It is clear from the facts that Kenneth(K), the former managing director, has committed a series of frauds. As a director of Harperbrew, he is in a ficuciary position to the company and would therefore access the company’s accounts as a constructive trustee for the company. Unfortunately for the shareholders who are beneficiaries of the trust, he has disappeared and the prospects of recovering the lost substantial monies from him in a personal action for breach of fiduciary duty must be remote. Consequently, they would resort to alternative remedies in attempting to establish that strangers,( such as Marilyn(M), Norman(N), Peter(P) and Quentin(Q)), to the company are fixed with constructive trusteeship because of their interference or involvement with the activities in a practical way in these affairs.
There are five circumstances, although this problem particularly focused into two situations, in which M,N,P,Q may become liable as a constructive trustee for intermeddling in some way with the affairs of the company funds.These are either knowingly received company funds for their own benefit in breach of fiduciary duty or dishonestly assisted in a breach of fiduciary duty: Agip
Furthermore, the shareholders need to establish two primary conditions in this case for imposing liability on M,N,P,Q: Houghton v. Fayers. First, there must be disposal of assets in breach of fiduciary duty, and in the absence of such breach no liability for receipt can arise : Brown v. Bennett.. Secondly, M,N,P,Q must have some degree of knowledge or notice of the fact that the transfer ( or inconsistent dealing ) was in breach of fiduciary duty.
The degree of knowledge, generally five, for fixing a stranger with a constructive trust described by Peter Gibson J in Baden Delvaux v. Societe General. First, there is actual knowledge of the relevant facts; secondly, the stranger may wilfully shut his eyes to the obvious; thirdly, the stranger may wilfully and recklessly fail to make such enquiries as an honest and reasonable man would make; fourthly, the stranger may have knowledge of circumstances which would indicate the relevant facts to an honest and reasonable man; and , fifthly, the stranger may have knowledge of circumstances that would put an honest and reasonable man on enquiry so that he would be liable if he failed to ask the relevant questions.
In most of the cases where the degree of knowledge has fallen to be considered, the judges have accepted the first three categories as a trigger for liability but not the last two, which are akin to constructive notice.
The general defence ‘change of position’ would be available to any innocent party (M,N,P,Q) to defeat the imposition of a constructive trust, if the court thought fit, depending on whether M,N,P,Q have changed their position in reliance on receipt of the money. However, the liability is primarily restitutionary to return property which belongs to another and is indicated by the House of Lords in Lipkin Gorman v. Karpnale.
The consequences of being fixed with a constructive trust are that they would be under a duty to return to the beneficiaries money which they still retain and, additionally, to make up any shortfall out of their own assets. Further, because a constructive trustee is also personally liable to the beneficiaries for any loss they have suffered –that is, he must satisfy a claim out of his own funds if necessary-this makes this remedy particularly attractive to beneficiaries who have no hope of recovery from the original trustee and little chance of maintaining a successful claim to the trust property per se through a tracing claim.
Turning to consider the particular facts of this problem, it may well be that shareholders will be able to claim successfully that M,N,P,Q who dealt with each aspect of the company funds should be clothed with a constructive trust.
The first stage of the shareholders proceedings against M will be an attempt to fix her with constructive trusteeship, on the basis of ‘knowing receipt. if this liablity is successfully established, M will be required to return the 70000 pounds . As a first step, it is apparent that M has received the 70000 pounds for her own use and benefit, thus establishing clearly that this is a case of receipt : Agip (Africa) Ltd v. Jackson.
The shareholders then would argue that this liability is strict, although Lord Browne Wilkinson in Westdeutsche Landesbank Girozentrale v. Islington LBC and, firmly, the Court of Appeal in BCCI v. Akindele noted liability is fault base, and so could be triggered simply by the receipt or inconsistent dealing with the trust property, irrespective of the state of knowledge of M as suggested by the house of Lords in Lipkin Gorman v. Karpnale. Furthermore, they could recover in establishing a right to the money that M never had any right to the money, so had to return it: the Court of Appeal in Jones v. Jones.
M on the other hand might argue that she is an innocent volunteer as K lied to her about the money that he had had a run of luck on the Stock Exchange thereby it would be inequitable to force her to repay the money which she has been received from her boy friend: Re Diplock. Consequently, she is not a constructive trustee upon the company’s funds as suggested in Westdeutsche Landesbank Girozentrale v. Islington London Borough Council.
Following Lipkin Gorman that M might be able to plead ‘change of position’ to minimise or deny her liability. This defence lie in the discretion of the court, and it may well be that, in the light of the bankruptcy of M , the court might admit the claim should fail because of her financial hardship and the manner in which the money came to her.
