JIBFL: A trustee by any other name

Elspeth Talbot Rice QC and Andrew Holden ask who is a “trustee” for limitation purposes?

Section 21(1) of the Limitation Act 1980 provides for there to be no period of limitation for claims by benefi ciaries under a trust in respect of a fraudulent breach of trust to which the trustee was party or privy, or to recover trust property in his hands. But who is a trustee for this purpose? In Williams v Central Bank of Nigeria, the Supreme Court decided that third party accessories to a breach of trust are not. In this article, we explore who is. In particular, we look at company directors, liquidators, and trustees in bankruptcy.


Participants in a breach of trust – whether because they dishonestly assist it or because they knowingly receive trust property – are sometimes called constructive trustees: they are liable to account as if they were trustees. However, as decided by the majority of the Supreme Court in the recent case of Williams v Central Bank of Nigeria [2014] 2 WLR 355, they are not trustees properly so called, such that the disapplication of any limitation period (contained in s 21 of the Limitation Act 1980 (LA 1980)) does not apply to them, and they can take advantage of the expiry of a six-year limitation period.

As Sam O’Leary pointed out in his useful analysis of Williams in the May edition of JIBFL ([2014] 5 JIBFL 334), the conclusion of the majority “is not uncontroversial and the reasoning is somewhat unsatisfactory”.

The purpose of this article is not to examine the decision in Williams itself, but to explore its application. Even if the majority’s view in Williams is accepted there is still room for debate as to who exactly counts as a trustee for limitation purposes.

THE MEANING OF “TRUSTEE”

Section 38(1) of LA 1980 provides that “‘trust’ and ‘trustee’ have the same meanings respectively as in the Trustee Act 1925”. The definitions are at s 68(1)(17) of the Trustee Act: “‘Trust’ does not include the duties incident to an estate conveyed by way of mortgage, but with this exception the expressions ‘trust’ and ‘trustee’ extend to implied and constructive trusts, and to cases where the trustee has a benefi cial interest in the trust property, and to the duties incident to the office of a personal representative, and ‘trustee’ where the context admits, includes a personal representative, and ‘new trustee’ includes an additional trustee”

Obviously, express trustees and personal representatives are within this definition. However, the extension of the definition to implied and constructive trusts prima facie casts the net very wide and introduces uncertainty. As Lord Sumption JSC observed, the expression “constructive trust”, “is not as informative as it might be, for there are few areas in which the law has been so completely obscured by confused categorisation and terminology as the law relating to constructive trustees”.

In Williams, the majority of the Supreme Court drew the same distinction as Millett LJ drew in Paragon Finance v Thakerar between two uses of the term “constructive trustee”:

The first category comprises, “persons who have lawfully assumed fiduciary obligations in relation to trust property, but without a formal appointment [as a trustee]”. Such a person, “does not receive the trust property in his own right but by a transaction by which both parties intend to create a trust from the outset and which is not impugned by the plaintiff.

His possession of the property is coloured from the first by the trust and confidence by means of which he obtained it, and his subsequent appropriation of the property to his own use is a breach of that trust”.

The distinguishing features of constructive trustees of this type are that, “(a) they do not claim to act in their own right but for the beneficiaries, and (b) their assumption to act is not of itself a ground of liability (save in the sense of course of liability to account and for any failure in the duty so assumed), and so their status as trustees precedes the occurrence which may be the subject of claim against them”.  Lord Sumption JSC referred to such constructive trustees as “de facto trustees”,5 although that might be thought to describe too narrow a category, as we would have thought that the category should also include those whom Millett LJ identified in Paragon Finance v Thakerar as being “properly described as constructive trustees”. He said: “A constructive trust arises by operation of law whenever the circumstances are such that it would be unconscionable for the owner of property (usually but not necessarily the legal estate) to assert his own beneficial interest in the property and deny the beneficial interest of another...He does not receive the trust property in his own right but by a transaction by which both parties intend to create a trust from the outset and which is not impugned by the plaintiff .

His possession of the property is coloured from the first by the trust and confidence by means of which he obtained it, and his subsequent appropriation of the property to his own use is a breach of that trust.”

