Secretary for Justice v. Hon Kam Wing and Others

HCA 3377/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3377 OF 2000

____________

____________

Coram: Deputy High Court Judge Barma, SC in Court

Dates of Hearing: 19-20 December 2002

Date of Handing Down Judgment: 7 February 2003

________________

J U D G M E N T

________________

The application

1.This is the trial of a preliminary issue which arises in an action by the Secretary for Justice (acting on behalf of the Government of the Hong Kong Special Administrative Region ("the Government")) against the estate of Hon Kwing Shum ("Hon"), a former police officer, his wife and two concubines, and the estate of his mother. The issue is:-

"Whether the Plaintiff's claims against each of the 1st to 5th Defendants are time barred by virtue of Section 4 of the Limitation Ordinance (Cap. 347) or by analogy thereto".

2.For the purposes of this hearing only, I have been invited to proceed on the basis that the facts alleged in the Amended Statement of Claim are true.

The assumed facts

3.Hon Sum, also known as Hon Kwing Shum or Hon Shum, was an officer of the Royal Hong Kong Police from 1 September 1940 until his retirement on 3 August 1971. From 16 June 1969 until his retirement some two years later, he served as a Staff Sergeant Class I. During the 31 odd years of his service, he earned a total of HK$193,852.31 by way of his official emoluments, awards and allowances. However, at the time of his retirement, Hon and the other Defendants had under their ownership assets, the bulk of which had been acquired in the course of the 1960s, which had a total acquisition cost of HK$4,155,775.25. These assets consisted of some 26 properties, monies in bank accounts and investments in a number of companies and other businesses and two Mercedes Benz motor cars. All of the properties for which payment records are available were paid for in cash or by means other than secured loan financing.

4.The Government alleges that Hon was a corrupt policeman, who received large sums of money by way of bribes, advantages or other corrupt secret profits during the course of his career. It is alleged (and for present purposes it is to be assumed) that he applied these bribes in acquiring the assets identified in the Amended Statement of Claim. The Government claims that in relation to such assets, Hon's wife, concubine and mother were nominees for him, and that these assets are therefore held by the Defendants on constructive trust for the Government by virtue of the principle established in Attorney General for Hong Kong v Reid [1994] 1 AC 324.

5.As Hon retired from the Royal Hong Kong Police in 1971, his corrupt activities must have taken place before then. The Government accepts that it became aware of his corrupt activities before February 1976. The writ in this action was not, however, issued until 30 March 2000. Thus, the corrupt activities which are relied upon as the foundation of the Government's claim to the properties and other assets identified took place upwards of 29 years before the writ was issued, and the Government became aware of such activities more than 24 years before the writ was issued.

The relevant provisions of the Limitation Ordinance

6.In these circumstances, the Defendants say that the Government's claims are time-barred by the provisions of sections 4(1)(a) and 4(2) of the Limitation Ordinance (Cap. 347) ("the Ordinance"), which provide for a limitation period of six years in relation to actions founded on simple contract or on tort and actions for an account, and are said to be applicable to the Government's claims by analogy by virtue of section 4(7) which provides:-

"This section shall not apply to any claim for specific performance of a contract or for an injunction or for other equitable relief, except in so far as any provision thereof may be applied by the court by analogy in like manner as the corresponding enactment contained in the Limitation Act 1980."

7.The Government, however, contends that no limitation period applies to its claim, by virtue of section 20(1) of the Ordinance. Section 20(1) provides:-

"No period of limitation prescribed by this Ordinance shall apply to an action by a beneficiary under a trust, being an action -

(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or

(b) to recover from the trustee trust property or the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted to his use."

8.By section 2(1) of the Ordinance, "trust" and "trustee" have the same meanings as in the Trustee Ordinance (Cap. 29), by section 2 of which these expressions extend to implied and constructive trusts.

Attorney General for Hong Kong v Reid

9.In Attorney General for Hong Kong v Reid, the Privy Council held that where a public officer who stood in a fiduciary relationship to the Government received a bribe, he held the bribe on a constructive trust for the Government. In this case, it is not, I think, disputed that Hon was a public officer, and that he stood in a fiduciary relationship to the Government.

10.Although Mr Sussex, who appeared for the Defendants, pointed out that the Reid case might not be strictly binding on me (being a decision of the Privy Council on appeal from the Court of Appeal of New Zealand), and reserved his position as to the correctness of that decision should this matter go further, he accepted, for the purposes of this hearing, that (subject to the limitation defence) the Defendants held the assets on constructive trusts in favour of the Government, and thus that the Reid case was, for present purposes, rightly decided.

11.At first blush, therefore, it would seem that the Government's claims are not statute-barred, since they are based on a constructive trust of which Hon was a constructive trustee and are therefore apparently within the definition of "trust" and "trustee" for the purposes of section 20(1) of the Ordinance, so that section 20(1)(b) (and perhaps also section 20(1)(a)) would apply with the result that there would be no period of limitation applicable to the Government's claims.

Two types of constructive trust

12.However, the position is not quite so simple. As pointed out by Millett L J in Paragon Finance plc v D B Thakerar & Co [1999] 1 All ER 400, the expression "constructive trust" has come to be used in two different senses. In the course of his judgment in that case, Millett L J said (at p.408j):-

"Regrettably, however, the expressions 'constructive trust' and 'constructive trustee' have been used by equity lawyers to describe two entirely different situations. The first covers those cases already mentioned, where the defendant, though not expressly appointed as trustee, has assumed the duties of a trustee by a lawful transaction which was independent of and preceded the breach of trust and is not impeached by the plaintiff. The second covers those cases where the trust obligation arises as a direct consequence of the unlawful transaction which is impeached by the plaintiff."

