In a recent decision, Williams v Central Bank of Nigeria [2014] UKSC 10, a majority of the United Kingdom Supreme Court held that knowing recipients and dishonest assisters in a fraudulent breach of trust can rely on limitation as a defence. The position of knowing recipients and dishonest assistants is contrasted with trustees who can be sued by beneficiaries for breach of trust without time limitation. This decision has direct relevance to Hong Kong as it has a similar limitation regime as England for actions concerning trust property.

Facts

Dr Williams, the plaintiff in the initial High Court proceedings, claimed to be the victim of a fraud carried out by the Nigerian State Security Services in 1986. He had agreed to guarantee a bogus transaction for the importation of foodstuffs into Nigeria. In connection with that transaction, Dr Williams paid around US$6.5 million to an English solicitor, Mr Gale, to be held on trust for him on terms that the money should not be released until certain funds had been made available to Dr Williams in Nigeria.

Dr Williams argued that, in fraudulent breach of trust, Mr Gale, knowing that those funds would not be available to Dr Williams in Nigeria, paid out around $6 million of the trust money to an account of the Central Bank of Nigeria (the “Central Bank”) located in London and kept the remaining $500,000 for himself. Dr Williams brought proceedings against the Central Bank on the basis that it was a party to Mr Gale’s fraud.

Parties’ arguments and procedural history

Dr Williams got permission to serve his claim against the Central Bank. The Central Bank applied for an order setting aside this order for service, arguing that the English Court lacked jurisdiction to hear Dr Williams’ claim. Specifically, the Central Bank argued that Dr Williams’ claim was time-barred. Since the alleged fraud took place in 1986, the six year limitation period for trust property actions under the English Limitation Act 1980 had long expired. However, the central issue was whether the trust fraud exception in s 21(1) of the Limitation Act prevented the Central Bank from relying on the general six year limitation period (s 21(1) is largely replicated in Hong Kong law by virtue of s 20(1) of the Hong Kong Limitation Ordinance).   

The High Court refused to set aside the order allowing Dr Williams to serve his claim. It considered that s 21(1) of the Limitation Act applied not only to actions against trustees but extended to an action against the Central Bank because of its participation in the trustee’s (Mr Gale’s) fraud.

A majority of the Supreme Court allowed the Central Bank’s appeal, declaring that the English Court had no jurisdiction in respect of Dr Williams’ action because the limitation period had expired. It therefore set aside the order for service.

Section 21(1) and (3) of the Limitation Act — the six year limitation and the exceptions for trust fraud

S 21(3) of the Limitation Act establishes the general rule that a six year limitation period applies for actions concerning trust property. Two exceptions to this general rule are established by s 21(1), which provides: “No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action  (a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or (b) to recover from the trustee trust property or the proceeds of trust property and converted to his use.

Issues

There were two issues in the case:

  1. Is a stranger to a trust, who has dishonestly assisted in a breach of trust or who has knowingly received trust assets in breach of trust, a “trustee” under s 21(1)(a) of the Limitation Act (UK)?

If the answer was yes, then the Central Bank would on Dr Williams’ case be a trustee by dishonestly assisting with the breach of trust. This would mean that the Central Bank was caught by the exception in s 21(1)(a) and therefore could not rely on the six year limitation defence.

However, if the answer was no, the second issue was:

  1. Under s 21(1)(a), does an action “in respect of” any fraud or fraudulent breach of trust to which the trustee was a party or privy include an action against a stranger to the trust, who has dishonestly assisted with or knowingly received trust assets in breach of trust?

If the answer was yes, then the Central Bank would on Dr Williams’ case be caught by s 21(1)(a) and therefore could not rely on the general limitation period as a defence.

If the answer was no, then the Central Bank would be allowed to rely on the limitation defence.

The Supreme Court’s decision

The majority decision

The majority of the judges answered both of the issues in the negative:

  • a stranger to a trust is not considered a trustee by dishonestly assisting with the breach of trust or knowingly receiving trust assets in breach of trust.
  • an action “in respect of” any fraud or fraudulent breach of trust to which the trustee was a party or privy does not include actions against non-trustees.

In summary, the majority held that the 1986 trust fraud claim was time-barred because s 21(1)(a) of the Limitation Act was only concerned with actions against trustees and the Central Bank was not a trustee. Therefore, the Central Bank was entitled to rely on the 6 year limitation period as a defence.

First issue: Knowing recipients and dishonest assisters are not true trustees, and are therefore not caught by s 21(1)(a) of the Limitation Act

As regards the first issue (whether the Central Bank was a trustee), Lords Sumption and Hughes considered that s 21(1)(a) only applied to “true trustees”, who owed fiduciary obligations to the beneficiaries.

