Limitation of Actions Consultation - Law Commission

with the meaning of fraud in section 21(1)(a) of the 1980 Act. The plaintiff in this
case alleged that the trustees had, in investing certain of the funds in the
settlement, acted wilfully and recklessly in breach of the terms of the trust, though
no allegation of dishonesty was made. The trustees argued, inter alia, that the
action was barred by section 21 of the 1980 Act. The plaintiff counter-argued that
the action came within section 21(1)(a) of the 1980 Act, on the basis that the
expression “fraud or fraudulent breach of trust” covered any wilful or reckless
breach of trust, as such a breach would qualify as “a breach for which it would be
against conscience for the trustees to avail themselves of the lapse of time”. This
argument was rejected by the Court of Appeal who, upholding Jacob J’s decision,
held that a claim of actual dishonesty was required. In Millett LJ’s words, “The
result is that in the absence of deliberate concealment liability for an honest breach
of trust is statute-barred after six years, but liability for a dishonest breach of trust
endures without limitation of time.” 36
4.15 Section 21(1)(a) only applies where the trustee was “a party or privy” to the fraud
or fraudulent breach of trust. This requirement is identical to the phrasing used in
section 19 of the Limitation Act 1939, and its predecessor section 8 of the Trustee
Act 1888. The meaning of the phrase was considered in Thorne v Heard, 37
where
the defendants, first mortgagees of land, had employed a solicitor to sell the land
for them. He then wrongfully retained the balance of the proceeds of sale and
converted them to his own use, instead of paying them over to the plaintiffs (the
second mortgagees). The defendants did not know of his actions, which were not
undertaken on their behalf, and did not benefit from them. It was held that the
defendants had not been party or privy to the fraud committed by the solicitor.
Kay LJ suggested 38
that the expression "party or privy" must indicate some degree
of moral complicity in the wrongdoing.
4.16 Reliance on the terms of section 21(1)(a) (unlike section 21(1)(b)) is not
restricted to actions against the trustee. Under the terms of the sub-section, the
action must simply be “in respect of” the relevant breach of trust. Providing there
has been a fraud or fraudulent breach of trust to which the trustee was party or
privy, action can be taken against the person to whom the trust property has
passed from the fraudulent trustee. In G L Baker Ltd v Medway Building and
Supplies Ltd, 39
a director of the defendant company (also the accountant of the
plaintiff company) misappropriated funds from the plaintiff and paid some of
those funds to the defendant. There was no suggestion in the case as pleaded that
the defendant had given value for the payments so as to be a bona fide purchaser
for value without notice. 40
The plaintiff’s action to recover these sums from the
defendant was brought more than six years after the breach of trust. The plaintiff
argued that no limitation period applied by reason of what is now section 21(1)(a)
36 Ibid, 719.
37 [1894] 1 Ch 599.
38
39
[1894] 1 Ch 599, 608.
[1958] 1 WLR 1216.
40 The defendant’s application to amend their pleadings to include this defence was rejected
by Danckwerts J. Its appeal against his decision on this point was successful, but the Court
of Appeal approved his remarks on limitation [1958] 1 WLR 1216, 1225.
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