13.Millett L J went on to explain the difference between the two senses in which the expressions were used, saying (at p.409a):-

"A constructive trust arises by operation of law whenever the circumstances are such that it would be unconscionable for the owner of property (usually but not necessarily the legal estate) to assert his own beneficial interest in the property and deny the beneficial interest of another. In the first class of case, however, the constructive trustee really is a trustee. He does not receive the trust property in his own right but by a transaction by which both parties intend to create a trust from the outset and which is not impugned by the plaintiff. His possession of the property is coloured from the first by the trust and confidence by means of which he obtained it, and his subsequent appropriation of the property to his own use is a breach of that trust. Well known examples of such a constructive trust are McCormick v Grogan (1869) LR 4 HL 82 (a case of a secret trust) and Rochefoucald v Boustead [1897] 1 Ch 196 (where the defendant agreed to buy property for the plaintiff but the trust was imperfectly recorded). Pallant v Morgan [1953] Ch 43 (where the defendant sought to keep for himself property which the plaintiff trusted him to buy for both parties) is another. In these cases the plaintiff does not impugn the transaction by which the defendant obtained control of the property. He alleges that the circumstances in which the defendant obtained control make it unconscionable for him thereafter to assert a beneficial interest in the property.

"The second class of case is different. It arises when the defendant is implicated in a fraud. Equity has always given relief against fraud by making any person sufficiently implicated in the fraud accountable in equity. In such a case he is traditionally though I think unfortunately described as a constructive trustee and said to be 'liable to account as constructive trustee'. Such a person is not in fact a trustee at all, even though he may be liable to account as if he were. He never assumes the position of a trustee, and if he receives the trust property at all it is adversely to the plaintiff by an unlawful transaction which is impugned by the plaintiff. In such a case the expressions 'constructive trust' and 'constructive trustee' are misleading, for there is no trust and usually no possibility of a proprietary remedy; they are 'nothing more than a formula for equitable relief': Selangor United Rubber Estates Ltd v Cradock (No. 3) [1968] 1 WLR 1555 at 1582 per Ungoed-Thomas J."

The issue dividing the parties

14.Before me, Mr Sussex, for the Defendants, and Mr Reyes, appearing for the Plaintiff, agreed that the determination of the preliminary issue turns on whether the constructive trust imposed on Hon pursuant to the decision in the Reid case falls into the first or second category of constructive trust described by Millett L J in the Paragon Finance case. If it falls into the first category, section 20(1) of the Ordinance is applicable so that the Government's claims against the Defendants are not time-barred. On the other hand, if it falls into the second category, section 20(1) does not apply, and the claims are time-barred, by virtue of sections 4(1)(a), 4(2) and 4(7) of the Ordinance.

The parties' contentions

15.Mr Sussex contended that the constructive trust imposed on Hon fell into the second of the categories described by Millett L J. He suggested that constructive trusts falling into the first category could be described as "institutional", whereas those falling into the second category could be described as "remedial". Mr Reyes cautioned against relying on such terminology, since one could say that all cases are about remedies. I note also that these terms are often used when debating the nature of the constructive trust - whether it is "institutional" in the sense that it arises by operation of law in defined circumstances in accordance with the settled principles of equity, or "remedial" in the sense that it is imposed by the court whenever it is considered just to do so. The "remedial" constructive trust in this sense exists in the United States, but does not (as yet, and perhaps never will) exist in England, Australia or Hong Kong.

16.In my view, if these terms are simply used as labels for the two different senses in which the terms "constructive trust" and "constructive trustee" are understood, as explained by Millett L J in the Paragon Finance case, they are unobjectionable, but add little to the analysis that is required in order to determine into which of the two categories the constructive trusts arising in this case fall.

17.In the course of his submissions, however, Mr Sussex amplified the nature of the distinction between what he termed "institutional" and "remedial" constructive trusts. He suggested that a constructive trust was "institutional" if it arose as a result of the intention of the parties and "remedial" if it did not. Thus, said Mr Sussex, where a person originally took possession of property on behalf of others by agreement between them, he was an "institutional" constructive trustee, who could not claim the benefit of limitation, whereas if he took possession of property on his own behalf but in circumstances where the Court would declare him to be a trustee, he was a "remedial" constructive trustee, who could.

18.Mr Sussex also suggested that apart from this test, which he submitted was supported by the Paragon Finance case and other authorities, there were two other tests discernible from the authorities. These were whether the existence of the trust itself is in issue; and whether the trust relied upon arose as a result of the conduct impeached or prior to it.

19.Mr Sussex submitted that, whichever of these three tests was used to distinguish between the first and second type of constructive trust described by Millett L J in the Paragon Finance case, the constructive trust arising in respect of bribes received by Hon Sum fell was of the second type.

20.As I understood Mr Reyes' submissions, he did not appear to quarrel with the last of the tests which I have mentioned - i.e., whether the trust relied upon arose as a result of the conduct impeached or prior to it. He submitted, however, that applying this test, the constructive trust imposed on a bribe fell within the first type of constructive trust described by Millett L J in the Paragon Finance case, so that no period of limitation would apply to a claim against the trustee for the trust property itself, or its proceeds, or against any person in respect of a fraudulent breach of trust to which the trustee was party or privy, by virtue of section 20(1) of the Ordinance.

The nature of the constructive trust arising in the Reid case

21.In order to decide whether the constructive trust which was held in the Reid case to arise in respect of a bribe is of the first or second type described by Millett L J in the Paragon Finance case, it is, I think, helpful first to examine the manner in which that constructive trust arises, with a view to identifying its nature.

22.Prior to the decision in the Reid case, it had long been held that a fiduciary who received a bribe was merely a debtor in equity of the person to whom he owed fiduciary duties, and that the only remedy available against him was a personal claim requiring him to account for the value of the bribe received: see The Metropolitan Bank v Heiron (1880) 5 Ex D 319; Lister & Co. v Stubbs (1890) 45 Ch D 1. However, in the Reid case, the Privy Council disapproved these decisions, holding that in such a case, the bribe was held by the recipient on a constructive trust for his principal, so that the principal was entitled to recover not just the amount of the bribe, but any property that was acquired with it, or any profits made through the use of it.

