Published date01 December 2016
Date01 December 2016
AuthorLusina HO BA, BCL (Oxon); Faculty of Law, The University of Hong Kong.

The equitable accounting rules are notorious for being ancient and technical, and hence hinder the development of the rules governing compensating claims against trustees. The present article seeks to overcome these difficulties by conducting a historical survey of the traditional accounting rules in order to identify their governing principle. It argues that equity acts on a principle different from common law, in that the purpose of accounting is to restore the beneficiaries or the trust fund, as from the time when the trustee departed from his duty, to the position they would have been in had the trustee performed his duty. This way, equity achieves exact justice so that the beneficiaries will not be kept out of their rights from the time when performance was due to the time when it is actually obtained. To do so, equity adopts the legal fiction of treating the unauthorised disbursement as having never been made and the property as having already been obtained. The article argues that this fundamental norm should also be applicable to equitable compensation, and proposes analysing this remedy on the basis of the duties breached, rather than the type of breach as in traditional accounting rules. It then uses this new framework to propose detailed remedial rules for various breaches of duty by the trustee.

I. Introduction

1 Although no one doubts the availability of account as a redress for a breach of trust, many find it hard to fathom the traditional accounting rules. Couched in archaic terminology, they include, aside from account of profits: (a) common account of all sums actually received (whereby improper discharges may be falsified); and (b) surcharging of all sums which should, without wilful default, have been received but were not. It does not help that there is a dearth of judicial analysis in the earlier authorities, probably because accounts are taken by masters who do not render publicly accessible judgments.

2 Although some useful accounts of the accounting procedure have been provided in recent decisions such as Meehan v Glazier Holdings Pty Ltd,1Agricultural Land Management Ltd v Jackson (No 2)2 (“Agricultural Land Management”) and Chng Weng Wah v Goh Bak Heng,3 the gap of knowledge continues to plague the development of personal remedies for breach of trust. The highest courts in Anglo-common law jurisdictions are quickly switching over to award equitable compensation – a relatively nascent remedy – even where traditional accounting was available.4 In two controversial decisions, the adoption of this new label also coincided with treating the restoration of misapplied assets as compensatory, much to the dismay of their critics.5 The critics argue that such liability involves substitutive performance analogous to the recovery of debt, as opposed to reparative compensation as in surcharging.6 The debate hinges on the correct understanding of the nature and governing principle of the accounting rules as they gave root and foliage to the award of equitable compensation for breach of trust.

3 For this purpose, important insights can be obtained from a historical enquiry into the accounting rules, which shows that equity acts on a principle different from common law contracts or torts, namely that what ought to have been done is treated as having been done.7 This guiding principle, of putting the trust, as from the time when the trustee departed from his duty, in the legal position it would have

been in had the trustee performed his duty properly, governs both the falsification and surcharging processes. It holds the trustee liable as if he has performed his duty by treating him as having always held the misapplied assets and having obtained or invested in property he was supposed to:8 put simply, the duty dictates the scope of the remedy. This principle encompasses both specific performance of the trustee's duty (falsification) and compensation for loss of expected benefits (surcharging). It focuses only on bringing the trust asset in question within the trust estate and is not concerned with any further harm beyond the particular asset in question or the trust estate, such as consequential losses.9

4 Furthermore, deterrence and prophylactic considerations also play a role in moderating the application of this governing principle. Where measuring the trustee's liability based on deemed performance does not provide an adequate disincentive from breach, such as when the trustee's breach has yielded more profits than if he had performed his duty, the falsification rules are rendered redundant by giving the beneficiary the option to adopt the unauthorised transaction and take its benefit. The trustee's culpability is also relevant in adjusting the level of the interest to be awarded.10 These observations will be illustrated as the article examines the detailed rules pertaining to the common account and surcharging on the basis of wilful default. They provide the apparatus for appraising recent developments in equitable compensation.

II. The historical origin of equitable account

5 Legal historians have traced the birth of the common law action of account to as early as the 13th century, when the sophistication of the English feudal system reached a point where landlords commonly granted manors to bailiffs to look after the land on their behalf.11 The bailiffs were accountable for rents and profits made from the land, but since they are allowed to deduct their general expenses, claims against bailiffs were always unliquidated and could not be brought as an action of debt, which did not lie for unliquidated claims. Account arose to fill

the gap.12 The action was extended to parties who were authorised to possess and control property belonging to another, such as the guardian in socage, common receiver, partner and other agent.

6 But the accounting process at common law was tedious and cumbersome. The plaintiff needed to bring an action to show that the defendant owed an obligation to account. If the court accepted that the defendant should account, the sheriffs would commit the defendant to prison until satisfaction was made. In the meantime, the auditors would hear the account, which consisted of items of charge and discharge. Items of charge consisted of sums received by the defendant for which he was chargeable; items of discharge consisted of expenses incurred by him on the plaintiff's account, which were to be allowed by deducting them from the amount chargeable on the defendant. If the balance struck was in the plaintiff's favour but the defendant did not pay, the plaintiff had to bring a second action, this time in debt, to recover the amount.13 But this is not all. Since the auditors did not have powers to compel discovery, the parties often had to go back to court to resolve factual and legal disputes along the way.

7 It was no wonder that between the 14th and 17th centuries the common law action gradually disappeared into oblivion. Courts of equity did not consider the common law action an adequate remedy and began to accept bills for an account based on a legal obligation.14 Account in equity was similar to the common law process, with technicalities and multiplicity of proceedings removed, however. It also goes without saying that a trustee owes an obligation to account in virtue of his possession and control of funds to which the beneficiaries are entitled.15

8 Briefly, the equitable bill or suit proceeds as follows. If the court is satisfied with the defendant's obligation to render account, it will make a decree for general administration in the common form as of course and refer the matter to the master to take account. Before the master, the defendant is charged with his actual receipts, and if he seeks

to discharge himself by an improper disbursement, the master will disallow (or falsify) the discharge. If an amount actually received was omitted from the credit entry, such as when rents received were not reflected in the account, it will be surcharged.16 The balance of the account will be struck on the basis that the disposed amount is still held by the trustee. The master then produces a report for the court, which issues a decree for payment of the debt by the defendant.17

9 Additionally, if the plaintiff has an equitable interest in the property held by the defendant, such as may arise where defendants act as trustees, personal representatives or mortgagees, he may surcharge funds that might, without the trustee's wilful default, have been received but were not received.18 This account is not granted as of right, but the beneficiary must prove at least one instance of wilful default.19 It must be pleaded in the original suit, unless the court permits it to be included in a supplementary bill. Upon proof of the wilful default at trial, the court may order a “roving commission”, which is a general account of all acts of the trustee's management,20 or just a specific account of the transaction in question. The master's findings on his enquiries are then considered by the court, which decrees a judgment upon the footing of wilful default.

10 Alternatively, in answer to the suit, the trustee may plead in bar that the parties have already in writing stated and adjusted the account and struck the balance, that is, there has already been an account stated. At this point, the beneficiary is at liberty to falsify or surcharge the account stated by showing mistakes and omissions.21 If he “shows an omission, for which credit ought to be, that is a surcharge; or if anything is inserted that is a wrong charge, … that is a falsification”.22

11 In light of the above historical overview, it is worth mentioning that the final decree in the common account for payment of the balance

is indeed directly analogous to an action for debt.23 It has been well established that in general a breach of trust creates a simple (equitable) debt.24 If it were in the nature of an unliquidated...

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