The Supreme Court1 has recently provided clarity on two questions where there have been inconsistent authorities for much of the 20th century. The first question was whether a third party who dishonestly assists or knowingly receives trust property in breach of trust is a trustee for the purposes of section 21 of the Limitation Act 1980 (the Act). Section 21 provides a six-year limitation period to an action to recover trust property, unless the action is one:
- in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or
- to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee, or previously received by the trustee and converted to his use.
The second was whether a third-party stranger to a trust can be sued in respect of an action for "fraudulent breach of trust to which the trustee was a party or privy". The Court by a majority of three to two answered both questions in the negative.
The respondent, Dr Williams, brought proceedings against the applicant, the Central Bank of Nigeria (the Central Bank), claiming that the Central Bank had been part of a wider conspiracy to defraud him by the Nigerian Security Services. Dr Williams alleged that, in 1986, he was induced to pay $6,520,190 to a solicitor in England, to be held on trust for him. In breach of trust the solicitor paid out $6,020,190 of the money, keeping the rest for himself. The money paid out was paid into an account held by the Central Bank with Midland Bank in London.
A claim was brought in England against the Central Bank as a constructive trustee. The allegation was that:
- the Central Bank knew that the money was trust money and it had dishonestly assisted the trustee solicitor in misapplying the money; and
- the Central Bank had knowingly received the portion of the trust money paid into its London bank account.
The Central Bank applied for a declaration that the claim be set aside on the basis that the English courts had no jurisdiction. The Central Bank's application was refused at first instance and by the Court of Appeal. In determining whether English courts had jurisdiction, it had to be established whether there was a real issue to be tried2, and this in turn meant establishing whether Dr Williams' claim was time barred.
On appeal by the Central Bank, the question before the Supreme Court therefore was whether Dr Williams' claim was time barred by virtue of section 21 of the Act and whether the Central Bank was a trustee for the purposes of the Act.
True trustees v. ancillary liability trustees
In determining whether a third-party dishonest assistant or knowing recipient is a trustee for limitation purposes, Lord Sumption emphasises the distinction between "true trustees" and "ancillary liability trustees". The reason for the distinction according to his Lordship is that, because trust assets were lawfully vested in a true trustee, the possession of trust property was entirely consistent with the beneficiary's interest. His Lordship points out that "if a true trustee misapplied the assets, equity would ignore the misapplication and simply hold him to account for the assets as if he had acted in accordance with his trust. There is nothing to make time start running against the beneficiary." Such reasoning cannot be applied to parties who have not assumed the responsibilities of a true trustee. Ancillary liability trustees have a relationship with the beneficiary by virtue of their participation in the misapplication of trust property itself. Their participation is at all times adverse to the interests of the beneficiary. There is no pre-existing trust for equity to compel the ancillary liability trustee to follow. Therefore, unlike a true trustee, equity can only hold an ancillary liability trustee to account as a wrongdoer but not as a true trustee. It follows from this analysis that only a true trustee can be a trustee for the purposes of section 21 of the Act.
In concluding that the Central Bank was not a trustee for the purposes of section 21 of the Act, Lord Sumption further points out, in the context of a knowing recipient that "no trust has been reposed in him. He does not have the powers or duties of a trustee…he may be accountable for any profit that would have been made or loss that would have been avoided…But all this is simply a measure of remedy. It does not make him a trustee or bring him within the provisions of the Limitation Act relating to trustees."
Fraudulent breach of trust to which the trustee was a party or privy
Dr Williams' case in the alternative was that if the Central Bank was not a trustee for the purposes of section 21 of the Act, it was nevertheless a party to a fraudulent breach of trust to which the trustee was a party or privy. Dr Williams' claim was that this enabled his claim to fall within the exception in section 21(1)(a) to the limitation period. Lord Sumption pointed out that the limitation period provided by section 21(3) (subject to section 21(1)) throughout its legislative history was intended to serve as a reprieve to trustees who previously faced harsh consequences of the equitable rule which held them to account without limitation of time. It therefore followed that the "exceptions must apply to the same persons as the rule" and that "the rule never applied to strangers who were subject only to an ancillary liability, and they have therefore never needed to be relieved."
The Court concluded that section 21(1)(a) did not apply to strangers to the trust, as the words "to which the trustee was a party or privy" are there to relieve trustees who had acted in good faith. Such words would have been "unnecessary if the provision applied to actions of strangers to the trust, because any fraudulent breach of trust must necessarily be one to which the trustee is party or privy."
The Supreme Court's decision draws a clear line of distinction between two classes of constructive trustees. The first being a trustee who is not formally appointed, yet lawfully holds and administers trust property, exercises and carries out the duties of a trustee and intends to do so for the benefit of the beneficiary. The second class of constructive trustees are those who have no relationship with the beneficiary before the occurrence of the transaction under which they receive trust property in breach of trust.
Banks are frequently the targets of claims that they were in Lord Sumption's view "ancillary liability trustees" because they received the proceeds of a fraud. As Banks have "deep pockets" they are a tempting target for such claims. This judgment provides Banks with the protection that any such claim must be brought within six years of the alleged breach of trust.