TRUSTS, TRUSTEESHIPS, AND THE LAW OF RESTITUTION

• Published date: 01 December 1996
• Author: YEO TIONG MIN
• Citation: (1996) 8 SAcLJ 499
• Date: 01 December 1996

Yogambikai Nagarajah v Indian Overseas Bank 1

AR V Valliyammai Achi v Indian Overseas Bank 2

INTRODUCTION

Where property has been transferred in breach of trust, the beneficiary has a number of legal recourses against the party in whose hands the property or its equivalent has been found. If the property has not changed form, there is a straightforward competition of title — a question of priorities. Where the property is the traceable product of the original trust property, the beneficiary can assert title to the property, and reclaim it as his property in equity, and the question of priorities arises. This is often but inaccurately called a tracing claim. Tracing is merely the process of identification of property in the hands of the defendant as being so causally related to the original property of the beneficiary as to justify equitable remedies.3 This remedy is often a claim for the return of the property, although other remedies like a charge or subrogation may be appropriate in some circumstances.4 The recipient of the property may also be liable for “knowing receipt”, an equitable in personam liability. There may also be cases where the recipient had also knowingly involved himself in the breach of trust or fiduciary duty, in which case there may be liability for dishonest participation in a breach of trust. In certain cases, a common law restitutionary action for money had and received could be available. More rarely, there may have been a breach of a tortious duty of care. These causes of action are well-established in the law. Less clearly established is applicability of the strict in personam liability based on the overpaid beneficiary principle in Re Diplock,5 and from a macrocosmic perspective, the role of the law of restitution in this area of the law.

The essential difference is that between the proprietary and the personal remedies. The former remedies have distinctive advantages over the latter: the capability of following property through changes of form and through transferees; the entitlement to claim profits; the ability to claim compound

interest from date of receipt; the absence of limitation period; and priority in insolvency. The Singapore Court of Appeal sought to clarify this fundamental distinction recently in the case of Yogambikai Nagarajah v Indian Overseas Bank. The relevant facts can be stated simply. V and her daughter, R, were beneficiaries of her late husband’s estate, of which she and A were co-administrators. V and A received a large sum of money in their capacity as administrators. For personal reasons, V did not want the money to be kept in her own name, and so A deposited it with the Indian Overseas Bank (IOB), initially in the names of A and R, and then transferred it to S’s account. A was at that time engaged to be married to S, but by the time of trial, they were divorced and A was married to V. IOB received and acted on the instructions purportedly from S to transfer the money in the account to two accounts in the name of V. S sued IOB for the return of the money, on the basis of an alleged forgery. V sued IOB for the money in her account, which the bank had refused to pay out because of the forgery suit. In the High Court, it was found in S’s suit that there was no forgery. S had joined herself as a defendant to V’s action, which is reported as AR V Valliyammai Achi v Indian Overseas Bank & Anor (Anbudurai Arangannal, third party).6

In the latter suit, Goh Joon Seng J found that there was insufficient evidence of intention to create a marriage settlement, and even if there was, it was void for want of writing under section 6A(c) of the Civil Law Act.7 The learned judge also found that there was no forgery, and in any event, the gift, if it were really so, was in breach of trust. The court therefore ordered IOB to repay V the money in her account, with costs against IOB and S, but S was to indemnify IOB. The Court of Appeal, which heard appeals from S from both actions, rested its decision on the basis that there was no gift and no forgery, and that the irresistible inference from the facts was that S held the money upon an express trust for V and R. That resolved the case satisfactorily, but the Court of Appeal also made several observations which merit attention.

PERSONAL AND PROPRIETARY REMEDIES

In the High Court judgment, the attention was focused on the alternative scenario that the money had been transferred by A to S in breach of trust. In that context, the High Court made a statement that can be misleading:

Thus an innocent volunteer’s liability to return trust property or its proceeds remains so long as he retains possession. This is so even if he had no notice of the trust at the time of the receipt but subsequently acquires such notice. (Emphasis added.)

This statement appears to conflate the personal remedy with the proprietary remedy. The Court of Appeal pointed out that the statement was obiter, and could not have been intended as such by the learned High Court judge since it was inconsistent with the passages cited from a leading trust textbook in the same judgment. The Court of Appeal confined the second sentence to the “persons holding trust properties as constructive trustees”.8 Thus, the passage must not be read literally, but must be read subject to an implied transition not only from one category of recipient (innocent volunteer) to another (knowing recipient), but also from one type of remedy (proprietary) to another (personal). The Court of Appeal emphasised the fundamental distinction between the proprietary and the personal remedy. Although it did not explain why it was fundamental, it is obviously so for the reasons given earlier. It is to this distinction, and the content of liability in each category, that the following discussion turns.

THE PROPRIETARY REMEDY — EQUITABLE TRACING

The Court of Appeal stated that, on the assumption that S had received a gift in breach of trust as an innocent volunteer, she “would potentially be liable for money had and received, or on the basis of an equitable tracing claim or under her liability as a knowing recipient.” The Court emphasised that the state of knowledge of the recipient is irrelevant to the proprietary claim.9 The court also noted that if she had given value in good faith in exchange, it is also unquestionable that she would be entitled to keep the money.10 The law in these respects is unchallengeable. What is more interesting is the dictum that the change of position defence was legally (though not factually) available to her.11

The traditional view of tracing is that the beneficiary is merely following his own property from one party to another, and in one form to another. The identified property in the hands of the defendant simply belongs to the beneficiary in equity. The proprietary interest is institutional, belonging to the law of property. Whether it is called a constructive trust or not is irrelevant. The fact is that the law recognises a split in the legal and equitable title, the innocent volunteer holds only the legal interest. On this analysis, the relevance of the change of position defence is not directly apparent. Indeed, on the face of the judgment of the House of Lords in the Westdeutsche Landesbank Gironzentrale v Islington London Borough Council,12 where the plaintiff is claiming an interest in an institutional trust, the defence is prima facie irrelevant.13 Of course, equity is free to

take into consideration all circumstances of the case,14 including the change of circumstances, but that is not necessarily the same defence created by the House of Lords in Lipkin Gorman v Karpnale Ltd15 and adopted by the Singapore Court of Appeal in Seagate Technology Ltd v Goh Han Kim,16 that is based on the balance of injustice in a restitutionary context.

On the other hand, Millett LJ has recently sought to explain that tracing is merely the process of identification,17 and the remedy after tracing is a matter of controlled discretion for equity. Explaining the power of the court to order the defendant to return the identified property to the beneficiary, the learned judge said: “The equity arises from the conduct of the parties on well-settled principles and in defined circumstances which make it unconscionable for the defendant to deny the proprietary interest claimed by the plaintiff.”18 The interest of the plaintiff is thus a restitutionary proprietary interest arising as a remedy after the tracing process has identified the property corresponding to the plaintiff’s original property. The tracing process is necessary, in Millet LJ’s view, to show that the defendant has been unjustly enriched at the plaintiff’s expense.19 The policy justification for the proprietary remedy lies in the “proprietary base” — the subtraction of property from the plaintiff in circumstances where the court will give very strong protection. As such, it follows that a defendant can not only raise a priority dispute (ie, whether he was a bona fide purchaser for value without notice), but also the restitutionary defence of innocent change of position.20

In the context of the present case, it was clearly unnecessary to elucidate the juridical basis of equitable tracing. But the acceptance of the restitutionary change of...