23.In the Reid case, having described a bribe as "a gift accepted by a fiduciary as an inducement to him to betray his trust" (p.330G), Lord Templeman explained how such a constructive trust arose at p.331B-H, where he said:-

"When a bribe is offered and accepted in money or in kind, the money or property constituting the bribe belongs in law to the recipient. Money paid to the false fiduciary belongs to him. The legal estate in freehold property conveyed to the false fiduciary by way of bribe vests in him. Equity, however, which acts in personam, insists that it is unconscionable for a fiduciary to obtain and retain a benefit in breach of duty. ... The false fiduciary who received the bribe in breach of duty must pay and account for the bribe to the person to whom that duty was owed. In the present case, as soon as [Reid] received a bribe in breach of the duties he owed to the Government of Hong Kong, he became a debtor in equity to the Crown for the amount of that bribe. So much is admitted. But if the bribe consists of property which increases in value or if a cash bribe is invested advantageously, the false fiduciary will receive a benefit from his breach of duty unless he is accountable not only for the original amount of the bribe but also for the increased value of the property representing the bribe. As soon as the bribe was received it should have been paid or transferred instanter to the person who suffered from the breach of duty. Equity considers as done that which ought to have been done. As soon as the bribe was received, whether in cash or in kind, the false fiduciary held the bribe on a constructive trust for the person injured. ... The authorities show that property acquired by a trustee innocently but in breach of trust and the property from time to time representing the same belong in equity to the cestui que trust and not to the trustee personally whether he is solvent or insolvent. Property acquired by a trustee as a result of a criminal breach of trust and the property representing the same must also belong in equity to his cestui que trust and not to the trustee whether he is solvent or insolvent."

24.At p.337E-H, Lord Templeman cited with approval the views expressed by Millett L J in his article "Bribes and Secret Commissions" [1993] R.L.R. 7, at p.20, where Millett L J said:-

"[The fiduciary] must not place himself in a position where his interest may conflict with his duty. If he has done so, equity insists on treating him as having acted in accordance with his duty; he will not be allowed to say that he preferred his own interest to that of his principal. He must not obtain a profit for himself out of his fiduciary position. If he has done so, equity insists on treating him as having obtained it for his principal; he will not be allowed to say that he obtained it for himself. He must not accept a bribe. If he has done so, equity insists on treating it as a legitimate payment intended for the benefit of the principal; he will not be allowed to say that it was a bribe."

25.It is clear from the judgment of Lord Templeman that the constructive trust arising in respect of the bribe received by a fiduciary such as Reid arose upon receipt of the bribe. It also seems clear that the manner in which the trust arises involves the use of two of the techniques of equity. First, because the fiduciary cannot be heard to say that he preferred his own interests to those of the person to whom he owed his fiduciary duties, equity regards the bribe as a legitimate payment, intended for his principal. Second, as the bribe is something that must be paid over at once (instanter) to the principal, equity treats as done that which ought to be done, and imposes a constructive trust over it for the benefit of the principal.

26.It is important to note that the recipient of a bribe who is in the position that Reid was in, is under a duty to pay it over to his principal the moment he receives it. As Millett L J explained in his article (with which explanation I would respectfully agree), it follows that he cannot have been entitled to retain it and mix it with his own monies, leaving it to be accounted for to the principal at some later point in time. The obligation is to hand over the very property that was received, in specie. Why is this the case? In relation to a person in the position of Reid, it must be because he has no authority to receive money of the principal or for the account of the principal at all, and therefore cannot have any authority to mix it with his own money and use it for himself. In the case of certain other classes of fiduciary, such as solicitors, there is an express obligation to keep the principal's monies separate from their own, so that they, too, have no authority to mix receipts for the account of their principal with their own monies and use such receipts for themselves. In the case of some agents, however, the arrangement between them and their principals may be different, they may (although owing some fiduciary duties) be permitted by the terms of the arrangement with their principals to have the use of monies received for the principal, subject only to a duty to account at a later stage. In such a case, there would be no obligation to pay over such receipts in specie.

27.It is the obligation to pay over the bribe in specie that gives rise to the constructive trust. Applying the second of the techniques mentioned above, equity regards the recipient of the bribe as having done what he should have done, by handing over the very money which he received to his principal. Since he has not in fact done this, equity vests the beneficial interest in the bribe (whether it be money or some other form of property) in the person to whom the recipient owes his fiduciary duties. Since the legal title in the bribe remains with the recipient, there arises a separation of the legal and beneficial (or equitable) ownership of the bribe, with the consequence that it becomes the subject matter of a trust. This is, I think, a real trust. There is trust property (the bribe), in relation to which the legal title rests with one person (the recipient) and the equitable title with another (his principal). It seems likely also that the recipient of the bribe owes fiduciary duties to his principal in respect of the bribe which has become the subject matter of the trust, as a result of the circumstances in which he came by it, of which he must have been cognisant.

28.It would, I think, follow that in the case of a fiduciary who receives a bribe, but is not, because of his arrangements with his principal, obliged to pay it over in specie (being permitted to mix monies acquired for his principal with his own), no constructive trust would arise, since equity would not see any need or justification for vesting the beneficial interest in the property representing the bribe in the principal, and there would consequently be no identifiable property in relation to which there has been a separation of the legal and equitable ownership.

29.As a result of the constructive trust which arises in a case like the Reid case, the principal has a claim to the property itself. In my view, it is precisely such a claim that the Government seeks to advance in these proceedings. The Government is not seeking damages or compensation for such damage as may have been caused to it by the taking of the bribe. It claims the bribe itself (or what it has become), as its own property. In doing so, the Government does not complain about the receipt of the bribe (which was of course a wrong in itself, but without which there would be nothing to claim), but the failure to hand it over, or the use of it by the recipient for his own purposes, in denial of the Government's title to it. Such a claim is, I think, different in character from the equitable counterpart of a common law claim for damages for fraud.

The difference between the two types of constructive trust

30.I turn now to consider what it is that constitutes the critical difference between the first and second type of constructive trust described by Millett L J in the Paragon Finance case. Having done so, it will, I think, be possible to determine to which of these types the constructive trust arising in respect of the bribes paid in this case belongs.

