impose the trust
but merely declare that the beneficiaries enjoy proprietary interest in the property from the time
the relevant events occurred
- Capable of gaining priority interest during the period btw the creation of the trust and its
recognition by the court
- Commonwealth countries
Remedial CT
- CT is imposed through judgment of the court when there is unjust enrichment – trust arises from
the date of the judgment
- The liability of the 3rd party starts from the date of the judgment – thus, any liability occurred
before the date of judgment is merely “accountable” by the 3rd party. (problem here is that
remedial CT backdates)
- USA, Canada, New Zealand

Difference between Institutional CT and Remedial CT

Landmark case: Westdeutsche Landesbank Girozentrale v Islington London Borough Council

Institutional CT- Arises by operation of law “from the date of the circumstances which give rise
to it”. The function of the court is merely to declare that such trust has arisen in the past. The
consequences that flow from such trust are determined by rules of law, not discretion.
Remedial CT- A judicial remedy giving rise to an equitable obligation. Operates retrospectively
to the prejudice of third parties and it lies in the discretion of the court. (More than just declaring).

Hussey v Palmer
Lord Denning:
“…the trust may arise at the outset when the property is acquired (ICT), or later on, as the
circumstances may require (RCT). It is an equitable remedy by which the court can enable an
aggrieved party to obtain restitution.”

Muschinski v Dodds (Australian Court recognizes both ICT and RCT)

Deane J:
“If ‘institution’ is understood as connoting a relationship which arises and exists under the law
independently of any order of a court and ‘remedy’ is defined as referring to the actual
establishment of a relationship by such order, these catchwords do serve the function of
highlighting a conceptual problem that persists about the true nature of a constructive trust.
However, these distinctions are ephemeral in nature… As equity regards as done that which ought
to be done, an equitable obligation can be enforced in accordance to this principle as it is to be
created. Where an equity court would retrospectively impose a CT by way of equitable remedy,
its availability as such a remedy provides the basis for, and governs the content of, its existence
inter partes independently of any formal order declaring or enforcing it. In this more limited
sense, the CT is also properly seen as both ‘remedy’ and ‘institution’.”

RHB Bank Bhd v Travelsight (M) Sdn Bhd & Ors and another appeal [2016] 1 MLJ 175 (FC)
In this case, the Federal Court upheld the proprietary right to refund of the purchase money of the
purchaser from the vendor under the remedial constructive trust doctrine. The Federal Court also
considered the impact of mutual rescission of the contract of sale and purchase by the company on
a remedial constructive trust and resulting trust.
The purchaser company called Travelsight entered into a sale and purchase agreement with the
vendor company called Atlas for the purchase of a property in Kuala Lumpur. Travelsight having
paid part of the purchase price took a loan from RHB Bank to pay the balance. The property was
given as security for the loan. The loan was settled, but the property was not handed over to
Travelsight. In the meantime, Atlas went into liquidation and the liquidators sold the property to
satisfy the creditors. In the lower court, Travelsight argued that the property was held by the
liquidators upon trust for Travelsight. Travelsight also sought orders under company law to set
aside the decision of the liquidators to sell the property and to prohibit them from selling and or
transferring the property. The High court dismissed that action who said that there was no
justification to construct a remedial trust under the circumstances. The Federal Court ruled that
the vendor, Atlas, had to refund the purchase price to take back the property.

RHB Bank Bhd v Travelsight (M) Sdn Bhd T Ors, the court recognize the constructive trust as a
remedy. The court may grant a proprietary remedy in appropriate circumstances where it would
be unconscionable for the defendant to retain the property. Here, the circumstances in this case is
such that it would be unconscionable for the Defendant to keep both the full purchase price paid
into its account and the diamonds ordered by the Plaintiff. First, the Defendant had already
received full purchase price from the Plaintiff. Yet, the Defendant failed to deliver the diamonds
to the Plaintiff nor refund the money paid to the Plaintiff. Second, even if the contract has been
rightfully terminated as claimed by the Defendant, only the deposit should be forfeited; the
remaining balance payment should be refunded to the Plaintiff As such, a constructive trust arises
as the Defendant knowingly retains both the diamonds and full purchase price without any
intention to fulfill its contractual obligation or refund the money which the Plaintiff is unjustly
deprived of.
Constructive trust is remedial and proprietary in nature so that the true owner can trace
his property into the product or substitute of the original property.
The Plaintiff is therefore entitled to an equitable interest in its share of diamonds and
the purchase money under a constructive trust. The Plaintiff as the owner of that interest
is entitled to follow it at common law and trace it in equity as it passes from hand to hand.
The right to trace ends where the property becomes vested in a charity. (Re Diplock) or
in the hands of a bona fide purchaser for value.

Lac Minerals Ltd v International Corona Resources Ltd (1989) 61 DLR (4th) 14, the Canadian
Supreme Court per La Forest J observed that ‘there is no unanimous agreement on the
circumstances in which a constructive trust will be imposed’ and identified a number of factors
that may be relevant in determining whether to award a proprietary remedy: A constructive trust
should only be awarded if there is reason to grant to the plaintiff the additional rights that flow
from recognition of a right of property. Among the most important of these will be that it is
appropriate that the plaintiff receive the priority accorded to the holder of a right of property in a
bankruptcy. More important in this case is the right of the property holder to have changes in value
accrue to his account rather than to the account of the wrongdoer ... The moral quality of the
defendants’ act may also be another consideration in determining whether a proprietary remedy is
appropriate. Allowing the defendant to retain a specific asset when it was obtained through
conscious wrongdoing may so offend a I court that it would deny to the defendant the right to
retain the property.