Who is a constructive trustee?

The reference to “true trustee” must be understood within the broader concept of “constructive trustees”. The majority explained there were two categories of constructive trustees:

  • true trustees (who were caught by s 21(1)(a)); and
  • those who merely dishonestly participated in the misapplication of trust assets without ever assuming the status of a trustee (who were not caught by s 21(1)(a)).

True trustees include de facto trustees (those who lawfully assumed fiduciary obligations in relation to trust property but without formal appointment). De facto trusteeship may be implied where parties’ conduct demonstrates a common intention to create a trust relationship. An example of a de facto trustee is a company director who has fiduciary obligations to his or her company.

However, constructive trustees also include people who never assume and never intended to assume the status of a trustee, whether formally or informally, but expose themselves to liability in equity by participating in the misuse of trust property. Such people might be held to account by equity as if they were trustees, even though they were not really trustees. People in this category were said to have “ancillary liability” for the trust property but are not true trustees.

True trustees have fiduciary obligations

True trustees and those having mere ancillary liability are distinguished by the fiduciary obligations that true trustees have. True trustees have fiduciary obligations to their beneficiaries because they hold property for the benefit of the beneficiaries. If a trustee has misapplied trust assets, equity will ignore the misapplication and simply hold the trustee liable as if he or she acted in accordance with the trust.  Time never starts running, thus preserving beneficiaries’ ability to commence claims for breach of trust without time limitation.

By contrast, knowing receivers and dishonest assisters are not trustees because they have never assumed fiduciary duties. A knowing receiver may be liable to account for trust assets because he or she has accepted the assets knowing that they were transferred in breach of trust. Although the knowing receiver’s possession of the assets is wrongful against both the trustee and the beneficiaries, no trust has been placed on the knowing receiver. A knowing receiver does not have the powers or duties of a trustee, for example, to invest or manage the trust assets. The knowing receiver’s sole obligation is to restore the trust assets immediately. The availability of proprietary remedies against knowing receivers does not make them trustees. Similar arguments apply to dishonest assisters.

Accordingly, the Central Bank, being an alleged dishonest assister, was not a trustee for the purposes of s 21(1)(a) of the Limitation Act.

Second issue: S 21(1)(a) of the Limitation Act does not apply to actions against non-trustees

As regards the second issue (whether s 21(1)(a) of the Limitation Act applied to actions against strangers to a trust), in broad terms the Court decided that s 21(1)(a) only applied to true trustees for four reasons.

  1. The six year limitation provided in s 21(3) was intended to give trustees some protection from claims for breaches of trust, except in the two situations specified in s 21(1)(a) and (b) where trustees would be held liable to account without limitation of time. The exceptions (in s 21(1)(a) and (b)) had to apply to the same people as the rule (in s 21(3)) did.
  2. The words “to which the trustee was a party or privy” in s 21(1)(a) would be unnecessary if the provision applied to actions against strangers to the trust. This was because any fraudulent breach of trust must necessarily be one to which the trustee was a party or privy.
  3. The ancillary liability of a stranger to the trust arose independently of any fraud on the trustee’s part. There was no rational reason why the intended effect of s 21(1)(a) was that the availability of the limitation defence to a non-trustee would depend on a factor that had no bearing on his or her liability, namely the honesty or dishonesty of the trustee.
  4. S 21(1)(b) was concerned with actions against trustees who had converted trust assets to their own use. This provision was “unquestionably” limited to actions against the trustee. It did not apply to actions against third parties, such as knowing recipients of trust property. There was no rational reason why Parliament, if it wanted to exclude persons under an ancillary liability, would exclude knowing recipients (under s 21(1)(b)) but not dishonest assisters (under s 21(1)(a)). The correct interpretation was that both s 21(1)(a) and (b) were concerned with actions against true trustees only.

Relevance to Hong Kong

This case is highly persuasive authority in Hong Kong, given that it is a United Kingdom Supreme Court decision. The reasoning in this case is directly applicable to Hong Kong, which has adopted a modified version of the English limitation regime for actions concerning trust property. Section 20 of the Hong Kong Limitation Ordinance has largely the same effect as s 21 of the English Limitation Act. Further, the majority of the United Kingdom Supreme Court expressly followed Hong Kong Court of Final Appeal authority (in Peconic Industrial Development Ltd v Lau (2009) 12 HKCFAR 139) for the proposition that dishonest assisters and knowing recipients are not treated as constructive trustees for limitation purposes.