The reason for denying trustees the benefit of limitation periods

31.Before considering the various tests proposed by Mr Sussex, however, I think it worthwhile to bear in mind the basis on which equity declined to afford to a trustee the benefit of a defence of limitation. In his judgment in the Paragon Finance case, Millett L J explained this as follows (at p.408f)

"Before 1890, when the Trustee Act 1888 came into operation, a claim against an express trustee was never barred by lapse of time. The Court of Chancery had developed the rule that, in the absence of laches or acquiescence, such a trustee was accountable without limit of time. The rule was confirmed by s25(3) of the Supreme Court of Judicature Act 1873, which provided that no claim by a cestui que trust against his trustee for any property held on an express trust, or in respect of any breach of such trust, should be held to be barred by any statute of limitation.

"The explanation for the rule was that the possession of an express trustee is never in virtue of any right of his own but is taken from the first for and on behalf of the beneficiaries. His possession was consequently treated as the possession of the beneficiaries, with the result that time did not run in his favour against them: see the classic judgment of Lord Redesdale in Hovenden v Lord Annesley (1806) 2 Sch & Lef 607 at 633-634.

"The rule did not depend upon the nature of the trustee's appointment, and it was applied to trustees de son tort and to directors and other fiduciaries who, though not strictly trustees, were in an analogous position and who abused the trust and confidence reposed in them to obtain their principal's property for themselves. Such persons are properly described as constructive trustees."

32.It seems to me that the distinction between the two categories of constructive trustee should bear some relation to this reasoning, and that in considering into which category an alleged constructive trustee falls, it is important to have regard to the question of whether or not he is someone who holds property for the benefit of some other person, in whom the equitable ownership of the property vests.

Intention to create a trust

33.The first suggestion put forward by Mr Sussex was that the difference turned on whether or not the trust relied upon was created by an agreement between the alleged trustee and his beneficiaries. It is certainly true that there are passages in the judgment of Millett L J in the Paragon Finance case that are consistent with this being the difference: see for example the passage in his judgment at p.409b-d, where the three examples given are all cases of trust relationships which arise consensually. I would accept that most trusts arise as the result of some agreement or understanding between the trustee and some other person (not necessarily the beneficiary - in the classic case of an express trust, the agreement is between the trustee and the settlor, who may not be a beneficiary, and the beneficiaries may never have been consulted in relation to the setting up of the trust). However, it does not seem to me that every trust must arise in this way. The present case would appear to be one in which there was no consensus or agreement as to the creation of the trust, but the trust seems to me nonetheless to be a real one, in which Hon is properly to be described as a trustee for the Government.

34.In a case such as this, although it would probably be fair to say that Hon did not intend to take on the role of a trustee for the Government in respect of the bribes which he received, I see no reason why, where the result of his actions was that he held the legal title to the bribes as trustee for the Government, he should be in any better position than a trustee who intended to take on such role would be for purposes of limitation. In both cases, the equitable or beneficial title to the trust property vests in someone other than the legal owner. In neither case is his possession of such property in virtue of any right of his own, in both it is taken from the outset (instanter, on receipt, in the case of a bribe) for the principal who is the beneficiary of the (in this case, constructive) trust.

35.Even if some element of volition or voluntary conduct is needed, I would think that it is present in a case such as this, since Hon presumably acted voluntarily in taking the bribes which he was offered. In so doing, he voluntarily placed himself in a situation in which equity created a trust in respect of the bribes which he received. By reason of his knowledge of the circumstances, it would also seem likely that he voluntarily placed himself in a situation in which equity would impose on him fiduciary obligations to the Government in respect of the property or money which he received as bribes.

36.I therefore do not consider that the critical distinguishing factor between the two types of constructive trust is to be found in the existence of an intention to create a trust relationship.

Whether existence of a trust is in issue

37.The second test suggested by Mr Sussex was to ask whether the existence of a trust was itself in issue. For this test, Mr Sussex relied on a number of the older authorities such as Beckford v Wade (1805) 17 Ves Jun 87 and Soar v Ashwell [1893] 2 QB 390. It is true that in both those cases, there are passages in the judgments of the courts that suggest that one of the reasons why a constructive trustee (as they termed him) should be permitted to take advantage of statutes of limitation was because his liability would often, or almost always, depend on disputed facts. It was therefore consonant with the policy of having periods of limitation to allow them to be vouched in such cases.

38.However, it seems to me that this does not provide a principled distinction between the two classes of constructive trust. One can readily envisage cases which clearly fall within the first class of constructive trust in which there may well be disputes of fact which require resolution before the court is in a position to say whether or not the trust relied upon exists. Thus, for example, in cases of secret trust, there may well need to be a factual investigation in order to determine whether or not a trust was in fact created; in cases such as Pallant v Morgan, it may be necessary for the court to decide, on disputed evidence, what the actual arrangement between the parties was. Even in the case of Soar v Ashwell, Kay L J appeared to recognise the possibility that it might be unjust to hold the defendant liable as a trustee de son tort, pointing out (at p.400) that:-

"... But, it may be argued, [external] evidence is requisite to make out that Ashwell was bound by the trust, of which he was not an appointed trustee, and therefore this reason for the distinction appears to apply to this case. Ashwell is dead. His evidence might have been conclusive against the claim. He might have disproved all the facts relied on to make out that he was a trustee. For instance, he might have proved that he never received the money, or that, having received it, he paid it over to the trustees. ..."

Nonetheless, the defendant in Soar v Ashwell was held to be a trustee de son tort, and thus unable to claim the benefit of the statutes of limitation.

39.Moreover, there is nothing in Millett L J's judgment in the Paragon Finance case to suggest that the difference between the two classes of constructive trust turns on any such distinction. I therefore conclude that whether or not the existence of the trust is in issue, and will require to be proved by evidence, does not provide the basis for distinguishing between them.