The second category comprises, “persons who never assumed and never intended to assume the status of a trustee, whether formally or informally, but have exposed themselves to equitable remedies by virtue of their participation in the unlawful misapplication of trust assets”. Such a person is not a true trustee at all. He is simply required to account as if he were a trustee, but “[i]n such a case the expressions constructive trust and constructive trustee are misleading, for there is no trust and usually no possibility of a proprietary remedy; they are nothing more than a formula for equitable relief ”.

Lord Sumption JSC referred to this form of liability, not as constructive trusteeship, but as “ancillary liability”. This distinction between the two categories of constructive trusteeship – or, more accurately, between true constructive trusteeship (category 1) and the purely remedial formula in which equity requires a person to account as if he were a trustee (category 2) – is fundamental for limitation purposes.

Put simply, true constructive trustees count as trustees for the purposes of s 21(1) of LA 1980, and the disapplication of the statutory limitation periods set out at s 21(1) will apply to claims against them; those who are merely referred to as “constructive trustees” as a form of remedy, are not trustees for the purposes of LA 1980, and the usual statutory limitation periods will apply to claims against them.

In theory, this distinction should provide a clear and precise means of separating out the sheep from the goats: the true constructive trustees from those who have been merely labelled as such as a formula for equitable relief. However, some practical examples expose some gaps in the theory.

COMPANY DIRECTORS

The authorities establish that for limitation purposes, company directors – including de facto directors – are treated as trustees of the company’s assets under their control: as Lindley LJ said in Re Land Allotments Company: “[E]ver since joint stock companies were invented directors have been held liable to make good moneys which they have misapplied upon the same footing as if they were trustees, and it has always been held that they are not entitled to the benefit of the old Statute of Limitations because they have committed breaches of trust, and are in respect of such moneys to be treated as trustees.”

We suggest that the logic here is questionable: a director is not really a trustee as such at all, as he is not the legal owner of the company’s assets: he holds no assets on trust. He is merely an agent, albeit one with fiduciary duties and control of the company’s assets. It seems to us therefore rather anomalous to describe a company director as a constructive trustee of the company’s assets, but this is how company directors have been treated in the authorities for some time: for example, Flitcroft’s Case, in which Lord Jessel MR described directors as “quasi trustees for the company”, and Re Sharpe, in which Lindley LJ spoke of the liability of a director “being treated as a breach of trust” for limitation purposes. In Paragon Finance v Thakerar, Millet LJ referred to the rule (that a claim against an express trustee was never barred by lapse of time before 1890, when the Trustee Act 1888 came into force) being applied to trustees de son tort (people who act as trustees without being formally appointed as such) and to “directors and other fiduciaries who, though not strictly trustees, were in an analogous position [as a trustee] and who abused the trust and confidence reposed in them to obtain their principal’s property for themselves. Such persons are properly described as constructive trustees.”

So, on established authority, a director is a true, category 1 constructive trustee of the company’s assets even though he is not really a trustee of those assets at all. This seems to us to open out the spectrum of others who could be classed as true, category 1 constructive trustees: fiduciary agents in possession of assets in a fiduciary capacity must surely lie in the same category as directors.

But a word of caution: while a director may be treated as a trustee of company assets, that does not mean that every claim for breach of fiduciary duty against a director will fall within s 21(1) of LA 1980. In Gwembe Valley Development Co Ltd v Koshy (No 3), the Court of Appeal distinguished between cases where a director has misapplied company property in respect of which he owed pre-existing fiduciary obligations, from a case in which a director is merely liable to account for assets acquired in breach of fiduciary duty. Only in the first case is the director a true, category 1 constructive trustee of the property, such that s 21(1) of LA 1980 will apply.

LIQUIDATORS

If a director is a trustee of the company’s assets, we do not see that a liquidator is in any different position. He occupies a fiduciary office in control of the company’s assets. Indeed, it seems to us that the case for a liquidator being a constructive trustee of the company’s assets is stronger than the case for a director being a constructive trustee of the company’s assets because on a liquidation, the company’s assets are held on a statutory trust: its assets, “become a fund which the company thereafter holds in trust to discharge its liabilities”. This is “a special kind of trust because neither the creditors nor anyone else have a proprietary beneficial interest in the fund”, but it is a form of trust, and the liquidator is responsible for administering it.