Datuk M Kayveas v See Hong Chen (Malaysian Position, recognizing remedial trust)
“From the various opinions above it may be construed that a CT arises by operation of law
irrespective of the intention of the parties, in circumstances where the trustee acquires property for
the benefit of the beneficiary, and making it unconscionable for him to assert his own beneficial
interest, and with equity fastened upon his conscience, he cannot transfer any interest to himself
let alone a third party. If he does, then a CT comes into existence. An aggrieved party, by
equitable remedy, may demand restitution of the property if he has been deprived of his beneficial
interest.”
Lord Browne-Wilkinson in Westdeutsche at p 716G considered that the remedial
constructive trust might be a suitable basis for developing proprietary
restitutionary remedies, for example against a defendant who knowingly retains
property of which the plaintiff has been unjustly deprived.

Circumstances CT will be imposed

1. Vendor and purchaser. Where there is specifically enforceable contract and the transaction was
not perfected, the vendor will hold the land in CT for the purchaser until i.e. the registration is
completed
Lysaght v Edwards –
the vendor is a constructive trustee for the purchaser of the estate from the moment the contract is
entered into.

Samuel Naik Siang Ting v Public Bank Bhd [2015] 6 MLJ 1 (FC)
MG Commentary:
The facts of the case were that a certain town council sold the same piece of land twice first, to the
earlier purchasers and second to the new purchasers. There were valid sale and purchase
agreements in respect of the earlier purchasers who had paid the full purchase price. This meant
that the earlier purchasers were fully vested with the rights, titles and interests to the lots which
rights, titles and interests were in turn absolutely assigned to the Bank (respondent) for the loan.
A similar exercise was subsequently engaged in for the new purchasers of the land by the town
council.
The question was whether there was a bare trust of the land for the earlier purchasers.
On the point of the bare trustee, the Federal Court held:

Jessel MR in Lysaght v Edwards (1876) 2 Ch D 499 clearly stated in that case that the effect of a
contract for sale has been settled for centuries. At p 506, His Lordship explained the following
legal doctrine:
It is that the moment you have a valid contract for sale the vendor becomes in equity a
trustee for the purchaser of the estate sold, and the beneficial ownership passes to the
purchaser, the vendor having a right to the purchase-money, a charge or lien on the estate
for the security of that purchase-money, and a right to retain possession of the estate until
the purchase-money is paid, in the absence of express contract as to the time of delivering
possession. In other words, the position of the vendor is something between what has been
called a naked or bare trustee, or a mere trustee (that is, a person without beneficial interest).

In Lysaght's case, an earlier authority by Lord Justice Turner in Hadley v London Bank of Scotland
(1865) 12 (LT) 747 was cited that held:

I have always understood the rule of the Court to be that if there is a clear valid contract for sale
the Court will not permit the vendor afterwards to transfer the legal estate to a third person,
although such third person would be affected by lis pendens. I think this rule well founded in
principle, for the property is in equity transferred to the purchaser by the contract; the vendor then
becomes a trustee for him, and cannot be permitted to deal with the estate so as to inconvenience
him.

The Federal Court followed the decision in Temenggong Securities Ltd & Anor v Registrar of
Titles, Johore & Ors [1974] 2 MLJ 45 , Karuppiah Chettiar v Subramaniam [1971] 2 MLJ 116
and Hon Ho Wah & Anor v United Malayan Banking Corpn Bhd [1994] 2 MLJ 393). The Lysaght
principle has been adopted and followed by the Federal Court in Temenggong Securities Ltd &
Anor v Registrar of Titles, Johore & Ors [1974] 2 MLJ 45 where it was held:

The law is clear that the vendors, after receipt of the full purchase price and surrender of possession
of the lands to the appellants are bare trustees for the Appellants of the said land and it must
consequently follow, as night must day, that the vendors have no interest in the lands which can
be the subject matter of a caveat.
The Federal Court followed the well-founded principles of law which, according to Jessel MR in
Lysaght's case, 'has been settled for centuries'. Applying the said principles to the facts of the
present case, the Federal Court found that the town council being the registered proprietor of the
land after executing the sale and purchase agreements with the earlier purchasers and having
received the full purchase price, was a bare trustee (that is, a person without beneficial interest in
the property); and to borrow the words of Jessel, MR in Lysaght's case ' ... the court will not permit
the vendor afterwards to transfer the legal estate to a third person'. In other words, the town council
in the present case, was therefore not permitted in law to sell or transfer the land to the new
purchasers (including the appellant).

2. Fully secret trusts. The apparent beneficiary under a will to whom property is bequeathed holds
as CT for the true beneficiary.
McCormick v Grogan

3. Failure of formalities. Where there is a gift (not a contract) and that gift was not perfected, the
donor will hold the gift on CT for the donee the moment the donor had done everything in his
power to divest himself the interest and vest it in the donee.
Re Rose –
held that the transferor of shares who had done everything in his power to transfer shares held
those shares on trust for the transferee pending registration.

