Resting upon the equitable maxim ‘he who comes to equity must come with clean hands’, the clandestine collusion between two brothers falls foul, when the agreement dissolves in favour of the abetting sibling.
After lapsing into bankruptcy, a business owner tries to circumvent the dissolution process in an attempt to save his home from repossession.
In order to achieve this, he asks that his brother purchase the property from the bankruptcy trustees, before holding the house on trust until such time that the now appellant is able to regain legal title.
While agreeing to this proposition, the respondent approaches the trustee, before securing the property through cash downpayment and mortgage redemption, prior to allowing the appellant to regain occupancy.
A second agreement followed that enabled the appellant to make contributions to the mortgage repayments, as well as investing money into the maintenance of the home; again under the pretence that the respondent held the property on trust and nothing more.
Fifteen years after the repurchase, the respondent sold the property for significant profit, placing roughly half the proceeds in trust with his sister, who then refused to pay the money back, on grounds that the respondent had breached his agreement and duty as a trustee to his brother.
At this point, the appellant issued proceedings for its recovery, before the sister part-paid the appellant and placed the remainder in the hands of the court.
This resulted in the appellant issuing proceedings for the balance held, while the respondent counter claimed to defend his position .
Relying upon the argument of numerous trusts (express, constructive, common intention and resulting) with which to recover the sale proceeds, it was argued that by selling the home, the respondent had unlawfully profited from his position as a trustee; and that as such, the money was now owed to the appellant and enforceable through equity.
This claim was struck out in the first instance, on grounds that equity will not allow a trust created through illegality to stand, and therefore no remedy in law could exist when the appellant had requested that the respondent purchase the home in order to avoid duties brought about under section 333(2) of the Insolvency Act 1986.
When heard in the Court of Appeal, the facts were revisited with little to no effect for the appellant, despite continued multiple arguments from his representative.
While the appellant accepted that the original agreement served two aims (retention of the home and avoidance of creditor payments), the Court would not ignore the reality that the same person seeking equitable remedy, was behind the illegal concept and undertaking of, a property purchase designed to undermine and breach the legal duty owed when winding down a business.
It was then, for that very simple and yet unmistakeable reason, that the judge upheld the previous findings and flatly dismissed the appeal, while reminding the parties that:
“[E]quitable proprietary rights are to be treated in essentially the same way as legal proprietary rights and will be enforced provided that the claimant does not plead or lead evidence of the illegality.”