Shareholders similarly would claim,in fixing N with constructive trusteeship on the basis of knowing receipt, 40000 pounds which he has been received from K in a breach of fiduciary duty. In this case, there is no doubt that N was negligent as the circumstances were such that it ought to have known or was put on enquiry that K paid car price with four cheques for 10000 pounds drawn on the company account and where as the company rule cheques above 10000 pounds to be signed by at least two of the company’s officers. Therefore, it would constitute constructive notice on the part of N and this is sufficient to make him liable as suggested in Belmont Finance Corporation v. Williams Furniture and International Sales and Agencies v. Marcus
There is also evidence in the facts that he made an excuse that he had forgotten about the signing requirements on cheques which ensures that liability will arise as the principle of the scale of knowledge is best forgotten: Baden v. Societe Generale.So, it is quite appropriate that he should be obliged to return the money which he has received in a breach of fiduciary duty.
On the other hand, the clear inference here is that N is not a bona fide purchaser for value, although there is no clear evidence that he knew the money was paid to him in breach of fiduciary duty and is unlikely to be a constructive trustee Westdeutsche v. Islington LBC. Further, the state of knowledge is not such as to make it unconscionable for him to retain the selling price as noted by the Court of Appeal in BCCI v. Akindele.
This is unlikely that he will have a change of position defence,as such a defence would be available only if he was an honest recipient.
The third element of the problem raises similar issues, although now it is a question of whether the liability of P lies in knowing receipt or dishonest assistance.
This seems to be a case of knowing receipt as he has received money, which is 10000 pounds a settle bet with K in a breach of fiduciary duty, for his own use Agip. As such, if P is to be fixed with a constructive trust, it is necessary to establish that he has acted with some degree of knowledge which falls one of the five categories of knowledge identified in Baden .
Furthermore, although it is unclear whether P actually assisted K to commit a breach of fiduciary duty, it may be possible to fix P with a constructive trust for dealing inconsistently with the company’s funds in the knowledge that the dealing was in breach of fiduciary duty.. Under the pre- Tan approach liability would seem to depend on finding that P had intention with regard to the existing breach as he deliberately denied noticing that the cheque was drawn on the company’s account at which a reasonable person was expected to check it prior any dealings take place.
Q may be liable as constructive trustee for dishonestly assisting K to commit a breach of fiduciary duty: Barnes v. Addy; Royal Brunei Airlines v. Tan. Although, it is not certain here whether he has received the money, as it is into a bank account in Antigua, even if he does which is not for his own benefit, this is a form of secondary liability and so he will be liable to recompensate the money.
However, it is clear that dishonesty requires a high standard of proof : Jyske v. Heinl. In this case, Q’s state of mind or motives is not clear, but it might be significant evidence of dishonesty that his cleaning lady was the sole director of the four companies and the sole signatory of their bank accounts where the cheques were paid; further, formation and liquidation of the companies was organised by him. While not conclusive, this does suggest some participation in Q’s fraud and , if this is true, he will be liable as constructive trustee and will be ordered to repay the 40000 to the company’s account.
Furthermore, in Barnes v. Addy , Lord Selbourne said that in order to be liable a stranger must have assisted ‘with knowledge in a dishonest and fraudulent design on the part of the trustees’. This statement has been rejected by the Privy Council in Royal Brunei Airlines v. Tan. It was held that where a third party dishonestly assisted a trustee to commit a breach of trust, or procured him to do so that third party would be liable irrespective of whether the trustee had been dishonest or fraudulent. Honesty was to be judged objectively , taking int account all the circumstances known to the third party at the time and his particular experience and intelligence. Dishonesty on the part of the third party is necessary to establish accessory liability sufficient to form the basis of a constructive trust: Satnam Investment v. Dunlop Heyword .
On the other hand, Q would not be liable, for being mere negligent or a deliberate but honest assistance:Royal Brunei Airlines v. Tan, as a stranger unless K’s direction to him was part of a design to escape with the company’s funds and a dishonestly assisted in this : Tan; Brinks v. Abu-Saleh.
Furthermore, the courts might found that Barclays Bank has constructive knowledge of a fraudulent design is sufficient to fix it with liability: Selangor United Rubber Estates v. Cradock. They on the other hand might argue that they are not liable as a constructive trustee unless it is also in breach of its contractual duty of care. As the bank has no reason to believe that there is a possibility that the money is being withdrawn in breach of fiduciary duty, it is not liable: Lipkin Gorman v. Karpnale Ltd.