4. Property acquired in breach of a fiduciary duty. Where a person stands in a fiduciary position to
another acquires property in breach of his or her fiduciary duty holds the property on CT for that
other.
Instances of where a fiduciary duty exists include partners, solicitor and client, religious adviser
and disciple, parent and child. (need pre-existing relationship)
Takako Sakao v Ng Pek Yuen
- Partners in business.
- According to A, property was to be purchased and registered in the joint names of herself and R1
in equal shares and she had provided RM 194,610 (less than half) as her contribution towards the
purchase price.
- Instead, R1 had purchased the property for a sum of RM 950,000 and registered it in her sole
name. R1 then sold the property to the R2’s (R1’s husband) company for a sum of RM 1,930,000.
- A had lodged a caveat to protect her interest in the property and she was the beneficial owner of
the property of which R2 was the registered proprietor. A claimed that a trust had arisen in her
favour.
Held, got CT because they’re partners, got fiduciary duty. CT arise the moment R1 breached her
fiduciary duties when she acquired the property, had it registered in her sole name, sold the same
to the second respondent at a higher price and denied the appellant her right to a half share in it. A
was therefore entitled to a half share in the trust property as a beneficiary under a CT. She was
also entitled to claim it from the R1 and to trace her half share in the property into the hands of
R2.
See also:
Keech v Sandford –
trustee of a leasehold approached the landlord to sell the reversion to the trust. The landlord
refused. Later the trustee obtained the reversion for himself. Held, he held the reversion in trust
for the beneficiaries.

Boardman v Phipps –
Boardman was solicitor to Phipps’ family trust. The trust owned a substantial minority
shareholding in a company. Boardman and one of the beneficiaries. Boardman is a solicitor to a
trust which owned some 8,000 out of 30,000 shares in a private company. Being unhappy with the
company’s performance, he subsequently personally bought the company’s remaining shares
without the consent from the beneficiaries. Significantly, in securing the purchase, he benefited
from the information he had received in his fiduciary position. The shares yield a handsome profit
which benefited the trust
Held, since Boardman is a fiduciary, he was a constructive trustee of the profit made on his
personal shareholding. Opportunity to make the profit arose out of his position and certain
confidential information had been used in the process. However, compensation was ordered from
the trust in recognition of the work and skill involved.

IDC v Cooley
F: Mr Cooley was an architect employed as managing director of IDC. The Eastern Gas Board had
a lucrative project pending, to design a depot in Letchworth. Mr Cooley was told tat the gas board
did not want to contract with a firm but directly with him. Mr Cooley resigned and undertook the
design work on his own account. IDC sued him for breach of duty of loyalty. Cooley argued that
he made it clear to the gas board that he was speaking in a private capacity.
Held:
Mr Cooley had ‘one capacity and one capacity only in which he was carrying on business at that
time. The capacity was as managing director of the plaintiffs. All information which came to him
should have been passed on.’

Regal (Hastings) v Gulliver – a company had the opportunity of an investment by forming a

subsidiary company to acquire the leases of two cinemas. However, the freeholder of the cinemas
was only prepared to grant the leases if the share capital of the subsidiary was fully subscribed for.
As the company itself did not have sufficient funds to achieve this, the directors of the company
took up the opportunity. The company later brought an action against the directors to recover the
profits they had made.
Held, directors were in a fiduciary relationship to the company, and liable to account.
Bray v Ford – a person in a fiduciary position is not, unless otherwise expressly provided, entitled
to make a profit. He is not allowed to put himself in a position where his interest and duties conflict.

5. Using statute as an engine of fraud. Where a person acquires property from another and asserts
legal ownership over it by using statute as an engine of fraud, he or she holds that property upon a
CT for that other.
Bannister v Bannister
- D transfers house to P (D’s brother in law) with condition that she can live in the house for life
and rent free. After 2 years, P gives D notice to quit as he is the legal owner now. P argues that
there is no resulting trust. By virtue of s53 (1) (b) of Law of Property Act(LPA), declaration of
trust must be evidence in writing. D pleads for oral trust.
- Held: unconscionable for P to use the statute as an engine of fraud to cheat D and escape promise
of life tenancy. He holds the house at con trust for the D imposed by the operation of law. Note:
Malaysia does not have LPA, so oral trust enforceable. (may be can cite Wan Naimah here?)

Binions v Evans
Mr and Mrs Binions promised the sellers to allow Mrs Evans to remain in her cottage for life when
they bought it. Mrs Evans's relationship pre-dated the Binions' interest in the property (the
Tredegar Estate had allowed her and her husband before he died, a servant of theirs to occupy and
had entered into its standard tenancy with her as the survivor). The Binions family argued she was
a ‘tenant at will’.

