Constructive Trust

The Nature of Constructive Trusts

A characteristic feature of constructive trust is that its existence is not dependant on the parties’
intention, either actual, inferred or presumed. Trusts of this nature arises by the operation by law.
Takako Sakao v Ng Pek Yuen
- A constructive trust is imposed by law irrespective of the intention of the parties. And it
is imposed only in certain circumstances. What equity does in those circumstances is to
fasten upon the conscience of the holder of the property a trust in favour of another in
respect of the whole or part thereof.
Snell Equity
- The primary question is whether the defendant has committed the kind of wrong which is
recognized in the authorities as giving rise to constructive trust.
Thus, constructive trust may be viewed as a device under which equity will intervene so as to
create a trust relationship between the parties in order to make a person accountable for the trust
to prevent any unfairness or injustice.

Classifications of Constructive Trust

Two types of constructive trust
1. Institutional Constructive Trust
Institutional constructive trust relates to the function of the courts in declaring such a trust has
arisen in the past. In Westdeutsche Landesbank Girozentrale v Islington LBC, it stated that a
constructive trust arises automatically and it is to be construed retrospectively from the time of
the circumstances which give rise to it. This means that the liability of a person to act as a
constructive trustee begins from the time the trust is breached.
2. Remedial Constructive Trust
Remedial constructive trust has no prior existence. The concept is that there are some assets in
the hand of the defendant and the equity will impose obligation on him to hold the property for
the benefit of another.
 Circumstances of Constructive Trusteeship
1. Breach of fiduciary relationship

Trustee is under a fiduciary duty to act for the benefit of the beneficiary. Thus, he or she is not
allowed to abuse such fiduciary duty for personal advantage.
Common category of fiduciary relationship includes principal and agent, solicitor and client, and
director and company.
Reading v AG
-A fiduciary relationship also come into existence where
(a) the plaintiff entrusts to the defendant property and relied on the defendant to deal with
such property for the benefit of the plaintiff or purposes authorized by him, and
(b) the plaintiff entrusts to the defendant a job to be performed and relies on the defendant to
procure for the plaintiff best terms available.
Re Goldcorp Exchange Ltd
-A contract between parties does not create a fiduciary relationship because fiduciary
relationship is of different nature from contractual relationship as there is no consideration
needed in fiduciary relationship.
Bray v Ford
-A person in a fiduciary position is under a duty to avoid a conflict of interest, and to avoid from
making an unauthorized profit.
Keech v Sandford
-the trustee took a lease for his personal benefit after the lessor refused to renew the lease for
the trust because the beneficiary was still an infant. The trustee was held to be a constructive
trustee and as such was accountable to the trust in respect of the profits received.
Boardman v Phipps
-A solicitor to a trust owned some shares in a company. Later he bought some shares without
the consent of the beneficiaries and he benefited from the information received in a fiduciary
position and he had made some personal profit. There was no conflict of interest because he
was not prohibited by the trust to purchase shares. It was held that he was accountable for the
profit and was deemed to be holding the shares as a constructive trustee.

2
 Strangers as Constructive Trustee
A stranger is a third party who is not appointed as a trustee, but who intermeddles in the trust
by taking it upon himself to administer the trust may be subject to the same liability as if he or
she is an express trustee. That person would be a constructive trustee, a trustee de son tort.
Halsbury’s Laws of Malaysia
-A person who not being a trustee and not having authority from a trustee, takes upon himself
to intermeddle with trust matters or to do acts characteristics of the office of trustee makes
himself a trustee de son tort, that is a trustee by virtue of his own wrongdoing, or, as such
persons is also called a constructive trustee.

Liability of Strangers: In General

Barnes v Addy – Strangers are not to be made constructive trustee merely because they act as
agents of trustee in transactions within their legal powers or otherwise, unless those agents:
a. Receive and deal with the trust property
b. Knowingly assist in a dishonest or fraudulent design on the part of the
trustee As a result, the said person cannot escape liability for the loss attributable
to him/her.

