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CFA hands down important judgment on the applicability of the 6-year statutory limitation period for “constructive trustees”

In Hui Chun Ping v Hui Kau Mo [2024] HKCFA 32, the Court of Final Appeal (“CFA”) has handed down its judgment which provided important clarification on the applicability of a 6-year limitation period for “constructive trustees”.

The case of Hui Chun Ping concerns an agent (the Defendant) who has made a secret profit in breach of his fiduciary duty owed to the principal (the Plaintiff). The Plaintiff contended, among other things, that the Defendant was a “constructive trustee” who held the unlawful gains on constructive trust on his behalf. The key issue before the CFA was whether such a claim had been time-barred by virtue of section 20 of the Limitation Ordinance (“LO“).

Section 20 of the Limitation Ordinance

Under section 20 of the LO, all actions in respect of trust property are time-barred after a 6-year limitation period unless they fall within the exempted categories of section 20(1), to which no limitation period applies. The exempted categories under section 20(1) are:-

a)  An action by a beneficiary “in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy“; or

b)  An action by a beneficiary “to recover from the trustee trust property or the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted to his use“.

The LO adopts the definition of a “trustee” under the Trustee Ordinance (Cap. 29), which includes a constructive trustee.

Ruling of the Court of Final Appeal

The Plaintiff’s contention that the Defendant was a “constructive trustee” within the ambit of section 20(1)(b) was rejected by the Court of First Instance, the Court of Appeal and finally confirmed by the CFA.

Having considered earlier authorities which pointed out the terminological confusion caused by judges who have used the term “constructive trustees” loosely, the CFA reiterates the distinction between:

a)  “constructive trustees” who have previously accepted fiduciary duties in relation to the principal’s property prior to a subsequent breach of trust (e.g. where a defendant agreed to buy property for the plaintiff but the trust was imperfectly recorded) (“Category 1 trustees“); and

b)  “constructive trustees” whose trusteeship arose solely as a result of their wrongful conduct (e.g. making a secret and unauthorised profit) (“Category 2 trustees“).

In line with the statutory intention and legal precedents, only Category 1 trustees are “constructive trustees” within the meaning of section 20(1) of the LO. They are “trustees” in the traditional sense in that they do not receive trust property in their own right but by a transaction which both parties intended to create a trust from the outset.

Properly characterised on the facts of this case, the CFA determined that the Defendant was a Category 2 trustee, thus falling outside of the scope of section 20(1) of the LO, resulting in the Plaintiff’s primary claim being time-barred. The consequential effect of this finding meant the Plaintiff’s alternative claims for (i) equitable compensation, and (ii) accounts and inquiries (which were either substantially in the same form of, or ancillary to the main claim) were equally rejected by the CFA as being time-barred.

Conclusion

In light of Hui Chun Ping v Hui Kau Mo [2024] HKCFA 32, beneficiaries and victims of wrongful conduct who are considering a claim in relation to a constructive trust are reminded to take heed of the distinction between Category 1 trustees and Category 2 trustees, and if applicable promptly take out an action before the statutory limitation period expires.

The full judgment of Hui Chun Ping v Hui Kau Mo can be viewed here.

Date:
3 February 2025
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