Lord Denning MR held that Mrs Evans could assert her right to remain in the cottage against the
Binions even though she had no legal or equitable property right as such.[1]
Suppose, however, that the widow did not have an equitable interest at the outset, nevertheless
it is quite plain that she obtained one afterwards when the Tredegar Estate sold the cottage.
They stipulated with the purchaser that he was to take the house “subject to” the widow’s rights
under the agreement. They supplied the purchaser with a copy of the contracts and the purchaser
paid less because of her right to stay there. In these circumstances, this Court will impose on
the purchaser a constructive trust for her benefit: for the simple reason that it would be utterly
inequitable for the purchaser to turn the widow out contrary to the stipulation subject to which
“ he took the premises. That seems to me clear from the important decision of Bannister v ”
Bannister(1948) 2 AER 137, which was applied by the Judge, and which I gladly follow.
This imposing of a constructive trust is entirely in accord with the precepts of equity. As Mr.
Justice Cardozo once put it: “A constructive trust is the formula through which the conscience
of equity finds expression”, see Beatty v Guggenheim & Co (1919) 225 N.Y. 380, 385: or, as
Lord Diplock put it quite recently, a constructive trust is created “whenever the trustee has so
conducted himself that it would be inequitable to allow him to deny to the cestui que trust a
beneficial interest in the land acquired”, see Gissing v Gissing (1970) W.L.R. at page 267-F.
6. Donatio mortis causa. Where a gift was made in contemplation of imminent death, the gift was
held by the donee on CT for the donor until the latter`s death.
Cain v Moon –
3 requirements for valid donation mortis causa: (i) the gift must have been made in contemplation
of, though not necessarily in expectation of, death; (ii) the subject matter of the gift must have been
delivered to the done; (iii) the gift must have been made under such circumstances as to show that
the property is to revert to the donor if the donor should recover.
7. Pallant v Morgan equity. Where A has an arrangement or understanding with B pursuant to
which B acquires property and then seeks to act inconsistently with the terms of the pre-acquisition
arrangement or understanding, B will hold the property on CT for A.
Bannister v Bannister
F: A woman owned a cottage. She made an oral agreement to sell the cottage to P on the condition
that she was to be allowed to stay as long as she lives. In the conveyance there was no mention of
that condition. P later tried to evict her on the absolute title that he held, relying on s53(1)(b) of
Law of Property Act 1925 (Declaration of trust must be in writing)
Held:
P held the legal fee simple on CT for D for an equitable determinable life interest in the land. As
he used the statute as an engine of fraud, he holds CT on behalf of D.
Pallant v Morgan –
Neighbours enter into agreement acquiring woodland nearby to prevent it from falling into hands
of strangers. One of them bid for it and the other withdraw his bid.
not necessary that the arrangement or understanding should be capable of being enforced as a
contract. (going back on an informal arrangement is also deemed unconscionable) Parties in this
case agreed that one would refrain from bidding at an auction of two lots of land on the
understanding that the other would bid for both lots and (if successful) would sell one of them to
the non-bidding party. The bidding party won the auction and was required to hold the lots on trust
for both parties pending fulfilment of his promise.
Held:
-The acquirer holds the share that the other was to acquire a CT.
-Where A has an arrangement or understanding with B pursuant to which B acquires property and
then seeks to act inconsistently with the terms of the pre-acquisition arrangement for
understanding, B will hold the property on CT for A.

Tan Sri Datuk Dr Mohd Swami v MISL & Associates Sdn Bhd (2003)
F: Df was obliged to sell shares in Sitt Tatt Bhd to Pfs under the Buy Back Agreements as seen in
enclosure 5 of exhibits ‘TS-7’ and ‘TS-8’. Df cannot deal with these shares unless and until Pfs
failed to honour the buy-back agreement within time stipulated. The Df however sold more than
19 million shares of the company to someone else.
Held:
-By selling the shares during the window period of four (4) months, Df has practiced fraud or
deception

8. Common intention CT. Where spouses or couples living together acquire a matrimonial home
in the name of one of them upon the express or implied understanding that both are to have an
interest in the property, the acquirer holds the property on CT for the other who has made direct
or indirect contribution, not necessarily in monetary terms. (note: RT and its presumptions apply
here, though England’s position favours common intention over presumption of advancement)
Express Common Intention
Grant v Edwards –
A house was purchased for P and D to live in as if married. P was in fact married to someone else
and the house was purchased in the name of D and D's brother. D stated that he would not put P’s
name on the title deeds yet as it would be prejudicial towards matrimonial proceedings between P
and her husband which were pending then.
Held, P was entitled to half of the proceeds of sale from the property based upon a common
intention based upon a statement that P’s name would appear on the title deeds.

-Must prove there was a common intention that the property was to be held on trust. The conduct
of parties after acquisition, whether there was reliance on that common intention must also be
examined.
-P was entitled to half of the proceeds of sale from the property based upon a common intention
from a statement that P’s name would appear on the title deeds.
-There was also detrimental reliance, as the P made direct/indirect contribution to the house.

Eves v Eves
F: P and D were unmarried couple. When a child was born, they bought a joint home which was
bought under D’s name because P was under 21 years old. The house was in a dilapidated state,
and the female partner had to wield a sledge hammer to make the house habitable. D left the house,
P claimed beneficial interest.
Held:
-D led P to believe that she had some interest in the property and that her name was omitted because
of age.

Inferred Common Intention (Conduct Imputing Agreement)

Grant v Edwards
-Substantial indirect contributions to mortgage and bringing up children.
Eves v Eves
-Labouring work
-Lord Denning:
“It seems to me that his conduct by Mr Eves amounted to a recognition by him that, in all fairness,
she was entitled to a share in the house, equivalent in some way to a declaration of trust…of all
she had done and was ding for him and the children and would thereafter do. By so doing he gained
her confidence. She trusted him. She did not make any financial contribution but she contributed
in many other ways (work in house and garden, children). In view of his conduct, it would be most
inequitable for him to deny her any share in the house.”
Lim Kin Chiu v Chan Poh Yuk (1991)
F: Pf and Df were a married couple who were separated. A land was in the sole name of the Df.
Held:
-Parole evidence is allowed to determine the common intention of the parties at the time of
acquisition of the property and it was found that the common intention was that the parties were
beneficially entitled to the land in equal shares.

