IN Williams v Central Bank of Nigeria [2014] UKSC 10, [2014] 2 W.L.R. 355, the Supreme Court faced the vexed question of what limitation period (if any) would apply where trust funds are misdirected in breach of trust, and a trust beneficiary brings proceedings to hold a third party liable for dishonest assistance or knowing receipt. This question would be easily answered if the Government had implemented the Law Commission's 2001 recommendations (Law Com No. 270): subject to a few exceptions, all civil claims would be governed by a “standard” limitation regime – a three-year period running from the date when the claimant knew or ought reasonably to have known of specified material facts, and a ten-year long-stop. Regrettably, these recommendations have never been made law.
The immediate question in Williams therefore depended on a proper construction of s. 21 of the current, unsatisfactory Limitation Act 1980. Under s. 21(3), an action by a trust beneficiary “to recover trust property or in respect of any breach of trust” is subject to a six-year limitation period (subject to general provisions postponing the running of time in cases of fraud, concealment or mistake (s. 32)). This is clearly apt to cover an action against a dishonest assistant or knowing recipient. However, s. 21(3) is subject to s. 21(1), which disapplies any statutory limitation period to an action by a trust beneficiary (i) “in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy” (s. 21(1)(a)), or (ii) “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” (s. 21(1)(b)).
The claimant in Williams offered two arguments that s. 21(1) might apply, so that no statutory limitation period would govern his claims. First, if a breach of trust was fraudulent, s. 21(1)(a) disapplied the statutory limitation period both (i) to an action against the trustee who was party to the fraud and (ii) to actions against third parties who incurred ancillary liabilities as dishonest assistants or knowing recipients. Second, dishonest assistants or knowing recipients, who were sometimes said to owe personal liabilities to account “as constructive trustees”, were “trustees” within the meaning of s. 21(1)(a) (or s. 21(1)(b)).
Both arguments failed. A majority (Lords Mance and Clarke dissenting) held that s. 21(1)(a) was confined to actions against a trustee who was party to a fraudulent breach of trust. It did not cover third parties, who were implicated in the frauds, as dishonest assistants or otherwise. A different majority of the Supreme Court (Lord Mance dissenting) also rejected the suggestion that dishonest assistants or knowing recipients were “trustee[s]” for the purposes of s. 21(1). Section 38(1) required “trust” and “trustee” to bear the same meanings as in s. 68(1)(17) of the Trustee Act 1925. Although this definition expressly includes “constructive trusts” and “trustees”, the majority held (i) that neither dishonest assistants nor knowing recipients, whilst said to be liable to account “as constructive trustees”, were “true” trustees – not even constructive trustees; and (ii) they were also not “constructive trustees” within the statutory definition. Lord Mance dissented, thinking that a knowing recipient could be regarded as a trustee for this purpose.
There is insufficient space for close engagement with the reasoning that underlies these conclusions. They rested, inter alia, on some nice points of interpretation, informed by speculation about the intentions of the drafters of the Limitation Act 1939, s. 19 which was replicated by s. 21 of the 1980 Act. As a limited decision on the limitation rules applicable to dishonest assistants or knowing recipients, the majority's decision seems acceptable. However, there are aspects of the majority's reasoning that are troubling from a wider perspective. In particular, their decision that a knowing recipient is not a “trustee” for the purposes of the Limitation Act 1980 relied heavily on a wider premise that a knowing recipient is not a “trustee” – and not even a constructive trustee – under the general law. With respect, that is questionable.
First, an alternative view is that when the courts have said that a knowing recipient is “personally liable to account as a constructive trustee”, they mean exactly this. Where a person acquires property that has been misdirected in breach of trust, and at the time he first receives the property (or at least, whilst the property remains identifiable in his hands) he acquires sufficient knowledge of its origins, equity renders him a constructive trustee. The knowing recipient is fixed with custodial duties that are of the same nature as those voluntarily assumed by express trustees. Furthermore, the accounting mechanisms through which the knowing recipient can be made liable for performance of his duties, or their breach, are the same as those through which trust beneficiaries can take action against express trustees (see further Mitchell and Watterson, in Mitchell (ed.), Constructive and Resulting Trusts; Goff & Jones – The Law of Unjust Enrichment 8th edn [8.123]–[8.130]).