To conclude, much turns in this case on precise proof of facts, which are not apparent from the problem, that whether the mens rea conditions are satisfied . It should also be noted that both N and P may incur the liabilities of constructive trusteeship if they have knowingly received company’s fund in breach of fiduciary duty. Furthermore, Q , and the bank which chashed K ‘s cheque, in theory, could be liable for assisting K in a breach of fiduciary duty, provided they were dishonest Tan.
Secondly, the strangers must either have lawfully received property and thereafter inconsistent dealing
This requires an understanding that the actions of willim were in breach of trust : Westdeutsche v. Islington LBC, expressed in Akindele as to whether it would be unconscionable for j to retain the benefit.
In this case, it is not clear whether c has any knowledge of the breach of trust; he may be innocent. An enquiry must be made as to c’s understanding of t’s actions and, it is submitted, that the better view is that he will be liable as constructive trustee if he was merely negligent or worse: that is , if any
Turning then to ‘knowing receipt’, it seems clear that the essence of the liability of the stranger in these cases is that he has received trust property for his own benefit: per Millet J in Agip Africa Ltd v. Jackson.
It is not clear from the facts whether A had sufficient knowledge to found liability. In principle, it is reasonably clear that mere negligence on A’s part as to whether the investment was breach of trust is not sufficient to found liability for knowing receipt. What appears to be necessary is either actual knowledge that it was a breach of trust to invest or a reckless disregard of whether it was a breach.Knowledge within any of the first three of the Baden categories is required. This may or may not exist in our case and liability will depend on a thorough examination of the facts and circumstances of the case.
If any liability exists, it will lay in dishonest assistance for clearly a has participated in T’s act which is revealed to be a breach of trust. In order to maintain a successful action against a on this ground, two essential conditions must be fulfilled. First, it must be established that a has assisted t in a breach of trust. Secondly, Tan makes it clear that the stranger’s assistance must be coloured by his own ‘dishonesty’ before liability can arise. This test now replaces the old tests of knowledge based on the Baden categories
There are significant issues concerning the standard of proof required for dishonesty. In Jyske v. Heinl it was held that the standard of proof involved a high level of probability greater than a ‘balance of probabilities’ and the inability of the claimants to meet this meant that the ‘assistance’ claim in Akindele was unsuccessful.
The power of this remedy that the constructive trustee will be liable not only to return any trust property that he retains (that is, it is held on trust), but also to recompense the beneficiaries bersonally from his own resources to the full value their loss.
Brinks v. Abu-Saleh suggests that dishonesty implies some knowledge on the part of the stranger, but it is not clear whether this is of the ixistence of a trust, or of the fact of breach, or of the fact that the property is another’s, or if it has some other meaning Armitage v. Nurse implies that dishonesty arises from intentional or reckless knowledge, but this was held in a different context and, in Jyske Bank v. Heinl, it was held that proof of dishonesty involved a high level of probability. So, in that case, it was not enough that H appreciated that there was a very real possibility of fraud; what was required was that he knew it.
The fourth element of the problem raises similar difficulties. w has clearly embarked on a fraudulent and dishonest course of action which has breached the terms of the trust.
however, the liability belongs to the stranger alone- it is for his misconduct that he is liable and hence it is no longer true that the stranger can be liable only if the trustee himself has behaved fraudulently. This was established by the Privy Council in Tan, overruling early cases that linked the strangers liability to the fraud of the trustee. Of course, it remains true that the stranger must himself be culpable. Previously, this was expressed in trems of whether the assistor had ‘knowledge’ of the breach of trust, such knowledge generally being thought to exist only when the first three Baden degrees existed: Agip.
in this problem, even if we were sure about what dishonesty meant, the facts are equivocal. S’s higher fee and realisation that the transaction was unusual may be evidence of dishonesty or it may simply be evidence that s appreciated the possibility of fraud which appears not to amount to dishonesty: Jyske. All in all, this stranger may well find himself liable to shareholders for the balance of the fund that w has taken with him to the bahamas.
Q may not be liable as he was Lord Selborne LC’s statement in Barnes v. Addy that as accessory was not liable ‘unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.
These are, principally, whether there were breaches of trust and. In appropriate cases, the powerful constructive trust will be imposed and the strangers will be held personally responsible for any loss to the trust fund. This will be in addition to the obligation to return any trust property that they do retain, along with any profits that that property has generated in the meantime.
It is notoriously difficult to determine whether the activities of a stranger fall under ‘knowing receipt’ or ‘dishonest assistance’ for the matter often turns on whether the trust property was received for the transferee’s own benefit.