Is a thief a constructive trustee?

Westdeutsche Landesbank Girozentrale v Islington London Borough Council –
Lord Browne-Wilkinson said that a thief was a constructive trustee of the money he steals. This is
absolutely wrong. A constructive trustee has title to the property he holds for the benefit of the true
owner. A thief on the other hand has no title. Nemo dat qoud non habet.
 The general rule is that when CT is imposed, the holder of the property is said to have
proprietary interest in the property so as to justify him to return it back to the rightful owner.
CT will only be imposed if the holder of the property has proprietary interest in it.
Dubai Aluminium v Salaam –
accused never had title to trust funds, or claimed the right to deal with them on behalf of those
properly entitled to them. He acted throughout his own behalf. Hence, the claim against him is that
he participated in a fraud, and equity makes him accountable in equity. But he is not a trustee. He
is not a fiduciary or subject to fiduciary obligations; and he could plead the Limitations Act as a
defence to the claim (6 years).

Liability of Third Party

Lord Selborne in Barnes v Addy
“Those who create a trust clothe the trustee with a legal power and control over the trust property
imposing on him a corresponding responsibility. That responsibility may no doubt be extended in
equity to others who are not properly trustees, if they found either making themselves de son tort
or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que
trust.”
3 involvement of strangers in trust property
(a) Trustee de son tort
-3rd party has acted as trustee without authority
Phipps v Boardman
“These two gentlemen took on themselves an authority which they did not truly possess: and, by
virtue of this assumed authority, they obtained information and knowledge which they would not
otherwise have got. There are many cases in the books where a person has assumed to have
authority when in truth he has none. The classic instance is an executor de son tort. If a person
intermeddles with the assets of an estate in such a way as to denote an assumption of the authority
of an executor, he is accountable just as if he were an executor.”

Gawton v Lord Dacres

Lord Anderson:
“If one become my bailiff of his own wrong, without my appointment, he is accountable to me..”

James v Williams
F: Pf’s mother died intestate. The family home was to be held on statutory trust for the Pf, her
brother and sister. Brother who knew that who was not solely entitled, took possession of the
property as his own. He died and left the property to the sister, who died and left it to the Df. The
Pf claimed 1/3 of the share. Df claimed statute barred.
Held:
Brother was the executor de son tort since he knew he was not entitled to the property. He held
property on CT. Hence claim not time barred.

Khor Kuekjin v Hj Yasin

F: A received $59,040 from the State government as compensation on acquisition of part of the
land which he sold to a buyer who had in turn sold it to R.
Held:
-A was in fact a CT of the money which had been paid to him on behalf of the purchasers. By his
conduct A had become a CT for R. The claim was not statute barred, as R did not know until 1970
that the money had been paid to the A.
-Referred to Soar v Ashwell and held that Statute of Limitation cannot be raised as a defence in
cases of CT.

Guindarajoo Vegadason v Satnasingam

F: MM applied for LA over AA’s estate, which were subsequently issued on 21 February 1995.
However, MM died intestate before the LA were issued. During her lifetime, MM informed the Pf
that she intended for him to have ownership of the property upon her death. She extracted a number
of promises from the Pf, all of which he had kept. After MM’s death, Pf discovered that Df had
also obtained LA over AA’s property, and later further obtained LA over estate of MM,
purportedly as her lawful nephew. Pf applied for a declaratory ourder with regard to his right in
the property and to revoke the grants of probate by Df. Pf asserted that the property was an
intervivos gift by MM during her lifetime.
Held:
-Df, although was neither appointed nor considered himself as a trustee, is a de facto trustee. In
their relations with the beneficiaries they are treated in every respect as if they had been duly
appointed. They are true trustees and are fully subject to fiduciary obligations.

(b) Dishonest Assistance

-Defendant has not received trust property otherwise would be liability for receipt. Hence, only he
has only a personal liability and not a proprietary one.

Royal Brunei Airlines v Tan

Lord Nicholls:
“Where a person dishonestly assists another in a breach of trust, that dishonest assistant will be
personally liable to account to the trust for the value lost to the trust. ‘Dishonesty’ in this context
does require that there be some element of fraud, lack of probity or reckless risk-taking. It is
not necessary that any trustee of the trust is dishonest; simply that the dishonest assistant is
dishonest.”
Issue: Given that BoT is an essential requirement for accessory liability, must this be dishonest or
fraudulent?

