Supreme Court finds trustee fraud exception under Limitation Act does not apply to claims for dishonest assistance / knowing receipt

Often, a substantial time may have passed before a beneficiary becomes aware of a fraudulent breach of trust. Even when the fraud has been discovered, there may be a number of reasons why the beneficiary decides to delay in commencing proceedings. When considering claims against third parties to a fraudulent breach of trust, however, beneficiaries will have to pay close attention to the limitation period in light of the Supreme Court's decision in Williams v Central Bank of Nigeria [2014] UKSC 10.  

The Supreme Court held that the exception under section 21(1)(a) of the Limitation Act 1980 for "any fraud or fraudulent breach of trust to which the trustee was party or privy" does not apply to actions against third parties based on dishonest assistance or knowing receipt. Such claims are therefore subject to the statutory six-year limitation period. The decision reverses the Court of Appeal on the point, and marks a significant limitation on claims based on ancillary liability for fraudulent breach of trust. Beneficiaries may however still benefit from section 32 of the Act, which suspends the limitation period in cases of fraud or deliberate concealment until the claimant has (or could with reasonable diligence have) discovered the fraud or concealment. 

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Background

Dr Williams claimed he was the victim of a fraud perpetrated by the Nigerian State Security Service, having agreed to act as guarantor of a transaction for the importation of foodstuffs into Nigeria. In connection with this transaction, Dr Williams had paid US $ 6,520,000 ("the Funds") to a solicitor, Mr Gale. The Funds were to be held by Mr Gale on trust for Dr Williams on terms that they should not be released until other funds had been made available to Dr Williams in Nigeria.

It was alleged that Mr Gale subsequently paid out a significant portion of the Funds to an account held by Central Bank of Nigeria ("CBN") in London, and pocketed the remainder for himself. It was claimed that Mr Gale acted in fraudulent breach of trust in that he knew the other funds would not be available for Dr Williams in Nigeria.  

The case against CBN was advanced on the basis that it was a party to Mr Gale's fraud and therefore liable to account as a constructive trustee, either for the full amount of the Funds on the basis of its dishonest assistance of Mr Gale's fraud, or for the portion of the Funds that CBN received in London on the basis of its knowing receipt of trust property obtained in fraudulent breach of trust.

Dr Williams was granted permission to serve proceedings on CBN in Nigeria, but CBN applied to have the order set aside on grounds that there was no serious issue to be tried and therefore the English court lacked jurisdiction.

The limitation issue     

The problem Dr Williams faced was limitation. The alleged transactions occurred in 1986 so, on the face of it, the claims were time barred.  

The normal limitation period for claims by beneficiaries to recover trust property or for breach of trust is six years from the date on which the right of action arose (s.21(3) Limitation Act 1980). Where fraud is involved, however, the position is different. Section 21(1)(a) Limitation Act provides that no limitation period under the Limitation Act applies to a claim by a beneficiary in respect of "any fraud or fraudulent breach of trust to which the trustee was party or privy".   

There were two questions before the court:

(i)     Does a stranger to a trust who dishonestly assists the trustee in, or knowingly receives trust assets from a fraudulent breach of trust count as a "trustee" for the purposes of the s.21(1)(a) limitation exception?

If the answer to the first question was yes, then Dr Williams' action against CBN would fall within s.21(1)(a), and no time bar under the Limitation Act would apply.

If the answer to the first question was no, then:

(ii)    Could the s.21(1)(a) exception nonetheless apply to an action against a stranger to a trust for dishonest assistance or knowing receipt?

Although he dismissed the idea that CBN was a "trustee" within the meaning of the Limitation Act, Supperstone J at first instance decided that the issue of whether the s.21(1)(a) exception could extend to the claims against CBN was a serious question to be tried. The Court of Appeal upheld the decision, and the parties agreed that the Supreme Court should decide the issue.

Decision of the Supreme Court

The Supreme Court allowed CBN's appeal by majority (Lord Mance dissenting; Lord Clarke dissenting in part), holding that the English court had no jurisdiction over the claims.

