TYPES OF BANKER-CUSTOMER

RELATIONSHIP

CHEW JEE SAN LEB100012

Banks have been held liable as constructive trustees for having given knowing assistance to the

trustees in misusing trust funds. The law in this area has developed through case law and has

become a strong principle in banking law.

Elaborate the principles of constructive trustees which involve banks and state your opinion on the

application of these principles.

QUESTION

In the constructive trustee and beneficiary relationship, the bank is liable as a constructive trustee if it has express notice about a person’s breach of trust and the bank is involved in the said breach.

The trust exists without any formality as long as there is a fiduciary relationship between the constructive trustee and the beneficiary’s property.

Although no formalities are required to create a constructive trust, there must exist specific trust property.

INTRODUCTION

Per Lord Selborne :

“Strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal

power, transactions perhaps of which a Court of Equity may disapprove, unless (i) those agents receive and become chargeable

with some part of the trust property, or (ii) unless they assist with knowledge in a dishonest and fraudulent design on the part of the

trustees..”

The bench of Barnes v Addy formulated 2 types of liability as a constructive trustee :

(a) Receiving/Operating trust property with knowledge (Knowing receipt)

(b) Knowingly assisting a dishonest trustee (Knowing/Dishonest assistance)

LIABILITY OF CONSTRUCTIVE TRUSTEE

KNOWING RECEIPT VS

KNOWING ASSISTANCE

Knowing receipt Knowing assistance

Mental State

A lack of probity must be present.

Dishonesty, morally reprehensible behaviour or lack of probity.

Liability Only liable to account for the sum received or handled for breach of

trust.

Liability extends to all losses to the trust funds

due to the trustee’s dishonesty, irrespective whether the trust funds

fall into the bank’s hands or not

Elements of knowing assistance :

(a) There must have been a trust

(b) There must have been a misfeasance or breach of trust

(c) There must have been assistance rendered by the third party in the breach of trust

(d) The accessory must have been dishonest

Rowlandson v National Westminister Bank The court held that there was fiduciary relationship between

Mrs. M and the bank when the account 608 was opened by the bank. It was clearly a trust account, and with the knowledge of the nature of the account and its history, the bank should have questioned or prevented the withdrawal of A.

Thus, the bank was liable to the plaintiffs.

KNOWING ASSISTANCE(DISHONEST ASSISTANCE)

• Depart from the requirement that the BOT must be a dishonest and fraudulent BOT by the trustee for the accessory to be held liable for knowing assistance.

• Reasonable banker test was formulated

“ the touch stone was whether the third party had knowledge of circumstances which would indicate to ‘an honest, reasonable man’ that the breach in question was being committed or would put him on inquiry.

(A) SELANGOR UNITED RUBBBER ESTATES LTD V CRADOCK

(B) KARAK RUBBER CO LTD V BURDEN

Decision of Selangor was later then rejected by the court of this case.

“If and so far as Ungoed-Thomas J intended, as I think he did, to say that it is not necessary that the breach of trust in respect of which it is sought to make the defendant liable as a constructive trustee should be fraudulent or dishonest, I respectfully cannot accept that view.”

Goff LJ was of the opinion that to depart from this rule would introduce an undesirable degree of uncertainty over what degree of unethical conduct would suffice if dishonesty were not to be the criterion.

BELMONT FINANCE CORPORATION LTD V WILLIAMS

Level of knowledge has been controversial and what is the level of knowledge required to satisfy the claim?

1. Actual knowledge

2. Deliberate ignorance/willifully shutting eyes to the obvious

3. Wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make

4. Knowledge of circumstances which would indicate that there has been a breach to an honest and reasonable person

5. Knowledge of circumstances which would put an honest and reasonable person on inquiry

BADEN, DELVAUX & LECUIT V SOCIETE GENERAL

• The Court of Appeal held in the favour of defendant on the ground that accessory liability was dependent on the breach of trust being dishonest, whereas the admitted BOT was only the bad result of management and not dishonesty.

• However, Privy Council took the opposite view of the law, where it was held that liability under the accessory category of constructive trusteeship required a BOT or other fiduciary duty, but it did not have to be a dishonest one.

• Lord Nicholls preferred to regard the dishonesty of the accessory, not of the trustee, as the touchstone of liability.

ROYAL BRUNEI AIRLINES V

TAN KOK MING

AND WHY?A dishonest solicitor persuades a trustee to apply trust property in a way the trustee honestly believes is permissible but which the solicitor knows full well is a clear breach of trust. The solicitor deliberately conceals this from the trustee. In consequence, the beneficiaries suffer a substantial loss. It cannot be right that in such a case the accessory liability principle would be inapplicable because of the innocence of the trustee.

A trustee is proposing to make a payment out of the trust fund to a particular person. He honestly believes he is authorized to do so by the terms of the trust deed. He asks a solicitor to carry through the transaction. The solicitor well knows that the proposed payment would be a plain breach of trust. He also well knows that the trustee mistakenly believes otherwise. Dishonestly he leaves the trustee under his misapprehension and prepares the necessary documentation. Again, if the accessory principle is not to be artificially constricted, it ought to be applicable in such a case.

• Criticised the Badens Delvaux classification as “best forgotten”.

LORD NICHOLLS

Twinsectra – the assistant must realize that the conduct would be dishonest by ordinary standards of honest and reasonable people. This is described as a “combined” test of subjective and objective elements.

First, there has to be some conduct that the ordinary reasonable person would regard as dishonest (objective element). Second, the perpetrator must be aware that what they have done is against what the ordinary reasonable person would regard as dishonest. That is, even if the perpetrator does not subjectively believe that what they have done is dishonest, the subjective element is satisfied if they know that other people believe that what they have done is dishonest.

“DISHONESTY”

THE END