Baden v Delvaux (Knowing Assistance)

1) The existence of a trust
2) Existence of a dishonest and fraudulent design on the part of the trustee of the trust
3) Assistance by the stranger
4) Knowledge of the stranger
5) CT must be privy to dishonesty on part of the trustee

Possible mental state of knowledge on the stranger for CT:

1) Actual knowledge
2) Wilfully shutting one’s eyes to the obvious
3) Wilfully and recklessly failing to make such inquiries as an honest and reasonable man
would make
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 on inquiry

Change in Position in Royal Brunei Airlines (Dishonest Assistance)

F: Tan was the managing director and principal shareholder of a travel company, BLT. BLT was
an agent of Brunei Airlines and was required, under an agreement, to see the money received was
to be paid in a separate account until passed over. But BLT, with Tan’s knowledge and assistance,
paid money into its current account and used it for its own business. BLT failed to pay on time,
contract terminated and went insolvent. Royal Brunei claimed the money back from Tan.
Held:
-Since the money paid to BLT was held on trust in favour of the airline, Tan was liable since he
had acted dishonestly in that he caused or permitted his BLT to utilize the money in a way he knew
was not authorized by the trust.
Lord Nicholls:
“…dishonesty 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. It is not necessary that… trustee was acting dishonestly… ‘Knowingly’
is better avoided as a defining ingredient of the principle, and in this context of this principle the
Baden scale of knowledge is better forgotten”.
When is a person dishonest for the purpose?
A person is dishonest when he fails to act in a manner an honest person would in the circumstances.
“He is required to act honestly…an honest person knows there is doubt…the only answer…lies in
keeping in mind that honesty is an objective standard…Acting in reckless disregard of other’s
rights or possible rights can be a tell-tale of dishonesty. An honest person would have regard to
the circumstances known to him including the nature and importance of the proposed transaction,
the nature and importance of his role, the ordinary course of business, the degree of doubt, the
practicability of the trustee or the third party proceeding otherwise and the seriousness of the
adverse consequences to the beneficiaries…He might…flatly decline to become involved…ask
further questions…seek advice…advise the trustee of the risk but then proceed with his role in
the transaction. Ultimately, in most cases, and honest person should have little difficulty in
knowing whether a proposed transaction, or his participation in it, would offend the normally
accepted standard or honest conduct.”

Twinsectra v Yardley
F: L(Twinsectra) was a solicitor who acted for Y in a transaction which included the negotiation
of 1 million pounds from R. L did not deal directly with the lender for this was attended by a firm
of solicitors, S. S received money subject to certain undertaking that the loan monies will be
retained by S until Y acquires a property and it will only be used for the property. However, S paid
the money to L who transferred it to Y, using 1/3 of it for purposes unrelated to acquisition of
property.
Held:
-Accessory liability requires a conduct that is dishonest assessed according to a standard of
reasonable and honest people. (There would be no liability if the person had not been aware that
the conduct in issue would be regarded by an honest man as dishonest.)
-L was not dishonest because he honestly believed that the undertaking did not run with the money
and he held it for his client unconditionally. He was therefore bound to pay it upon his client’s
instructions without restriction on its use. Even though he knew of all the facts, he was not by
normal standards dishonest.

Barlow Clowes v Eurotrust International Ltd

Held:
-Objective standard. Interpreted Twinsectra’s ruling as ‘what he knows would offend normally
accepted standards of honest conduct’ meant only his knowledge of the transaction had to be such
as to render his participation contrary to normally acceptable standards of honest conduct. It did
not require that he should have had reflected about what normally acceptable standards were.

CA Kuan Pek Seng v Robert Doran

-The test is an objective one.

(c) Recipient Liability

General law under Karak Rubber Co Ltd v Burton
A CT will be imposed on a stranger who “has received trust property with actual or constructive
notice that it is trust property transferred in BoT”.
Elements:
1) Disposal of Pf’s assets in breach of fiduciary duty
2) Receipt by Df which are traceable;
3) Df’s knowledge that the said assets are traceable to the breach of FD.

Charter Plc v City Index

Held: Liability for knowing receipt depends on the Df having sufficient knowledge of the
circumstances of the payment to make it unconscionable for him to retain the benefit or to pay it
away for his own purposes.

Polly Peck International Plc v Nadir

F: A bank assisted the misappropriation of funds through whose account the funds had passed. The
question was whether the bank has a duty to inquire as to whether there were improprieties in the
transfer of the funds.
Held:
-Liability of a CT in a knowing receipt case did not require that the acts complained of to be
fraudulent.
-The Df would be liable if it can be shown to have had knowledge of facts which would put an
honest and reasonable man on inquiry, or at least, if the Df can be shown to have willfully and
recklessly failed to make such inquiries as an honest and reasonable man would have made.
-If no constructive knowledge, not liable.
Selangor United Rubber Estate v Caddock
-Dicta: Knowledge required to hold a stranger liable as CT in a dishonest and fraudulent design,
is knowledge of circumstances which would indicate to an honest, reasonable man that such
a design was being committed or would him on enquiry, which the stranger failed to make,
whether it was being committed.

Citadel General Assurance v Lloyds Bank Canada

Held:
Kind of knowledge necessary on the part of the stranger as to render it sufficient for equitable
intervention:
1) There is a fundamental difference between assisting liability (fault-based) and recipient
liability (restitution-based).
2) Liability for receipt-based fault must be founded on a lower threshold of knowledge.
3) Test of CT is sufficient for receipt-based fault. Knowledge of facts sufficient to put a
reasonable man on notice or inquiry would be sufficient to attract recipient liability.
BCCI (Overseas) Ltd v Akindele (2001)
F: Liquidator of BCCI sued Akindele for $6.679m that he got in divestiture payment (selling off
subsidiary interest) in 1988. A subsidiary in BCCI, ICCI had agreed that Akindele would buy
shares in BCCI Holdings and be guaranteed a 15% for a $10m investment. BCCI gave him 6.679
extra. He did not know that this was part of a fraud scheme to enable BCCI Holdings to buy its
own shares. The liquidator argued that Akindele was a CT and his knowledge can be inferred from
the artificially arranged loan transactions and his unusually high interest rate of 15%.
Held:
-There should be a single test for recipient liability like dishonest assistance.
-Fault means that the Df must know enough of the facts surrounding the misapplication of the trust
property to make it unconscionable for him to retain the benefit of the receipt.
-Dishonesty was not needed to establish liability for knowing receipt as CT.
-Single Test: “The recipient’s state of knowledge must be such as to make it unconscionable
for him to retain the benefit of the receipt.”
-There was nothing to alert Mr Akindele to the transaction being tainted.

