Constructive Trusts Flashcards
(23 cards)
What is a Constructive Trust?
A constructive trust is a trust imposed by a court to prevent a person from retaining property to which they are not beneficially entitled
arises by operation of law and exists irrespective of the parties’ intention. It is imposed by equity to prevent unjust enrichment and ensure fairness
Example:
If a trustee uses trust funds to buy a personal asset, a constructive trust may arise over that asset in favour of the beneficiaries.
- What is the Difference Between Institutional and Remedial Constructive Trusts?
Institutional Constructive Trusts arise automatically when a fiduciary breach occurs—the court merely recognizes an existing trust.
Remedial Constructive Trusts are imposed at the court’s discretion when fairness requires it. Irish courts are more open to it than English courts are.
FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45. In this case, the Supreme Court unanimously held that constructive trusts in English law are institutional, not remedial.
Lord Neuberger
“the general rule that proprietary interests must be determined by rules of law rather than judicial discretion. This would create uncertainty”
What did N.A.D v T.D establish about remedial constructive trusts in Ireland?
(1985) court ruled that remedial constructive trusts depend on the conduct of the person they are imposed on, preventing them from acting in breach of good faith.
Criticism: narrow judgement, very similar to institutional trusts
What principle did Murray v Murray reinforce about remedial constructive trusts?
(1996) High Court expressly stated that courts can impose a constructive trust where justice and fairness require, even in the absence of formal intention or wrongdoing.
approach broader than in England
How did H.K.N. Invest Oy v Incotrade Pvt Ltd apply remedial constructive trusts? (Irish)
(1992) The court imposed a remedial constructive trust to ensure that money held by defendants for contracts before and after incorporation was held for the company’s benefit.
Criticism arose because money from contracts before incorporation was held on trust, raising questions about whether a trust could exist before the company formally existed.
How did Re Custom House Capital Ltd refine the Irish approach?
(2012) court held that to impose a constructive trust, there must be fraudulent conduct by or on behalf of the company, restoring a more structured approach.
Irish courts allow remedial constructive trusts, but their application varies, sometimes favoring broad fairness principles (Murray v Murray) and sometimes requiring misconduct (Re Custom House Capital Ltd)
Main Criticisms of Remedial Constructive Trusts?
They introduce uncertainty because they are imposed at the court’s discretion.
They disrupt insolvency law, potentially favoring beneficiaries over creditors.
Lonrho (1992) “neither room nor need for the remedial Ct”
Why Did Re Polly Peck International Plc Reject Remedial Constructive Trusts? (UK)
(1998) The court held that equity should not override insolvency legislation, meaning proprietary claims could not unfairly disrupt creditors’ rights
How Do Constructive Trusts Differ from Liability to Account?
Constructive trusts are proprietary remedies, meaning the beneficiary has an ownership interest in the misappropriated property.
Liability to account is a personal remedy, meaning the wrongdoer is required to compensate the beneficiary financially, but the property does not transfer.
What is the Difference Between Proprietary and Personal Remedies?
Proprietary remedies give the beneficiary ownership rights over assets, allowing them to trace misappropriated property.
Personal remedies impose financial liability but do not grant ownership rights.
Why is a Proprietary Remedy Advantageous in a Constructive Trust?
1) CT wrongdoer goes bankrupt or insolvent, original owner gets property back first, but doesnt occur with LTA.
2) If fiduciary grew value of property, principal can claim whole asset with CT but with LTA get exactly what was lost or wrongly gained.
3) opens up possibility of tracing remedy, recover assets from third party without having to prove fault.
What is the ‘No Conflict’ Principle in Fiduciary Relationships?
Greene v Coady (2014) owe duty of good faith, fiduciary must never place themselves in a situation where their duty to the trust and their personal interest conflict.
What is the ‘No Profit’ Principle in Fiduciary Relationships?
Gabbet v Lawder (1883) fiduciary must not retain any advantage gained through their position. They cannot personally benefit from inside information or opportunities that arise in their fiduciary role.
What is ‘Fully Informed Consent’ in Fiduciary Relationships?
needed to authorise fiduciary actions..
Boardman v Phipps (1967) “nothing less than FIC is acceptable” - Lord Hodson
A fiduciary can act in situations of potential conflict of interest if the principal gives fully informed consent, meaning all material facts are disclosed. Green v Coady (2014)
What Did Keech v Sandford Establish?
Keech v Sandford (1726) established that a fiduciary must not profit from their position, even if the profit arises innocently or unavoidably. Strictly applied in UK, less so in Ireland.
Competition with Trust Business?
Another application of the no conflict / no profit rules
Moore v McGlynn (1894) Testator left estate to brother and son to be held for wife and nine children. Brother took over and set up own business and moved post office to business… Conflict of duty and interest. Removed as trustee
How Does Liability for Secret Commissions and Bribes Work?
If a fiduciary accepts bribes or secret commissions, they must hold the money/property on trust for the principal. This rule prevents unjust enrichment
AG for Hong Kong v Reid
(1994) took bribes and bought land and property..
The court ruled that bribes received by a fiduciary are held on constructive trust for the principal, ensuring the fiduciary does not benefit from illegal gains.
Issues arise if there are other unsecured creditors and isnt shared with them
What Did FHR European Ventures LLP Decide About Secret Commissions?
overruled Sinclair Investments v Versailles Trade Finance Ltd (2011) which stated secret commissions and bribes were personal remedy.
FHR: The Supreme Court held that secret commissions received by a fiduciary belong to the principal, reinforcing the proprietary nature of the remedy
How Do Company Directors Fit Into Fiduciary Principles?
Company directors owe a fiduciary duty to the company, meaning they cannot put personal interests ahead of corporate duties or exploit business opportunities.
Regal (Hastings) Ltd v Gulliver (1942) directors paid out of own money as investment was needed. Had to give up profit
How Did Regal (Hastings) Ltd v Gulliver Clarify Fiduciary Liability?
(1942) The court ruled that a fiduciary must account for any profits made due to their position, regardless of their intentions.
“however honest and well intentioned”
Gulliver Principle Exhibited
Boardman v Phipps (1967) two people in trust improved company in trust and made profit but even with good faith, profit goes to trust
Crown Prosecution Service v Aquila Advisory Ltd (2021) “deterrent effect of the fiduciary duty would be undermined” if CT didnt apply to profits.
Why Are Fully Secret Trusts Often Considered Constructive Trusts?
Fully secret trusts avoid formality requirements, and courts often classify them as constructive trusts to prevent trustees from abusing their position