In dealing with the first question the majority held that, in light of its legislative history, the s.21(1)(a) exception applied only to actions against "true trustees". This was consistent with the purpose of the six-year limitation period, which was intended to provide some statutory protection for trustees from their liability in equity. The position in equity is that claims against trustees can never be time barred because equity treats trustees as having acted always in accordance with their duties: there is nothing against which time can run (although certain equitable defences such as acquiescence or laches may be available to the trustee).  

When is a constructive trustee a "true trustee"?

To determine whether CBN was a "true trustee", it was necessary to examine the nature of its constructive trusteeship. Lord Sumption (who gave the leading judgment) confirmed that there are two categories of constructive trusteeship (approving Millett's LJ's distinction in Paragon Finance v. DB Thackerar & Co. [1999] 1 All ER 400):

1. Constructive trusteeship involving real, or "de facto", trustees; and
2. Constructive trusteeship arising in cases of ancillary liability (for dishonest assistance or knowing receipt).

This distinction matters, because different legal consequences follow depending on the category. Where the defendant is a "de facto" trustee, the claimant-beneficiary will have the rights and remedies equivalent to a beneficiary under an express trust, even though the defendant has not been formally appointed as a trustee. Equity fixes the defendant with the obligations necessary to make it a "true trustee".

Where the claim is based on an ancillary liability, however, the defendant is not a trustee at all. Rather, through its dishonest assistance and/or knowing receipt, the defendant exposes itself to equitable remedies which give rise to a liability to account. But this liability is only on the basis that the defendant is a wrongdoer, rather than a real trustee. As emphasised in Paragon Finance, to call this type of defendant a "constructive trustee" is potentially misleading, as it is "nothing more than a formula for equitable relief".

As CBN was merely a constructive trustee of this second variety, it was not a "true trustee" for the purposes of the s.21(1)(a) limitation exception.

Was CBN nonetheless a party sued "in respect of" the trustee's fraud?

Having held that CBN was not a "true trustee", the majority applied a narrow construction to the s.21(1)(a) exception, holding that it only extends to actions against true trustees on account of their own fraud or fraudulent breach of trust. This was consistent with a purposive analysis of the clause and the rationale that claims for ancillary liability arise independently of the trustee's fraud, and should not therefore depend for limitation purposes on the nature of the trustee's conduct.  

Comment

The decision resolves what was an uncertain issue concerning the limitation of claims for ancillary liability, confirming that the six-year limitation period applies to such claims. This eliminates what was a potentially confusing distinction between ancillary liability claims based on the nature of the "true trustee's" breach of trust. Previously, the availability of the limitation defence to third-party defendants was thought to turn - not on the seriousness of their own conduct - but on whether or not the true trustee was party or privy to fraud.

Importantly, the decision draws together the limitation position for dishonest assistance and knowing receipt (whereas the lower courts had considered only dishonest assistance). Dishonest assisters and knowing recipients are now in the same position for limitation purposes as those who are liable in common law for fraudulent or improper conduct.  

The practical point is that claims based on ancillary liability for breach of trust must be made promptly: any delay past the six-year limitation period will provide the defendant with a complete defence. This is especially important to note where the claimant-beneficiary may also be considering claims against the trustee, which may fall within the s.21(1)(a) exception. Claimant-beneficiaries will still of course have the benefit of s.32 Limitation Act, which provides that in cases of fraud or deliberate concealment the clock will not start to run until the claimant has (or could with reasonable diligence have) discovered the fraud or concealment.    

The decision also provides an important summary of the categories of constructive trusteeship, which may have wider significance for the application of constructive trust principles in fraud and corruption claims (see for instance FHR European Ventures LLP. V Mankarious [2013] EWCA Civ 17). Lord Sumption approved previous authorities confirming that dishonest assisters and knowing recipients - while they may be labelled "constructive trustees" for the purposes of their liability to account - are not truly trustees at all.