Limitation of actions – trusts – claim by beneficiary – s. 20(1)(b) not applicable to constructive trusts and trustees arising out of knowing receipt or knowing assistance of breach of trust – whether defendants arguably de facto trustees and so action not time-barred – Limitation Ordinance (Cap. 347) s. 20(1)(b)
X, deceased, and his wife, W, were the directors of C, a company. D1, a company, was the trustee of a discretionary trust under which X and W’s children and W were beneficiaries (the “Trust”); and the beneficial owner of shares in another company, D2, which were assets of the Trust. C held shares in SHH while X and W held shares in SHH on trust for C, so that it was effectively the sole shareholder of shares in SHH. In late 1989 or early January 1990, 100,000 shares in SHH were issued at par value to D2 (the “Allotment”) and consequently C and D2 became equal shareholders of SHH. C brought proceedings against Ds as constructive trustees, alleging its interest in SHH was diluted by the Allotment; this was procured by X in breach of his fiduciary duties to C; and D2 had acquired C’s interest knowing it was for no value or alternatively at a substantial undervalue since the source of the funds D2 used to subscribe for shares was the respective dividends declared by SHH and C (the “Dividends”) and no monies changed hands. At issue was whether Ds were trustees within s. 20(1)(b) of the Limitation Ordinance (Cap. 347). No limitation period applied to this first class of constructive trust, where the defendant, although not appointed as trustee, had assumed such duties by a lawful transaction independent of and preceding the breach of trust and which was not impeached by the plaintiff (the “First Category”). However, the limitation period applied to the second class where the trust obligations arose as a direct consequence of an unlawful transaction impugned by the plaintiff. The defendant might be “liable to account as a constructive trustee” although there was no real trust but merely a remedial mechanism to give equitable relief (the “Second Category”). The Judge refused Ds’ application to set aside an order granting leave to serve the concurrent writ outside the jurisdiction on them, holding that it was seriously arguable that D1 as trustee of the Trust was a “fiduciary” and could be treated as an express trustee, such that no limitation defence was available. Ds appealed.
Held, allowing Ds’ appeal, that:
- S. 20(1)(b) of the Ordinance had no application to constructive trusts and trustees arising out of knowing receipt of trust property or knowing assistance of a breach of trust.
- It was not arguable that, as a result of the transactions leading to the Allotment, Ds were constructive trustees of the First Category, whether as de facto trustees or trustees de son tort, for the beneficiaries of the Trust or C, so that no limitation period applied. First, C’s submission was contrary to its pleaded case, namely that Ds were knowing recipients of C’s interest in SHH and holding it as constructive trustees for C.
- Second, there was nothing to show that when Ds received the Dividends, they intended to act as trustees thereof and/or had assumed the obligations of a trustee vis-à-vis C. The fact that D1 was the trustee of the Trust and had in that capacity received trust assets from X was irrelevant, since C was not a beneficiary under the Trust and C’s pleaded claim was not premised on D1 being a trustee of the Trust.
- Third, on C’s case, D2 was not entitled to the Dividends. D2’s receipt of the same was at all times wrongful and adverse to C’s rights and this was a characteristic of the Second Category.
- Fourth, even on C’s case on appeal, knowledge remained an integral element, namely Ds knew their use of the Dividends to acquire the interest in SHH was not authorised by SHH’s shareholders or C and/or was a breach of X’s fiduciary duties. Any trust obligations assumed by Ds were therefore the direct consequence of the impugned transaction.
- Accordingly, C’s claim fell outside s.20(1)(b) of the Ordinance and was time-barred; and the order for leave to serve out on Ds should be set aside.