The liquidator is thus (much more so than a company director) in a position analogous to that of a trustee. It has, however, been held that a liquidator is not a trustee “in the strict sense”, and instead may be “more rightly described as the agent of the company – an agent who has, no doubt, cast upon him by statute and otherwise special duties, among which may be mentioned the duty of applying the company’s assets in paying creditors and distributing the surplus among the shareholders”. This status (an agent with special duties) applies with more force to the position of a company director who, as set out above, is treated as a true constructive trustee of the company’s assets.

In Re Windsor Steam Coal Co (1901) Ltd, Maugham J held that a liquidator was not entitled to rely on the protection afforded to “trustees” by s 30(1) of the Trustee Act 1925. In the course of reaching that conclusion, the judge noted that whilst company directors were treated as trustees for limitation purposes, there was, “a wide difference between the position of a director and a liquidator; and in particular the position of a liquidator is, in such a case as the present, that of a professional man employed for reward to carry out certain duties which, in a large measure, are statutory”.

The authors of Lewin on Trusts treat this decision as authority that liquidators are not trustees for the purposes of s 21(1) of LA 1980. However, we doubt that it is such authority, and even if it is, we do not believe it can be justified in principle for the reasons given above. The reason that we doubt that it is authority for the proposition that liquidators are not trustees for the purposes of LA 1980 is that when the case went to the Court of Appeal the question whether a liquidator could be treated as a trustee was left open by all three judges. It seems to us that this casts a shadow of uncertainty over the correctness of Maugham J’s decision.

In our view, there is a good argument that liquidators should be treated as trustees for limitation purposes. When a liquidator is appointed, he assumes responsibility for the management of the company’s assets for the benefit of those entitled pursuant to the statutory scheme (the company’s creditors and, if there is a surplus, its members). While the liquidator’s powers and duties derive from the Insolvency Act 1986, the office is fiduciary in nature and is just as analogous to the role of trustee as a company director’s role is.

In short, in our view, if a company director is a “trustee” for limitation purposes, a liquidator, who is in substantially the same position, must be too. The fact that the liquidator is also an officer of the court with statutory duties to perform does not alter our view.

TRUSTEE IN BANKRUPTCY

The case for counting a liquidator as a trustee for limitation purposes is reinforced by the case for counting a trustee in bankruptcy as a trustee for limitation purposes. A trustee in bankruptcy is a true trustee: the bankrupt’s assets vest in him upon his appointment. He holds those assets, in his name, on statutory trust for the benefit of the bankrupt’s creditors as a class.

In principle, in our view, the argument that for the purposes of applying statutory limitation periods, a trustee in bankruptcy counts as a “trustee” is unassailable: he is an express trustee. It might be said that the clue is in his name. However, in Re Cornish [1896] 1 QB 99, the Court of Appeal decided that a trustee in bankruptcy did not come within the precursor to s 21(1) of LA 1980 (s 8 of the Trustee Act
1888), Kay LJ holding that, “s 8, which limits the time for making claims upon trustees, has nothing to do with an officer of the court who is required by the court to account. If it had, it would equally apply to a receiver and to other officers of the court who have been put by the court in possession of property, and are required to account to the court. I have never yet heard it suggested that s 8 of the Trustee Act applied to such cases as that”.

While this is Court of Appeal authority, and therefore presently binding unless and until disapproved by the Supreme Court, we cannot follow its logic. Why should it matter for limitation purposes that a trustee in bankruptcy (or a liquidator) is an officer of the court? A trustee in bankruptcy has assets vested in him, but they do not belong to him beneficially. He must therefore hold them on trust. He does: the statutory trusts. Why is that trusteeship not within the definition of “trustee” for the purposes of s 21(1) of LA 1980? We think it is.

This analysis would also bring cohesion to the rules on limitation: claims against directors, liquidators and trustees in bankruptcy would all be treated the same for limitation purposes. It would, we would suggest, be anomalous if liquidators and trustees in bankruptcy could defend actions against them on the basis of the expiry of a six-year limitation period but a company director could not.

CONCLUSION

We suspect that the Supreme Court’s decision in Williams is not the last word on s 21(1) of LA 1980. As we have demonstrated in this brief discussion, who counts as a trustee for the purposes of LA 1980 is far from clear, and  cohesive statement of the law in this regard would be welcome.

Elspeth Talbot Rice QC and Andrew Holden are barristers practising from XXIV Old Buildings, London. Email: elspeth.talbotrice@xxiv.co.uk; andrew.holden@xxiv.co.uk

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