Liability of strangers as constructive trustees can be divided into two categories:

1. Accessory Liability: Knowing/Dishonest Assistance
GR: A stranger who has not received trust property but who assists trustees in a fraudulent and
dishonest design may become personally liable as a constructive trustee.
Baden Delvaux and Lecuit v Societe Generale
- There are four elements which must be established if a case is brought within the
category of knowing assistance:
i. The existence of a trust
ii. The existence of a dishonest and fraudulent design on the part of the trustee of
the trust
iii. The assistance by the stranger on that design
iv. The knowledge of the stranger
- Knowledge can be any of the five situations:
i. Actual knowledge
ii. Willfully shutting one’s eyes to the obvious
iii. Willfully and recklessly fail to make inquiries in which an honest and
 reasonable man would do
iv. Knowledge of certain circumstances which would indicate the facts to an
honest and reasonable man
v. Knowledge of circumstances which would cause an honest and reasonable man
to make inquiry
Royal Brunei Airlines Sdn Bhd v Tan
- The law imposed by the Privy Council
i. Dishonesty on the part of the third party is a prerequisite for liability
ii. Dishonesty is also a sufficient ingredient
iii. The breach of trust by the trustee need not itself be dishonest and fraudulent
- Tan = managing director of a travel co - Borneo Leisure Travel Sdn Bhd (BLT)
- Facts: Tan was the MD and principal shareholder of a travel company, BLT Sdn Bhd,
and his wife was the other director and shareholder. BLT was an agent of Brunei
Airlines and BLT was required under the agreement to store the money received in a
separate account. This was x done, the money was transferred into BLT’s normal
account and was used for ordinary business purposes. Subsequently, BLT falled into
arrears in respect of its arrangement with Borneo Airlines.
- Held: Since the money paid to BLT was held on trust in favour of the airline, Tan was
liable as a constructive trustee since he had acted dishonestly in which he caused or
permitted his BLT to use the money in a way he knew was x authorised by the trust.
(had referred to Baden Delvaux to infer the mental state of the Tan)
- Principle: Honesty is an objective standard. A person is dishonest if he fails to act in a
manner in which an honest person would act in such circumstances. If the trustee has
acted dishonestly and the 3rd party knows that and assisted the trustee, then he is
liable.

2. Recipient liability: knowing receipt and dealing

Where a stranger receives trust property knowing that his possession is in breach of trust or
where he receives without the knowledge of any breach of trust but he subsequently becomes
aware of the trust but still acts in a manner inconsistent with it.
Karak Rubber Co Ltd v Burden
- The general law is that a constructive trust may be imposed on a stranger who has
received the property with actual or constructive notice that it is a trust property
transferred to him in breach of trust.
El Ajou v Dollar Land Holdings plc
- The essentials of knowing receipt liability are:
i. A disposal of the plaintiff’s assets in breach of fiduciary duty
ii. The beneficial receipt by the defendant of assets which are traceable as representing
 the assets of the plaintiff

iii. The defendant’s knowledge that the said assets are traceable to the breach of fiduciary
duty

Re Montagu’s Settlement Trusts

- The knowledge required for both knowing receipt and knowing assistance is the same.
Based on the case of Baden.
Polly Peck International plc v Nadir
- Facts: A bank was sued for knowingly assisting the misappropriation of funds through
whose account the funds have passed.
- Issue: Whether the bank was under a duty to inquire as to whether there are any
improprieties in the transfer of fund?
- Held: The liability of a constructive trustee in a knowing receipt case did not require
that the acts complained of to be fraudulent. Court applied the constructive knowledge
basis and held that the bank is not liable because there is x duty for the bank to inquire
and after that only the bank knows of the facts.

3. Agreement to Create Secret Trust

A secret trust arises when A intends his gift to B to be used for the benefit of C in which C
could not be named in the will for some reasons.
A communicates that intention to B and B accepts that obligation either expressly or
impliedly. In doing so, A has failed to comply with the requirements of Wills Act, but in
allowing B to take it beneficially for the benefit of C, there is a possibility that the statute will
be used as an instrument of fraud by B.
The trustee-beneficiary relationship exists outside and independently of the
will. Therefore, the B will become the constructive trustee to hold the
property for C.

4. Mutual Wills
Two persons agree to make wills on identical terms in favour of each other and the remainder
will go to the same beneficiary.
The moment A dies, B holds all the combined property on a constructive trust basis and B will
not be allowed by equity to revoke his will or execute a new will which is in conflict with the
terms of the mutual will.
In order for constructive trust to arise, it is necessary to prove that there was an agreement that
the parties would not revoke the mutual will.
Re Oldham
- There was no evidence to suggest that a mutual will between a husband, since
deceased, and wife was intended in all circumstances to be irrevocable.
Re Cleaver
- There was “clear and satisfactory evidence that the testator and the testatrix did make
an agreement which they intended should impose mutual legal obligation.”