Whether the trust arises before or as a result of the transaction impeached

40.The third test suggested by Mr Sussex (and one which I did not understand Mr Reyes to take serious issue with), was based on a passage in the earlier Privy Council decision in Taylor v Davies [1920] AC 636, at p.653, where Viscount Cave, delivering the judgment of the court said that:-

"... The expressions "trust property" and "retained by the trustee" [in the limitation provision there under consideration] properly apply, not to a case where a person having taken possession of property on his own behalf, is liable to be declared a trustee by the Court; but rather to a case where he originally took possession upon trust for or on behalf of others. In other words, they refer to cases where a trust arose before the occurrence of the transaction impeached and not to cases where it arises only by reason of that transaction."

41.There are several passages in the judgment of Millett L J in which this distinction is given prominence: see, e.g., the judgment at pp.408j-409a, 409b, 409f, 413a-b and 413h-j.

Whether the trust is a real trust or only a basis for equitable relief

42.It seems to me, however, that Millett L J was emphasising the relevance of the chronological sequence as an indicator of the difference between the two types of constructive trust. That difference is, I think, whether or not the terms "constructive trust" and "constructive trustee" are being used in relation to a real trust, where there is trust property of which the constructive trustee is the trustee, and the plaintiff or claimant the beneficiary, in which case the constructive trust is of the first type, or whether they are being used simply to signify a case in which equity will grant a remedy for fraud or wrongdoing by making the "constructive trustee" liable as if he was a trustee, even though he is not, there being no trust. The difference is between a situation in which there is a real trust, with identifiable trust property to which a claim is made, or in relation to which a breach of trust is alleged, and situations in which the phrase "constructive trust" is being used as a label to justify the grant of an equitable (usually personal) remedy.

43.That this is the distinction between the two types of constructive trust considered by Millett L J in the Paragon Finance case appears, I think, from the passages in his judgment at pp.409a-g (cited above), 409j (where constructive trusts of the second type are described as "not in reality trusts at all, but merely a remedial mechanism by which equity gave relief for fraud"), 412f-g (where constructive trustees of the second type are described as "persons whose trusteeship is merely a formula for giving restitutionary relief" and "in reality neither trustees nor fiduciaries, but merely wrongdoers"), 413d (referring to "the distinction between an institutional trust and a remedial formula - between a trust and a catch-phrase), 413h-j, where he said:-

"Although at first sight the distinction drawn in Taylor v Davies appears to be merely chronological, it marks a real difference between trustees (whether or not expressly appointed as such) who commit a breach of trust (however created) and persons who are not trustees at all but who are described as trustees for the purpose of enabling equitable relief to be granted against them."

(my emphasis), 414b (suggesting that fraudulent breach of trust could be treated differently for limitation purposes from other frauds, but only if what was involved really was a breach of trust), and 414g, where he explained that:-

"... Before the Supreme Court of Judicature Act 1873 the expression was a catch-phrase which was employed by the Court of Chancery to justify the exercise of equity's concurrent jurisdiction in cases of fraud. 125 years later it is surely time to discard it. If we cannot bring ourselves to discard it, at least we can resolve not to take it literally."

44.The passage at p.413h-j encapsulates, I think, the difference between a claim for the trust property itself, or for a breach of the trust, on the one hand, and a claim in respect of wrongdoing in relation to a particular transaction on the other. In the former case, complaint is not made of the transaction that gives rise to the trust - it is accepted as having taken place, and the claimant seeks to take the benefit of it, by making a claim for the property which, by reason of the transaction, came to be held on trust for him. In the latter case, the plaintiff complains of the transaction itself, and seeks relief in relation to it.

45.The Paragon Finance case itself was a case in which it was sought to make a claim against a firm of solicitors in respect of their alleged involvement in a fraud on the plaintiff lender, by failing to disclose (despite their having been retained on terms which required them to do so) the fact (known to them) that the borrowers (for whom they also acted) were sub-buyers, who were purchasing the property at a price substantially higher than that paid by the sub-vendor to the vendor, and whose mortgage application to the lender was for a mortgage which was also much higher than the price paid by the sub-vendor to his vendor. An unsuccessful attempt was made by the plaintiff to amend outside the limitation period to plead that the solicitors were guilty of fraud, conspiracy to defraud, fraudulent breach of trust and intentional breach of fiduciary duty. In these circumstances, it is not surprising that Millett L J was of the view that the claim in constructive trust was in respect of a constructive trust of the second type, and merely another way of putting the other three claims sought to be introduced by the amendments, since the plaintiff's real complaint was that they had been defrauded, and that the solicitors were parties to the fraud. What was sought was not the recovery of trust property, or compensation for a breach by a true trustee of his obligations in relation to trust property, but compensation, either by way of common law damages or equitable compensation, for fraud.

The authorities

46.That this is the difference between the two types of constructive trust, is, I think supported by the judgment of Deputy Judge Jules Sher Q.C. in Coulthard v Disco Mix Club Ltd [2000] 1 WLR 707, where he said (at p.732A-D):-

"What the Paragon Finance case makes clear is that the critical boundary in these cases lies between those cases where the defendant is a true trustee (be if of an express trust or a constructive trust) and those where he is not. In the Nelson v Rye relationship, which is the same in this respect as Mr Coulthard's and Mr Prince's relationship, the relationship is not that of trustee and beneficiary. The touchstone of a true trusteeship is trust property. There is no allegation or evidence ... that D.M.C. was required to keep moneys reaching it as a result of commercial exploitation of Mr Coulthard's mixes separate from its own moneys. Everything in the pleading and evidence is consistent with the idea that D.M.C. was free to mix such monies with its own and then account at some later point in time to Mr Coulthard, after deduction of the appropriate commission. In its essence the commercial relationship engendered personal claims between them rather than proprietary ones. At no stage in Mr Coulthard's pleading or evidence is an asset or fund identified as an asset or fund which is or should have been held in a trustee capacity. That is why this dispute attracts the application of the six year limit under section 5 of the Act, directly or by analogy. Had there been a true trust of property alleged, the relevant section would have been section 21; and to the extent to which there was fraud, or a receipt by the trustee and conversion to his use, there would not have been any limitation defence."