Datuk Kayveas v See Hong Chen (2014)

F: A incorporated 5th Df as the investment arm of PPP. In 2003, A made a successful bid for an
auctioned property and paid 10% deposit. A obtained a friendly loan of about RM 2.4m from the
1st Df to complete the payment and had paid full purchase price of the property through the 5th
Df, the registered proprietor of the property. As security, A transferred the shares in the 5th Df to
1st Df on trust. However, despite being a mere trustee, 1st Df proceeded to increase the shares
from two to 100k. He took 99,998 and left 2 to his nominees, 2nd and 3rd Df, In 2005, they
disposed the shares to 4th Df for 2.5m. 4th Df allotted the shares to 6th and 7th Dfs. In 2008, 4th
Df sought to oust A from the property.
Held: A CT came into existence when 1st Df unconscionably transferred the sahres to the
‘collective dfs’. The consequential effect was that as the ‘collective dfs’ had notice of the trust and
therefore could not qualify as bona fide purchasers of the shares of the 5th Df, they likewise
became CTs.
Agents carrying out ministerial duties not liable

Mara v Browne
-“An agent in possession of money which he knows to be trust money, so long as he acts honestly,
is not accountable to the beneficiaries interested in the trust money unless he intermeddles with
the trust by doing acts characteristic of a trustee and outside the duties of an agent”

Remedy
Equity imposes a duty and provides remedies against 3 categories of person:
1. Trustee: bare trust, resulting trust, con trust (positive obligations imposed, eg to invest the
trust funds and produce income)
- all trustee are fiduciary but not all fiduciary are trustee.
- trustee act 1949 applied to him.
- Trustee cannot use trust property to profit himself even if he acts innocently. If he does he
commits a breach of trust. To prove breach of trust, damage is an important element.

2. Fiduciary (only negative duty, eg; don’t take client money and run off. Eg: director of company,
partner in partnership, solicitor and client)
- Trustee act 1949 doesn’t applied to fiduciary
- The only positive duty is to protect the money

3. Accessories (no obligation imposed at all)

- Accessories are not constructive trustees.
Royal Brunei Airlines v Tan Kuok Ming –
An accessory is a third party who does not personally receive any trust property but has provided
dishonest assistance in a breach of trust. It is a form of secondary liability in the sense that it only
arises where there has been a breach of trust. Such a person is liable to account to the beneficiaries
for any loss that they may have suffered in consequence of the breach of trust. But he is not a
constructive trustee, it’s a personal action. (see Dubai’s case)
- If the title of the property is, pursuant to the BOT, transferred to the accessories so as to vest him
the legal title, he will become constructive trustee.
Lipkin Gorman v Karpnale –
As long as plaintiff can establish some form of a proprietary base, tracing as a technique can be
invoked whether or not the person is liable as a constructive trustee.
- The liabilities of accessories were extensively discussed in the case of Royal Brunei Airlines v
Tan Kuok Ming. Too bad, the court in that case has also erred(this is according to Gopal Sri Ram):

Royal Brunei Airlines v Tan Kuok Ming (can disregard, but just FYI only)
- P company appointed Borneo Leisure Travel (BLT) as its agent for sale of passenger and cargo
transportation. The D in this case was the director + principal shareholder of P company. D assisted
BLT with knowledge to pay the profits of the sale it got into its own account. BLT later bankrupt
and P sought to recover the money from D as CT
- Previous position. Barnes v Addy – trustee misappropriated the fund and the transaction was
effected by a solicitor. The court held a stranger will only be held as CT if:
a) He has “knowingly assist” or “knowingly receive”
b) The trustee was dishonest
c) Mere negligence or constructive knowledge is sufficient to impose CT – Karak Rubber v
Burden

- Royal Brunei Airlines.

