Introduction
The Limitation Ordinance (Cap.347) (LO) plays a crucial role in setting definitive time limits for initiating legal actions. In particular, section 20 of the LO outlines the time limit for claims on trust properties. In the recent judgment of Hui Chun Ping v Hui Kau Mo [2024] HKCFA 32,1 the Hong Kong Court of Final Appeal (CFA) clarified the application of limitation periods for claims involving constructive trusts.
Hui Chun Ping v Hui Kau Mo [2024] HKCFA 32
In 2004, Hutchinson Whampoa (HW) engaged the Plaintiff as a consultant for a Qingdao construction project based on the Defendant’s recommendation. The Defendant negotiated the agreement terms on behalf of the Plaintiff. By those terms, HW agreed to remunerate the Plaintiff with a cash payment and a 10% interest in the project’s profits. The 10% interest in the profits was referred to as “dry shares”.
The Plaintiff later claimed that the Defendant persuaded him to accept an additional payment of RMB 40 million in place of the dry shares, and that the Defendant was authorized to reach an agreement with HW on behalf of the Plaintiff to this effect. However, following a fallout between the parties, the Plaintiff sued the Defendant in 2018, alleging that the Defendant secretly acquired the dry shares in 2006 for himself, thereby breaching his fiduciary duty (Claim).
The primary issue in the appeal was whether the Plaintiff’s Claim was barred by section 20 of the LO. The context was that the Plaintiff applied to amend the Statement of Claim so as to include the Claim. In the Court of First Instance, Deputy Judge H Au-Yeung ruled that the Claim was statute-barred by section 20(2) of the LO. The Court of Appeal upheld this decision, ruling against the Plaintiff on all four points of appeal (as set out below). The Plaintiff further appealed to the CFA and its appeal was dismissed.
Framework under Section 20 of the LO
Section 20(2) of the LO imposes a 6-year limitation period (that begins on the date on which the right of action accrued) on actions by a beneficiary to recover trust property or for breach of trust. However, certain types of claims falling under section 20(1) will be exempted from the 6-year limitation period. They include:
(a) actions involving fraud or fraudulent breach of trust to which the trustee was a party or privy; or
(b) actions to recover trust property or its proceeds from the trustee in the possession of the trustee, or previously received by the trustee and converted to his use.
Plaintiff’s issues on appeal
In this appeal, the CFA had to consider the following 4 issues:
- “Section 20(1)(b) Point”: Whether the application of a limitation period was excluded by section 20(1)(b).
- “Section 20(2) Point”: If section 20(1)(b) did not apply, whether the Defendant was entitled to rely on section 20(2).
- “Accounting Point”: If the Claim was barred, whether the Plaintiff could pursue a claim for accounts and inquiries.
- “No Profit/No Conflict Point”: If the Claim was barred, whether the Plaintiff could claim “equitable compensation” for breach of fiduciary duty.
The CFA’s analysis
Section 20(1)(b) Point
In respect of the application of Section 20(1) of the LO, there exists a distinction between “category 1” and “category 2” trustees. The CFA confirmed this distinction between “category 1” trustees i.e., trustees where the trust concerned arose before the occurrence of the transaction impeached, and “category 2” trustees i.e., trustees where the trust concerned arose only by reason of the transaction in question. Section 20(1) may apply in claims against category 1 trustees (which will not be subject to the 6-year limitation period), but may not apply in claims against category 2 trustees (which will be subject to the 6-year limitation period).
The critical issue in this case was whether the Claim fell within “category 1” or “category 2”. There are conflicting authorities on this point.
The CFA began its analysis by exploring the history of section 20 of the LO, tracing its origins to the UK Limitation Act 1939 and the Trustee Act 1888 (1888 Act), and how the court traditionally dealt with the issue of limitation before the 1888 Act.
Historically, equity courts did not apply limitation periods to breach of trust actions. A fiction of viewing trust assets as continually in the beneficiary’s possession was devised by the courts to explain why there was no limitation for an action for breach of trust. However, the position that (traditionally) no limitation period applies to breach of trust actions was not the same for constructive trust claims (i.e. a claim against a person, who obtained property by or with knowledge of fraud or breach of fiduciary duty, holds it on a constructive trust for a plaintiff “as if” he had agreed to be a bare trustee – also a fiction). By reference to the case of Beckford v Wade, the CFA reminded that constructive trust claims were historically subject to a limitation period. Such claims were analogous to a common law action to recover property. In a constructive trust claim, time begins to run from the moment when the constructive trust arose.
Hence, while the 1888 Act abolished the old rule that there had been no limitation for an action of breach of trust, the position has always been that constructive trust claims are subject to a limitation period (with time beginning to run from the moment when the constructive trust arose).
The Plaintiff argued that a constructive trustee is also a category 1 trustee. In doing so, the Plaintiff cited previous authorities where the court relied on the fiction – that the constructive trustee holds the properties concerned on a constructive trust for a beneficiary “as if” he had agreed to be a bare trustee and is deemed to be acting in accordance with the trust – in ruling that no limitation period applies to a constructive trust claim for unauthorised profit, such as bribes. The Plaintiff’s argument was rejected by the CFA on the basis that it is against authority and the aforesaid fiction is created not for limitation, and there is no reason to extend the application of the fiction to the issue of limitation. Consequently, the Plaintiff’s claim did not fall under section 20(1)(b) of the LO.
Section 20(2) Point
The CFA affirmed that section 20(2) applied and that category 2 trustees, like the Defendant, are entitled to invoke a defence of limitation. The court reasoned that section 20(2) aimed to create a limitation period for all breach of trust claims, whether express or constructive, except those specified in section 20(1).
Accounting Point
The CFA held that taking an account is ancillary to a claim for a sum due, and if the claim for the sum is time-barred, there is no point in taking an account.
No Profit / No Conflict Point
The CFA ruled that a claim for “equitable compensation” for a trustee’s profit or conflict of interest is considered a breach of trust within section 20(2) because it is a breach of aspects of a trustee’s fiduciary duties. Thus, notwithstanding the label, such claims are subject to limitation periods.
Outcome
Ruling that the Claim was statute-barred under the LO, the CFA dismissed the Plaintiff’s appeal.
Insights
Limitation issues frequently arise in claims involving breach of fiduciary duties. Often, the breaches are said to be covered up and are not easy to discover. The CFA decision provides welcomed clarification in a thorny area of law. Now, once the wrongdoings are discovered, claimants should consider investigating the matter and taking legal advice at once, in order to avoid any procedural pitfall: proper characterisation of the claim in question is particularly important to address the issue of limitation.
For further information, please contact:
Paul Kwan, Partner, Deacons
paul.kwan@deacons.com
1 Handed down on 23 December 2024.