Second, various cases are consistent with this analysis, in treating a knowing recipient as holding misdirected trust property on a “real” (constructive) trust (e.g., Independent Trustee Services Ltd. v GP Noble Trustees Ltd. [2012] EWCA Civ 195, [2012] 3 W.L.R. 597, [74]–[84]). Indeed, in Arthur v Attorney General of the Turks & Caicos Islands [2012] UKPC 30, a decision not cited in Williams, the Privy Council explicitly accepted this analysis. Citing Mitchell and Watterson's article, it said: “The recipient's personal liability as a constructive trustee by virtue of knowing receipt means that the recipient is subject to custodial duties which are the same as those voluntarily assumed by express trustees … The recipient's core duty is to restore the misapplied trust property” (at [37]).
Third, the Williams majority's reasons for concluding, contrary to this analysis, that a knowing recipient is not a trustee, are inadequate. Five reasons emerge from the judgments: (1) there is never property of which the knowing recipient is relevantly in possession as trustee, since “they become accountable as constructive trustees only by parting with the trust property” (Paragon Finance Plc v D.B. Thakerar & Co. [1999] 1 All E.R. 400, 412 (Millett L.J.), cited at [26]); (2) nobody has ever reposed any relevant trust and confidence in the knowing recipient (at [31], [64], [165]); (3) the knowing recipient never assumes the position of trustee, and his possession of the property is at all times adverse to the rights of the original trustee and beneficiaries (at [31], [64], echoing Millett L.J. in Paragon Finance); (4) a knowing recipient does not have the full range of powers and duties characteristic of a “real” trustee (at [26], [31], [71]); (5) the supposed “constructive trusteeship” of a knowing recipient is merely a remedial formula (e.g., at [9]–[11], [31]).
Reason (1) involves a false premise. Custodial duties – and most importantly, the core restorative duty – are imposed on the knowing recipient when he has possession of the misdirected trust property. His characteristic personal liability for the value of the trust property is the natural remedial response, where he no longer retains the property and cannot discharge that pre-existing duty by restoring the property in specie. Reasons (2) and (3) cannot identify necessary hallmarks of a “trust”, without undermining the well-established categorisations of many trusts that are imposed by operation of law. The same is true of reason (4). Trusts are diverse phenomena, with diverse purposes. It is an error to assume that every trust must bring the same extensive array of powers and duties, to warrant the status of “trust”. Express trusts span a wide spectrum of arrangements, of differing complexity. And many trusts that arise by operation of law are characteristically rather bare remedial arrangements, imposing limited duties that require a nominal owner to hold property for another. Reason (5) restates the point that needs to be proven. In any event, the remedial orientation of the knowing recipient's liabilities is inconclusive as to their character. The law could rationally seek to achieve the restoration of misapplied trust property by imposing on the knowing recipient a real trustee status, bringing real custodial duties and associated liabilities.
Fourth, there may be wider implications of downgrading the trusteeship of knowing recipients. For example, courts might miss the possibility that knowing recipients may sometimes owe other custodial duties, in addition to their core restorative duty (e.g., Evans v European Bank Ltd. [2004] NSWCA 82, discussed in Mitchell and Watterson, pp. 138–142). Again, the status of knowing recipient as a “trustee” may also be important for the liabilities of third parties who subsequently participate in dealings with misdirected trust assets. Some cases assume that if someone assists in laundering activities after the original misdirection, they may be liable for dishonest assistance of the original breach of trust: the breach is not fully implemented until the misdirected funds are hidden away (e.g., Jyske Bank (Gibraltar) Ltd. v Spjeldnaes (No. 2) (CA) 29 July 1999). But could liability also be based more directly on the subsequent party's dishonest assistance of later misapplications by the knowing recipient of the funds held as constructive trustee?
