Trusts — constructive trust — unauthorised withdrawal of money from estate’s account as loan to administrator — unfair to impose constructive trust on property as sum repaid to estate
X, the deceased, had six children including P and D1. X died intestate in 1978 and letters of administration of his estate (the “Estate”) were granted to D1–2 in 1983. The Estate consisted primarily of land in the New Territories and would receive substantial compensation monies from the Government from time to time upon resumption of its land. In April 2003, $11.48 million (the “Sum”) was withdrawn from a bank account in the name of D1–2 as administrators of the Estate (the “Estate’s Account”) and paid into D1’s personal bank account. D1 used the Sum to pay for part of the purchase price of a property (the “First Property”) and executed a declaration of trust over the First Property in favour of D3, a company beneficial owned by D1. In October 2003, D1 repaid the Sum to the Estate with interest. In November 2004, D1 assigned the First Property to D3. In March 2006, D3 purchased a property (the “Second Property”) with the assistance of two loans from banks, respectively secured by two “all monies” mortgages of the First and Second Properties. D1–2 did not inform P of the withdrawal of the Sum or seek P’s consent to the same in advance. P commenced an action against D1 and D3 claiming, inter alia, that D1 was in breach of his duties as an administrator of the Estate by making an unauthorised withdrawal of the Sum from the Estate’s Account. D1 contended that the Sum was a bridging loan by the Estate to himself and earned it a far better rate of interest than it would otherwise have received from the bank.
Held, allowing P’s claim and directing an inquiry on the profits which D1 was liable to account to the Estate in respect of the First Property, that:
- For a claimant to be able to trace his original asset into the traceable proceeds thereof or substituted asset, he must first show a proprietary interest in the original asset. While the credit balance of the Sum in the Estate’s Account prior to its withdrawal represented an asset owned by the Estate, property in the Sum passed to D1 as the payment was a loan by the Estate to him. There was no asset of the Estate which could be traced into the First Property.
- The court could impose a constructive trust on the property which the trustee acquired through the misapplication of trust monies or on the benefit improperly obtained by a trustee in breach of fiduciary duty, even though the benefit: (a) did not flow from an asset which was (i) beneficially owned by the principal, or (ii) intended for the principal; or (b) was not derived from an activity of the agent which he was under an equitable duty to undertake for the principal. However, D1 repaid the Sum with interest to the Estate in October 2003. It would be unfair to D1 and/or D3 to impose a constructive trust on a proportionate share of the First Property unless the Estate reimbursed D1 for a proportionate part of the purchase price (ie, $11.48 million). There was no evidence that the Estate had the means to do so and P had not offered to do so on its behalf.