5. Other instances of Constructive Trusts

a. Vendors of Land
When there is a valid contract for sale, the vendor of land becomes in equity a trustee for the
purchaser of the land.
Wong Siew Choong Sdn Bhd v Anvest Corporation Sdn Bhd
Held: A Vendor becomes in equity the trustee for the purchaser of land and the
beneficial ownership passes to the purchaser once the purchase price has been paid.
Vendor of land has the right to retain possession of the land until the full payment was
made.

b. Acquisition of Property by Killing

General rule = A murderer shall not inherit victim’s property
Re Crippen
- A constructive trust was imposed in favour of those who entitled under the wife’s
intestacy and the murderer husband’s right to inherit was denied.
ESSAY COMPLETE

UK 8083 EQUITY & TRUSTS

CONSTRUCTIVE TRUSTS

A constructive trust is one imposed by the court on a person in whom the legal
title to property is vested. Constructive trust usually involves some fraudulent or
unconscionable behavior on the part of the legal owner. A characteristic feature of
constructive trust is that its existence is not dependant on the parties’ intention, either
actual, inferred or presumed. Trusts of this nature arises by the operation by law. In the
case of Takako Sakao v Ng Pek Yuen, a constructive trust is imposed by law irrespective
of the intention of the parties. And it is imposed only in certain circumstances. What
equity does in those circumstances is to fasten upon the conscience of the holder of the
property a trust in favour of another in respect of the whole or part thereof. The issue
that might arose is that whether the defendant has committed the kind of wrong which
is recognized in the authorities as giving rise to constructive trust. Thus, constructive
trust may be viewed as a tools under which equity will intervene so as to create a trust
relationship between the parties in order to make a person accountable for the trust to
prevent any unfairness or injustice. There are three well-established categories of
constructive trusts. There are :

(1) where someone obtains an advantage from fraudulent or unconscionable behavior,

(2) where a fiduciary derives a profit from the fiduciary relationship and

(3) where a third party receives and holds property in breach of trust or fiduciary
obligation with notice of the breach.
Where a fiduciary derives a profit from the fiduciary relationship

Where a fiduciary derives a profit from the fiduciary relationship, the court have
applied a number of differing circumstances which regard to the fiduciary relationship.
Trustee is under a fiduciary duty to act for the benefit of the beneficiary. Thus, he or she is
not allowed to abuse such fiduciary duty for his personal advantage. Common category of
fiduciary relationship includes principal and agent, solicitor and client, and director and
company. In the case of Reading v AG a fiduciary relationship come into existence when
(a) the plaintiff entrusts to the defendant property and relied on the defendant to deal with
such property for the benefit of the plaintiff or purposes authorized by him, and
(b) the plaintiff entrusts to the defendant a job to be performed and relies on the defendant
to procure for the plaintiff best terms available.

Ordinary business relationship where parties act independently in their own interest
do not create this sort of relationship. For instance, in the case of Re Goldcorp Exchange
Ltd, Lord Mustill held that a contract between parties does not create a fiduciary
relationship because fiduciary relationship is of different nature from contractual
relationship as there is no consideration needed in fiduciary relationship.
A trustee must not make an unauthorized profit on an account of his or her
trusteeship. In the case of Keech v Standford, the trustee took a lease for his personal
benefit after the lessor refused to renew the lease for the trust the beneficiary of which was
an infant. The trustee was held to be a constructive trustee and was accountable to the trust
in respects of the profit received. In Boardman v Phipps [1967] , Boardman was a
solicitor to a trust which owned some 8,000 out of 30,000 shares in a private company. As
he was unhappy with the company’s performance, he subsequently personally bought the
company’s remained shares. This was done without the consent from the beneficiaries. In
securing his purchase, he benefited from information he had received in his fiduciary
position. There was no conflict of interest because he was not prohibited by the trust to
purchase shares. However, when a profit made as a result of information acquired from the
fiduciary relationship, it falls under this principle. It was held that he was accountable for
 the profit and was deemed to be holding the shares as a constructive trustee. In Re
Macdam (1946) Ch 73, a trustee who was able to use his position as trustee to appoint
himself as director of a company was held to be a constructive trustee for the trust of his
director’s fees.

