Queensland Mines Ltd v Hudson (1978)

Australian Equity & Trusts

Queensland Mines Ltd v Hudson
‘Three Miners’ by Josef Herman

While the strictness of fiduciary duties within a corporate entity are prime examples of greed overshadowing obligation, this particular case demonstrates the need for contextual adjudication when examining the seemingly selfish actions of those shouldering such burdens.

Having been appointed managing director of a company designed to pursue mining opportunities within the Australasian continents in 1958, the respondent was later sued for breach of duty when obtaining coal and iron ore mining licences from the Tasmanian government by way of his position.

In the first instance, the Equity Division of the Supreme Court of New South Wales found in favour of the appellants, although legal recourse was unavailable due to its commencement beyond the statute of limitations, and so upon appeal to the Privy Council, the council was compelled to review the findings of the supreme court, while dissecting the sizeable case material used.

Here the council found that although the respondent had been serving as a director at the time negotiations had begun, it was also evident that a severe loss of capital over the preceding years had resulted in the respondent placing the company in ‘stasis’ whilst seeking alternative funding to carry out the work should they eventually receive the licences.

In addition to this, it had been made expressly clear by the board of shareholders following the receipt of the licences in 1961, that they no longer had any financial interest in the company, and that the appellant was free to pursue the benefits arising from the mining of the land available. 

However in March 1962, the appellants had also sold their existing interest in the company to a third party for the sum of £2500, and so despite any claim of breach, they had by all accounts financially, contractually and orally divorced themselves from the company and those still remaining, and so when establishing the fiduciary parameters required for such a case, the council turned to Boardman v Phipps, in which Cohen LJ had held that:

“[I]t does not necessarily follow that because an agent acquired information and opportunity while acting in a fiduciary capacity he is accountable to his principals for any profit that comes his way as the result of the use he makes of that information and opportunity.”

And so basing their judgment on the strength of Boardman the council noted that not only had the respondent been transparent in his dealings with the Tasmanian government and the appellants, but that the appellants themselves had unequivocally shown their disinterest both in the value of the company and the actions of the respondent prior to their departure; and so with little hesitation the council dismissed the appeal while holding that:

“[A] limit has to be set to the liability to account of one who is in a special relationship with another whose interests he is bound to protect.”

Barclays Bank Ltd v Quistclose Investments Ltd (1968)

English Equity & Trusts

Barclays Bank Ltd v Quistclose Investments Ltd
Image: ‘Bankers in Action’ by Remedios Varo

Conditional lending, while perhaps overlooked during commercial and personal loans, forms the bedrock of such delicate transactions, and so should the borrower find themselves unable to apply the funds as expected, the nature of the agreement remains lawfully intact in favour of the lender. In this matter, an insolvent debtor’s bank attempted to convert such monies into company assets at the expense of the lender, at which point the reassurance of equity intervened.

In 1964, the shareholders of a relatively successful enterprise took steps to issue dividends of around £210,000, however upon inspection, they discovered that without adequate liquidity, the payment would be impossible. With that in mind, the company owner secured a conditional loan from the respondents, on the express condition that the funds were to be used for dividend issue only.

Once received, the owner wrote to the company bank, giving instruction to open a standalone account for the retention of the funds, while stipulating that:

“We would like to confirm the agreement reached with you this morning that this amount will only be used to meet the dividend due on July 24, 1964.”

Unfortunately, on July 17 1964, the company entered into voluntary liquidation, whereupon the monies held remained unused, as per the instructions given at the point of receipt. Some time later, the respondents demanded repayment of the money loaned, after which the appellant bank argued that it had since become a corporate asset, and was therefore subject to the priorities of all associated creditors involved in the bankruptcy process.

At the point of litigation, the respondents held that the money loaned was subject to a resulting trust, and that the bank by virtue of their position, were now under a fiduciary liability as constructive trustees for the amount loaned. In the first hearing, the judge awarded in favour of the appellants, on grounds that equitable principles did not apply when arms-length dealings fail, whereupon the respondents appealed and the Court held that in matters involving third parties to a failed transaction, recovery under equity was a principle long enjoyed, and routinely evidenced through a number of judgments across hundreds of years.

Presented again to the House of Lords, the House examined the complexity of the transaction, and noted that in Toovey v Milne, Abbot CJ had ruled that failure to apply the money loaned in the way originally intended, allowed for recovery of the funds during insolvency, under the principle that:

“[T]his money was advanced for a special purpose, and that being so clothed with a specific trust, no property in it passed to the assignee of the bankrupt. Then the purpose having failed, there is an implied stipulation that the money shall be repaid.”

Here again, reference was made to the express conditions applied to the loan, as well as the statement made in the letter at the time the money was passed to the appellant bank. It was further noted that while in circumstances where the lender agrees to loan on non-specific terms, there is an implied assumption that such funds become part of the corporate estate (albeit not entirely free of equity), however on this occasion there was ample testimony that the respondents had bargained with the borrowers on clear conditions, therefore the House uniformly and unreservedly held that the Appeal Court decision was to remain untouched and the bank’s appeal dismissed.