47.The Coulthard case involved a claim by a disc-jockey against his managers and agents in respect of alleged deliberate under accounting in respect of sums due to him under the management and agency agreements. It will be apparent from the passage cited above that the court concluded, in the light of the arrangements between the parties, that there could not be any real trust, since there was no obligation on the part of the managers to keep the monies received for the plaintiff separate from their own funds, so as to give him a right to claim them in specie, thereby creating a trust over them. The only claims which the plaintiff could have in those circumstances were personal ones for an account and payment, whether based on common law or equity.

48.Similar views were also expressed by Langley J. at first instance in Cia de Seguros Imperio v Heath (REBX) Ltd [1999] Lloyd's Rep I & R 571 at p.591. That the distinction between the two types of constructive trust turns on the existence or otherwise of a genuine trust is also reflected in the judgment of Waller L J in the Court of Appeal in the same case: see the report in [2001] 1 WLR 112 at p.123B-D.

49.In Dubai Aluminium Co. Ltd v Salaam [2002] 3 WLR 1913, in which the issue for consideration was not limitation, but whether a firm of solicitors was liable for the conduct of one of its members which involved him in liability as a constructive trustee, so as to enable it to claim an indemnity from other wrongdoers in respect of sums it had paid to settle the claim against it. It was argued by the persons resisting liability to indemnify the solicitors that no such vicarious liability could arise, since it was no part of a solicitor's business to constitute himself a trustee. The House of Lords held that the firm was entitled to an indemnity, since it was vicariously liable for its member's acts. In his judgment, Lord Millett referred to his judgment in the Paragon Finance case and reiterated the need to be clear as to which of the two possible senses of "constructive trustee" was being used in any given case. Commenting on Taylor v Davies and Clarkson v Davies [1923] AC 100, Lord Millett said (at p.1946D-H):-

"... In the latter case the Lord Justice Clerk explained (at p.110) that the distinction was between a trust which arose before the occurrence of the transaction impeached and a claim which arose only by reason of that transaction. In the former case the defendant is treated as a trustee even though not expressly appointed as such; in the latter case he is a stranger to the trust at the time of the transaction.

"Referring to these cases in [the Paragon Finance case], I drew attention to the fact, which was becoming increasingly overlooked, that the expressions "constructive trust" and "constructive trustee" were used by equity lawyers to describe two entirely different situations. One was the situation which the claimants unsuccessfully contended had arisen in Mara v Browne. The other is the situation which arose in present case.

"Unlike HB in Mara v Browne [1896] 1 Ch 199, Mr Amhurst [the solicitor] did not assume the position of a trustee on behalf of others. He never had title to the trust funds or claimed the right to deal with them on behalf of those properly entitled to them. He acted throughout on his own or his confederates' behalf. The claim against him is simply that he participated in a fraud. Equity gives relief against fraud by making any person sufficiently implicated in the fraud accountable in equity. In such a case he is traditionally (and I have suggested unfortunately) described as a "constructive trustee" and is said to be "liable to account as a constructive trustee". But he is not in fact a trustee at all, even though he may be liable to account as if he were. He never claims to assume the position of trustee on behalf of others, and he may be liable without ever receiving or handling the trust property. If he receives the trust property at all he receives it adversely to the claimant and by an unlawful transaction which is impugned by the claimant. He is not a fiduciary or subject to fiduciary obligations; and he could plead the Limitation Acts as a defence to the claim."

50.Lord Millett was therefore of the view that the solicitor was not truly a trustee, but was simply a wrongdoer. Since his liability was in respect of his participation in a fraud, which was perpetrated while acting within the ordinary scope of his practice, there was no reason why his firm should not be vicariously liable for his acts. Had he acted so as to constitute himself a true trustee, however, this would have been outside the scope of his practice, and his firm would not have been liable in respect of any breach of that trust.

51.Other post Paragon Finance authorities which were cited to me are, I think, also consistent with this approach. Cases such as J J Harrison (Properties) Ltd v Harrison [2002] 1 BCLC 162, Bank of Credit & Commerce International (Overseas) Ltd v Jan (unreported, 17 November 1999, Jonathan Parker J), Re Pantone 485 Ltd, Miller v Bain [2002] 1 BCLC 266 and DEG-Deutsche Investitions und Entwicklungsgesellschaft mbH v Koshy [2002] 1 BCLC 478 are all, it seems to me, cases in which the court regarded the situation as one in which the defendant was in a position of someone who was to be regarded as being in an analogous position to a trustee, given that he stood, in relation to property of the plaintiff, in a trustee-like position.

52.In my view, this basis of distinction also holds good in respect of the earlier authorities, when one considers the nature of the claim that was being made in the particular case. Thus, in Beckford v Wade, while the passage in the judgment of Sir William Grant, M R often cited as support for the proposition that limitation periods do apply to constructive trusts appears at page 96 of the report, the basis of the claim in respect of which this passage appears is set out on the previous page, where Sir William Grant said this:-

"The other Exception, within which the case is said to fall, is that relating to trustees. On that head the respondent thus states her case; and for the purpose of trying, whether the Statute of Limitation applies to it we must take the case to be, as she states it. She says, that the conveyances, under which the Appellants claim, were the result of a fraudulent combination between the several parties to them, and not made in the fair and necessary execution of the testator's Will; that consequently the parties, taking under those conveyances, and all, who claim by virtue of them, or by title deduced from them, are in the contemplation of a Court of Equity to be considered as trustees for those, who are injured by the fraud; and who would be owners of the estate, if the fraud had not been committed."

53.It seems to me that this makes it clear that the case there under consideration was one in which the claim was for liability on the basis of a constructive trust of the second type, it being sought to render the appellants in that case liable for their involvement in a fraud.

54.In Soar v Ashwell, the liability of the defendant solicitor, Ashwell, was based on the fact that by being entrusted with a fund by trustees, he had himself, though a stranger to the trust, assumed to act as a trustee. He was treated as a trustee of the funds in his hands. There was no complaint as to his having received the funds which he did, but rather a complaint that having received them on trust, he failed to account for them to his beneficiaries.