Position of stranger as constructive trustee

A stranger who is not appointed a trustee, but who intermeddles in the trust by taking it
upon himself and administer the trust may be subject to the same liability as if he or she is
an express trustee. That person would be a constructive trustee, a trustee de son tort (a
trustee on his own wrong). In Halsbury’s Law of Malaysia, a person who not being a
trustee and not having authority from a trustee, takes upon himself to intermeddle with
trust matters or to do acts characteristic of the office of trustee make himself a trustee de
son tort, that is trustee by virtue of his own wrongdoing, or as such person is also called, a
constructive trustee. The responsibility which attaches to a trustee may extend to a person
who is not properly a trustee in equity, if he either makes himself a trustee e son tort or
actually participates in any fraudulent conduct of a trustee to injury of the beneficiaries.

In the case of Barnes v Addy, strangers are not consider as constructive trustee merely
because they act as agents of trustee in transactions within their legal powers unless those
agents:

a. Receive and deal with the trust property

b. Knowingly assist in a dishonest or fraudulent design on the part of the trustee. As a

result, the said person cannot escape liability for the loss attributable to him/her.

Liability of strangers as constructive trustees can be divided into two categories:

1. Accessory Liability: Knowing/Dishonest Assistance

General Rule : A stranger who has not received trust property but who assists trustees in
a fraudulent and dishonest design may become personally liable as a constructive
trustee. In the case of Baden Delvaux and Lecuit v Societe Generale there are four
elements which must be established if a case is brought within the category of knowing
assistance:
i. The existence of a trust

ii. The existence of a dishonest and fraudulent design on the part of the trustee of the trust
iii. The assistance by the stranger on that design

iv. The knowledge of the stranger

Type of knowledge that are relevant for the purpose of constructive trusteeship can
be any of the five situations:

i. Actual knowledge

ii. Willfully shutting one’s eyes to the obvious

iii. Willfully and recklessly fail to make inquiries in which an honest and reasonable man
would do

iv. Knowledge of certain circumstances which would indicate the facts to an honest and
reasonable man

v. Knowledge of circumstances which would cause an honest and reasonable man to make
inquiry

In the case of Eagle Trust Plc v SBC Securities Ltd, Vinelott J held that in order
to make defendant liable as constructive trustee, it must be shown that he knew from the
(i), (ii) and (iii) categories laid down under the case of Baden, that the moneys were trust
money misapplied. However, different approach had been applied by the Privy Council in
the case of Royal Brunei Airlines Sdn Bhd v Tan. Knowingly assist in fraudulent design
not necessarily in receipt of trust property. Therefore the term knowing assistance is a
misnomer. The accessory must himself be dishonest in his intention.The law adopted in
this case are as follows :

1) dishonesty on the part of the third party is a prerequisite for liability;

2) dishonesty is also a sufficient ingredient;

3) the breach of trust by the trustee need not itself be dishonest and fraudulent
In Royal Brunei Airlines Sdn Bhd v Tan , Tan was the Managing Director and principal shareholder of a
travel company, BLT Sdn Bhd, and his wife was the other director and shareholder. BLT was an agent of
Brunei’s Airlines and BLT are required under the agreement to see that the money received in a
separate account. This was not done, the money was transferred into BLT’s normal account and was
used for ordinary business purposes. BLT falling into arrears in respect of its arrangement with Borneo
Airlines. It was held that, since the money paid to BLT was held on trust in favour of the airline, Tan was
liable for constructive trust since he had acted dishonestly in that he caused or permitted his BLT to
utilize the money in a way he knew was not authorised by the trust.If the trustee has acted dishonestly
and the 3rd party knows that and assisted the trustee, then he is liable.

2. Recipient liability: Knowing receipt and dealing

Where a stranger receives trust property knowing that his possession is in breach of trust or
where he receives without the knowledge of any breach of trust but he subsequently
becomes aware of the trust but still acts in a manner inconsistent with it.

Karak Rubber Co Ltd v Burden - The general law is that a constructive trust may be imposed
on a stranger who has received the property with actual or constructive notice that it is a trust
property transferred to him in breach of trust.

El Ajou v Dollar Land Holdings plc - The essentials of knowing receipt liability are:

v.A disposal of the plaintiff’s assets in breach of fiduciary duty

vi. The beneficial receipt by the defendant of assets which are traceable as representing the
assets of the plaintiff

vii.The defendant’s knowledge that the said assets are traceable to the breach of fiduciary
duty

Re Montagu’s Settlement Trusts - The knowledge required for both knowing receipt and
knowing assistance is the same. This is based on the case of Baden.