Ream v. Frey

US Equity & Trusts

Ream v Frey
Image: ‘The Banker’s Table’ by William M Harnett

The essence of fiduciary duties run counter to the arms-length relationships navigated by contracting parties, and so on this occasion, the relinquishing of trustee duties by a regulated bank proved a reversal of fortune for an innocent employee.

While operating his construction company, the sole owner established a Profit Sharing 401(k) Plan for the benefit of his numerous employees. Almost six years later, the company filed for bankruptcy under Ch. 7 of the Bankruptcy Code, after which one of its employees requested payment for the money he had invested during the life of the plan.

With an estimated $14,000 owed, the employer agreed to settle the matter with a payment of $21,000 to cover court fees incurred while pursuing the debt on grounds of a fiduciary breach. Unfortunately, the employer paid only $18,500, after which he escaped jurisdiction and was never seen again. This left the employee with no option other than to claim the remaining $3,000 from the now appellant bank, who in accordance with the terms of the plan, was an acting trustee under the Employee Retirement Income Security Act of 1974 (ERISA).

At the point of litigation, it became clear that while serving as a trustee, the bank was under duty to inform where possible, all plan beneficiaries of its decision to rescind its appointment, as expressed under art. 15.6 of the plan, which allowed the bank to resign by written notice, after which any outstanding funds would be transferred to a successor trustee; however should one not be available, the administrator of the plan would automatically occupy that position.

Unbeknown to the employee, the bank had been struggling to communicate with the employer for a number of months, and after resigning as trustees with the knowledge that the trustee-administrator relationship had broken down, and that the company was now also in financial trouble, the bank had handed $53,000 of plan funds to the employer without notifying the beneficiaries of their decision. It was at this point that the employer converted the assets for his own personal use, sometime before part-settling with the employee and disappearing.

When heard in the district court, the judge awarded in favour of the claimant employee, whereupon the bank appealed to the court of appeals, who investigated further, the nature of the plan and associated case precedents. Here it was agreed that under § 106 of the Restatement (Second) of Trusts, a trustee was able to resign in accordance with a trust with express permission of the beneficiaries or consent of the court, yet at no point had the bank alerted the employee(s) of either the decision to resign, or the uncertain future of the employer.

It was also noted that under s. 11.4 of the plan, that the bank could be could liable:

“[T]o the extent it is judicially determined that the Trustee/Custodian has failed to exercise the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character with like aims.”

While the bank argued that under such circumstances, legal remedy would be sustainable only as a class action involving all the beneficiaries, the court held that in Varity Corp. v. Howe, individual remedy was viable under ERISA § 502(a)(3), which provides that equitable relief is granted to individuals in order to “redress any act or practice which violates any provision of this title”. The court also noted that § 173 of the Restatement (Second) of Trusts provides that:

“[The Trustee] is under a duty to communicate to the beneficiary material facts affecting the interest of the beneficiary which he knows the beneficiary does not know and which the beneficiary needs to know for his protection in dealing with a third person.”

It was for these salient reasons that the appeal court supported the district court ruling and awarded in favour of the employee for the remaining balance of the plan monies, while adding that had the bank been in a position to hand over money of its own to the employer, things may have taken quite a different turn, especially when considering the vulnerability of the beneficiaries.

Attorney-General for Hong Kong v Reid

English Equity & Trusts

Attorney-General for Hong Kong v Reid
‘Hong Kong Skyline’ by Bri Buckley

The phrase ‘two wrongs do not make a right’ is virtuous to the truth that misdeeds can never amount to anything more than loss, yet when adopted for equitable purposes, the exact opposite can be found.

After rising through the ranks of Hong Kong administration, a solicitor turned Director of Public Prosecutions positioned himself whereby he was able to accept sporadic bribes in exchange for his obstruction of justice through the failed convictions of known criminals. Having taken over HK $12m in payments, the respondent in this matter invested the funds into three properties, two of which were in title to himself and his wife and the third to his solicitor.

The discovery of his fraudulent behaviour and subsequent criminal prosecution, raised the question of whether by his breach of fiduciary duty as a servant of the Crown, the sums paid were now held upon constructive trust for his former employers, and that any monetary gain following the purchase of the homes was composite to that trust.

Common law principles surrounding fiduciary breach and profit from such breaches have been long held to apply in favour of the trust beneficiary, despite the illegality on the part of the fiduciary when in receipt of bribes from third parties. This is because when acting beyond the remit of the trustee, and in a manner that is dishonest, the action itself becomes legitimate, if only for the benefit of those the fiduciary/trustee was appointed to serve.

This translates that although the respondent allowed himself to selfishly receive bribes in exchange for personal profit, equity would ascribe that his deceit was immediately converted into a positive gesture conferring direct gain to his employers, as no fiduciary can be seen to profit from his breach as previously mentioned. This, by virtue of the fact of those principles, altered the manner in which the respondent not only executed his plans, but provided the Crown with privilege to acquire beneficial interest in the properties purchased, along with any increase their value since initial conveyance.

When considered by the Privy Council, it was quickly agreed that any conditions imputed by the respondents upon the entitlement of his employers to seek recovery of the debts through the homes, failed to override the fundamental obligations owed to him while serving and acting under fiduciary capacity, despite any notion of separateness or mixed investment on his part.