55.In Taylor v Davies, a creditor who had been appointed as an inspector in an insolvency took an assignment from the assignee in bankruptcy of property of which he was the mortgagee at an undervalue. The claim made by other creditors was to have the assignment set aside. It therefore involved an attempt to challenge the validity of (or impugn) the transaction by which the defendant had acquired the property. It was in this case that the distinction appears first to have been drawn between a trust which arose prior to the transaction or breach complained of, and one which arose as a result of the transaction itself. As we have seen, in the former situation, there is a real trust, whereas in the latter, the case is one in which the courts apply the language of constructive trust to justify the grant of equitable relief against the wrongdoer. At p.651 of the judgment, Viscount Cave observed that the inability to claim the benefit of periods of limitation:-

"... applied, not only to trustees named as such, but to a person who, though not so named, had assumed the position of a trustee for others or had taken possession or control of property on their behalf ... These persons, though not originally trustees, had taken upon themselves the custody and administration of property on behalf of others ... It followed that their possession also was treated as the possession of the persons for whom they acted, and they, like express trustees, were disabled from taking advantage of the time bar. But the position in this respect of a constructive trustee in the usual sense of the words - that is to say, of a person who, though he had taken possession in his own right, was iable to be declared a trustee in a Court of equity - was widely different, and it had long been settled that time ran in his favour from the moment of his so taking possession."

56.The Privy Council held that the defendant was not a true trustee, but was a constructive trustee of the second type identified by Millett L J in the Paragon Finance case. It is, I think, important to note that the complaint in the action was as to the original taking possession of the property, so that the claimants were not, it seems, saying that the property in the possession of the defendant was in equity their property, but that the defendant should either be ordered to give it back to them (which assumes that it had become his), since the transaction by which he obtained it should be set aside, or (perhaps) that he should be treated as if he were a trustee of it, and ordered to compensate them on that basis. If the claim had been that, because of the circumstances in which the defendant acquired the property, he held it on an actual trust for the claimants, there would have been no need for a claim to set aside the transaction, but instead an acceptance of it, and an acceptance of the defendant's title to the property.

57.Finally, there is the case of Clarkson v Davis, on which Mr Sussex placed considerable reliance, since it appears on the face of it to have been a case involving a bribe, in which it was held that the recipients of the bribe were constructive trustees of the second type (i.e. those to whom periods of limitation apply). Mr Reyes, I think, felt some difficulty with this decision, and with Lord Millett's evident approval of it in Dubai Aluminium v Salaam, and suggested that it could not, in fact, stand in the light of the decision in the Reid case. However, I think that when the facts of that case are examined, it can be seen that the claim against the defendants there was that they were constructive trustees of the second type, but that this does not, having regard to the nature of the claim there made, mean that a bribe cannot give rise to a constructive trust of the first type.

58.In Clarkson v Davis (also a decision of the Privy Council), one company (the Dominion Company) wished to acquire the assets of another (the Provincial Association). It was agreed that a valuation should be made of the assets of the Provincial Association, and that the Dominion Company should acquire them by issuing to the shareholders of the Provincial Association shares in the Dominion Company to that value. A separate agreement was made with the directors of the Provincial Association that they should be paid a sum of $30,000, a payment that was not disclosed to the Provincial Association, or the shareholders of either the Dominion Company or the Provincial Association. Later, the payment came to light, and an action was brought by the Dominion Company (acting through its liquidator), and a person suing on his own behalf and on behalf of all other shareholders in the Provincial Association, and of all shareholders in that company prior to the date of the agreement for the transfer of the assets, who had transferred their shares in the Provincial Association pursuant to the agreement. The payment to the directors of the Provincial Association was described as a bribe, and this description would appear to be justified.

59.The Privy Council held that any claim that the Provincial Association might have had was never pursued, and no such claim was transferred to the Dominion Company so as to entitle the Dominion Company to bring such a claim in right of the Provincial Association. The claim on behalf of the shareholders failed as the Privy Council considered that the Provincial Association was a necessary party to such a claim, but it was not a party to the action. The claim on behalf of the former shareholders failed as the Privy Council held that the directors were not their agents, but the agents of the Provincial Association - thus, any duties owed by the directors were owed to the Provincial Association (which was not a party), and not to the shareholders. In the course of his judgment, the Lord Justice Clerk said (at p.110):-

"But, further, in the opinion of this Board, any claim by the Dominion Company, or the liquidator thereof, to recover the said $30,000, if competent at all, could only be based on constructive trust: Taylor v Davies, and is therefore now barred by the Limitations Act of Ontario."

60.This would seem, however, to be a reference to a claim of constructive trust made by the Dominion Company in its own right (no claim in right of the Provincial Association having been transferred to it), and such a claim, on the part of the Dominion Company, could only be of the second type, since there was no basis on which the Dominion Company (the payer of the bribe) could claim to be entitled to a real trust over it. Its complaint against the directors of the Provincial Association (not its own directors) would be for complicity in a fraud. The only party which could have suggested that it was entitled to the equitable title to the bribe would have been the Provincial Association, for whom the directors were agents and fiduciaries, but the Provincial Association was not a party. Had the Provincial Association been a party, which it was not, no doubt the Privy Council would have considered whether any claim by it to be entitled to the bribe on the basis of constructive trust would have been barred by limitation. As it was not a party, the Privy Council did not have to do so, and cannot be taken as having done so. I therefore do not regard this case as establishing a principle that a claim to recover a bribe or property representing it as trust property belonging in equity to the person to whom the recipient of the bribe owed fiduciary duties is a claim based on a constructive trust of the second type, to which a period of limitation applies.

61.It seems to me, therefore, that the distinction to be drawn between the two types of constructive trusts considered in the Paragon Finance case is whether or not there is a real trust arising, and whether the claim made relates to that trust. As I have indicated, this distinction seems to sit well with the reason for denying a true trustee the benefit of periods of limitation where the claim is by his beneficiary for the trust property, or in respect of fraudulent breaches of a trust in relation to such trust property.