a) The court replaced “knowingly assist” with “dishonest assistance” and “knowingly receive” as
“recipient liability”.
b) Knowledge is different from dishonest. Trustee`s dishonesty is prerequisite for knowledge. But,
trustee`s dishonesty is not a prerequisite for accessories` liability. Re Baden`s five scale of
knowledge was rejected.
c) Mere negligence is not enough to impose CT on accessories. Accessories must have acted
dishonestly.
d) Dual test;
i. D`s conduct is dishonest by the ordinary standard of reasonable man
ii. D knows that, by this standard, he was dishonest
e) However, dishonesty is not a requirement to “recipient liability”. According to the court,
recipient liability is a strict liability i.e. the recipient must return the property even if he has been
honest. It is to be noted that recipient liability is not accessories liability.
- Summary. According to RBA, if an “accessory dishonestly assisted the trustee to breach his trust”
or a “recipient, regardless of whether he has the intention or knowledge that the property was
obtained due to BOT, has received the property” – both will be CT for the rightful owner.
- Gopal Sri Ram said RBA is wrong because an accessory can never be held as CT because they
don`t have proprietary interest. This is in spite they have been acting dishonestly.
4. Recipient of a bribe
AG for HK v Reid: In this case, Reid took bribe and used that bribe to buy property in New
Zealand. PC held that servant/agent who receives a bribe or secret commission holds it on trust for
his employer/principal. This went against the long standing decision of Lister v Stubbs, which
held that a bribe is recoverable as a debt due from the recipient to his employer. The servant or
agent is also liable in equity to account to his employer or principal for the bribe which is
recoverable as money had and received. (personal action)
Held;
When a bribe is offered and accepted, the bribe belongs in law to the recipient. The property as
well. But equity, acting in personam, insists that it is unconscionable for a fiduciary to obtain a
benefit in breach of his duty. The provider of the bribe cannot recover as he committed a criminal
offence. The recipient must account for the bribe to whom that duty was owed, which is the
Government of HK. Reid must not only account for the bribe but also the increased value of the
bribe. As soon as the bribe was received it should be duly paid to the person who suffered from
the breach. As soon as the bribe was received, the false fiduciary holds it on CT.

Sinclair Investments v Versailles Trade Finance – refused to follow Reid’s case. This is better
position.

Mahesan v Malaysian Government Officers Co-operative Housing Society

F: Director and secretary of the society purchased property on behalf of society. They knew that
vendor paid 456k but didn’t disclose to the society. He took 122k a bribe or secret commission.
Held: Commission and loss suffered by society can be claimed from the agents.

5. Important to make a distinction between liability of a trustee and that of an accessory/receiver

of bribe because no limitation period when a claim is made against a trustee for fraudulent
BOT/converted trust property to his own use. But accessory/bribe receiver may plead limitation.
*Paragon Finance PLC v D B Thakerar & Co
Summary
Amendments after expiry of the limitation period alleging intentional wrongdoing ie fraud, where
previously only negligence had been alleged, constituted the introduction of a new cause of action
and were statute-barred by the Limitation Act 1980.
Facts
Conjoined appeals from judgments of Chadwick J and Timothy Lloyd J respectively sitting in the
Chancery Division. The defendants in the original actions ('Thakerar' and 'Thimbleby'
respectively) were firms of solicitors who acted for the plaintiff ('Paragon') and mortgagees in a
number of mortgage fraud cases, and also acted for, and in concert with, fraudsters. In 1994
Paragon brought proceedings against the defendants alleging negligence, but not fraud. Part of the
loss sustained by Paragon arose from the collapse of the property market, and this loss could only
be recovered if fraud was alleged and proved. Paragon sought to amend its pleadings to allege
fraud, but ran into limitation problems. In the Thimbleby case leave was granted by Timothy Lloyd
J on 25 March 1997, but in the Thakerar case leave was refused by Chadwick J on 4 June 1997.
Thimbleby appealed against the judge’s finding that for the purposes of s.32 of the Limitation Act
1980 the lenders could not with reasonable diligence have discovered the fraud before 21 March
1991 and therefore the limitation period did not run until that date. Paragon appealed against the
opposite finding in the other conjoined appeal.
Held
(1) As a general proposition, any new claim made in the course of existing proceedings which
involved the addition or substitution of a new cause of action was treated as a separate
action commenced on the same date as the original proceedings (s.35(1) and (2) Limitation
Act 1980). (2) In this case, non-contentious amendments not introducing a new cause of
action, and which the defendants had no objection to, would be allowed. (3) An allegation
of actual knowledge of fraud was not an allegation of fraud, and such amendments would
be allowed. (4) Amendments introducing a new cause of action but in respect of which
Paragon alleged that there was no applicable limitation period would not be allowed. The
court held that for a new action by beneficiaries under a trust where fraud was performed
by the trustee, the normal limitation period applied. Section 21 of the Act did not apply to
a wrongdoer who committed fraud and in the present situation the defendants would not
 be deprived of an arguable limitation defence. For a similar reason, application for leave
to plead fiduciary duty also failed and the court
(2) distinguished the authority of Nelson v Rye (1996) 1 WLR 1378, relied on by the plaintiffs.
(5) The test in s.32 of the Act was not whether the plaintiffs should have discovered fraud
sooner, but whether they could with reasonable diligence have done so. Thus, amendments
introducing a new cause of action but in respect of which Paragon alleged that there was
an extended limitation period would not be allowed as this would deprive the defendants
of the right to argue the question of an extended limitation period. (6) Relying on the House
of Lords in South Australia Asset Management Corp v York Montagues Ltd (1996) 3 WLR
87 and Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd
(1996) 3 WLR 1051, part of the loss sustained by Paragon arose from the collapse of the
property market, and this loss could only be recovered if fraud was alleged and proved. (6)
Amendments to add allegations of fraud where previously mere negligence had been
alleged amounted to a new cause of action, and were more than six years after the last of
the transactions took place and were thus statute barred. (7) Amendments alleged to arise
out of the same or substantially the same facts as already pleaded would not be allowed,
as, following Welsh Development Agency v Redpath Dorman Long Ltd (1994) 1 WLR
1409, it was "contrary to common-sense" to hold that allegations of fraud could arise out
of the same facts as allegations of negligence.
Appeal in the Thakerar case dismissed