Polly Peck International plc v Nadir - A bank was sued for knowingly assisting the
misappropriation of funds through whose account the funds have passed. The issue is
whether the bank was under a duty to inquire as to whether there are any improprieties
in the transfer of fund?

Held : The liability of a constructive trustee in a knowing receipt case did not require that
the acts complained of to be fraudulent. Court applied the constructive knowledge basis
and held that the bank is not liable because there is no duty for the bank to inquire and
after that only the bank knows of the facts.

Maybank Trustees Bhd. v CIMB Bank Bhd & ors [2012] 6 MLJ 354 - Pesaka assigned
all its revenue from the government contracts it had won as security for bonds issuance
with Maybank Trustees as trustee to hold the revenue for the bond holders and that the
revenue had to be ring fenced. Ring fencing was not done and as a result funds received
from the bonds were disbursed and credited into Pesaka’s CIMB account. Pesaka
fraudulently withdrew the money in the account. The court held that , CIMB knew that the
account was that of the bondholders, it has become a constructive trustee and the act of
permitting the funds to leave the account was a breach of duty as trustee.

2. Agreement to Create Secret Trust

A secret trust arises when A intends his gift to B to be used for the benefit of C in which C
could not be named in the will for some reasons. A communicates that intention to B and B
accepts that obligation either expressly or impliedly. In doing so, A has failed to comply
with the requirements of Wills Act, but in allowing B to take it beneficially for the benefit
of C, there is a possibility that the statute will be used as an instrument of fraud by B. The
trustee-beneficiary relationship exists outside and independently of the will. Therefore, the
B will become the constructive trustee to hold the property for C

Others instances of constructive trusts :

i) Mutual will

Constructive trusts can arise from Mutual Wills. This is when 2 persons (usually
husband and wife) may agree that on the death of either one of them, the property shall be
enjoyed by survivor and after his/her death by nominated beneficiary. Mutual will be
effective in this circumstances if survivor is given a life interest or absolute interest with no
will at all.
 In the Re Dale, a husband and wife had agreed that each would leave their estate to
their son and daughter equally. The husband died first, leaving his estate of 18,500
accordingly. The wife made a new 300 to her daughter and the rest of her estate of 19,000
to her son. It was held that the son, as the executor, held the estate on trust for himself and
his sister equally, even though had not benefited under her husband’s will.

ii) Vendors of land

The principle is that, when the vendor and purchaser enter into a specifically
enforceable contract for the sale of land, equity looks upon the vendor as a constructive
trustee holding the property for the purchaser who is regarded in equity as the owner. The
availability of remedy known as Specific Performance means that the purchaser is already
an owner. Lord Cairns in Shaw v Foster mentioned that, the vendor was trustee of the
property for the purchaser, the purchaser was the real beneficial owner in the eye of a
Court of Equity of the property subject only to this observation, that the vendor, a trustee
was not merely a dormant trustee, he was a trustee having a personal and substantial
interest in the property, a right to protect that interest and an active right to assert that
interest if anything should be done in derogation of it. In short, he observed that, although
the vendor is the trustee and the purchaser has a beneficial interest, the trustee also has a
personal interest in the property.

Similarly, Sir George Jessel MR in Lysaght v Edwards recognized that, when there
is a valid contract for sale, the vendor becomes in equity a trustee for the purchaser of the
estate sold, and the beneficial ownership passes to the purchaser, the vendor having a right
to the purchase-money, a charge or lien on the estate for the security of that purchase-
money, and a right to retain possession of the estate until the purchase-money is paid, in
the absence of express contract as to the time of delivering possession.

Under the position in Malaysia, this is being discussed in the case of Wong Siew
Choong Sdn Bhd v Anvest Corporation Sdn Bhd where the court held that, a vendor
becomes in equity the trustee for the purchaser of land and the beneficial ownership passes
to the purchaser once the purchase price has been paid. Vendor of land has the right to
retain possession of the land until the full payment was made
i) Acquisition of property by killing

Consideration of public policy has led to the principle that a murderer is not to gain
or inherent the victim’s property. In the case of Re Crippen, a constructive trust was
imposed in favour of those next entitled under the wife’s intestacy thus denying the
murderer husband of his entitlement. The principle has been applied, for example, in the
context of entitlements to life insurance policy and pension.