Conclusions

62.It will, I think, be apparent from the foregoing analysis that, in my view, the constructive trusts that were found in the Reid case to arise in respect of bribes received by a fiduciary in the position of Reid, and in this case, Hon, are real trusts and that in consequence, section 20(1) of the Limitation Ordinance applies to such trusts so that the claims of the Government are not barred by limitation. For the reasons which I have endeavoured to explain, the Government was, on receipt of the bribes by Hon, immediately the beneficiary of a constructive trust in respect of such bribes, under which the legal title to the bribes was in Hon, but the equitable title in the Government. Hon was therefore a trustee in the true sense of the word. His ownership of the bribes was never, from the moment of receipt, in any right of his own, but was always in right of his beneficiary, the Government. He cannot, therefore, set up any limitation defence to defeat the Government's equitable title to the trust property. In bringing this claim, the Government is seeking to recover its own property, property which has, from the moment it found its way into Hon's hands, belonged to the Government in equity. It is not seeking equitable compensation for Hon's wrongdoing in accepting the bribes. It makes a claim that is quite different in character from the equitable counterpart of a common law claim for fraud - any claim of that nature, which would no doubt at one time have existed, is now statute-barred. Rather, the Government acknowledges that the bribes have been received, makes no complaint about that, but seeks instead to recover them (or their fruits) in specie. Hon's liability to the Government in respect of the bribes does not arise because he is treated as if he were a trustee, but because he was actually a trustee for the Government. The fact that equity treats him as if he received the bribes on behalf of the Government and consequently imposes a constructive trust over the bribes does not, in my view, make the trust so imposed any the less a real one.

63.It seems to me that this result also arises by the application of the test laid down by Taylor v Davies. Mr Reyes submitted that applying that test, it was necessary to consider what the transaction impeached was. He submitted that the Government, by bringing this claim, did not impeach or impugn the receipt of the bribes by Hon, but impeached the failure to hand them over, or the application of them for Hon's own purposes. I had at one stage understood Mr Sussex to submit that this was incorrect, but in the course of his submissions, Mr Sussex, too, agreed that the transaction impeached was not the receipt by Hon of the bribes, but the failure to hand them over. For the reasons explained above, I think this is correct, since the Government's claim involves an acceptance that the bribes have been received, rather than a complaint about that fact. Its complaint is (as Mr Reyes said) that having been received in circumstances in which they became its property under a constructive trust, the bribes were not handed over to it, and were instead applied by Hon for his own purposes.

64.Mr Sussex submitted, however, that the approach advocated by Mr Reyes was narrow and artificial, since the obligation to hand over arose at the same time as the trust, and that a breach in the form of a failure to hand over arose simultaneously with the trust. He submitted that this brought the case within the second category described in Taylor v Davies and the Paragon Finance case. I do not agree. It seems to me that the arising of the constructive trust in such a case is necessarily anterior to the breach of it. It seems to me that what is complained of here is the breach of the trust over the bribes and that this trust could only have existed from the moment of their receipt. This trust could not have arisen at any earlier time - before they were paid to Hon, the bribe monies were the property (legal and equitable) of whoever paid them to him. It was only on receipt by Hon, in breach of his fiduciary duties, that they became the subject of a constructive trust in favour of the Government. It is only thereafter that Hon could be in breach of that trust. His behaviour up in receiving the money was, no doubt, a breach of fiduciary duty, but it was not, I think, a breach of trust.

65.Thus, it seems to me that the Government is not, in this case, seeking a remedy by way of constructive trust that is the equitable correspondent to damages for fraud at common law. If it were, such a claim would lie in equity's concurrent jurisdiction and the limitation periods under section 4(1)(a) or 4(2) of the Ordinance would apply by analogy pursuant to section 4(7). Rather, it is seeking to enforce a claim in respect of the trust imposed over the bribes, and in seeking to enforce its equitable ownership of such bribes, it is relying on a claim which arises in equity's exclusive jurisdiction, and which is not subject to such limitation periods. The bribes, on receipt, belonged in equity to the Government, although they were held by Hon. I find it difficult to see any reason why he, unlike any other trustee, should be in a position to deny the title of his cestui que trust by reason of lapse of time.

66.Mr Sussex submitted that, even if I were to conclude, as I have, that the constructive trust arising in this case is of the first type described by Millett L J in the Paragon Finance case, the claims in paragraph 29(3) of the Amended Statement of Claim and paragraph (6) of the prayer should nonetheless be struck out on the basis that they relate to purely personal claims of a nature which should be regarded as being barred by analogy. Mr Reyes, on the other hand, submitted that these stood or fell with the other claims. As to this, I think that Mr Reyes is right. Even though such claims might be personal in nature, it seems to me at least arguable that they arise out of the constructive trusts over the bribes, and do not represent an attempt by the Government to obtain a personal remedy in respect of Hon's wrongdoing in receiving the bribes in the first place, which would be subject to limitation by analogy.

67.I therefore conclude that the Government's claims in this action are not statute-barred, whether by operation of section 4(1)(a) or 4(2) of the Ordinance, or by analogy pursuant to section 4(7). It follows that the answer to the question raised by the preliminary issue is "No", and that the Government's claim should not be struck out. It does not, of course, follow that it is necessarily a claim which will succeed, since there are likely to be arguments as to whether the claims are barred by delay or laches, which are defences which remain available notwithstanding that the claims are not barred by limitation, and there may well also be factual disputes in relation to a number of issues.

Costs

68.So far as costs are concerned, I propose to make an order nisi that the Plaintiff shall have its costs of and occasioned by the Summons dated 11th June 2002, such costs to include the costs of the hearing before Master Mary Yuen on 11th July 2002, and of the hearing before me.

69.Finally, I would like to thank Counsel for their very helpful submission.

Representation:

Mr A T Reyes, SC leading Ms Lisa Wong, instructed by Department of Justice, for the Plaintiff

Mr Charles Sussex, SC leading Mr Douglas Lam, instructed by Andrew Lam & Co., for the Defendant