Ag of Hong Kong V.reid
Ag of Hong Kong V.reid
Ag of Hong Kong V.reid
*324 Attorney-General for Hong Kong Appellants v. Charles Warwick Reid and
Others Respondents
[1993] 3 W.L.R. 1143
Privy Council
PC
Lord Templeman, Lord Goff of Chieveley, Lord Lowry, Lord Lloyd of Berwick and
Sir Thomas Eichelbaum
While he was a Crown servant in Hong Kong the first respondent in breach of his fiduciary duty
to the Crown accepted bribes with which it was alleged that he purchased two properties in New
Zealand which were conveyed to him and his wife, the second respondent, and a third which was
conveyed to his solicitor, the third respondent. The first respondent pleaded guilty in Hong Kong
to offences under the Prevention of Bribery Ordinance and was sentenced to eight years'
imprisonment and ordered to pay the Crown H.K.$12.4m., the value of his assets which could
only have been derived from bribes. The Attorney-General for Hong Kong lodged caveats in
New Zealand against the titles to the properties. He applied to the High Court of New Zealand to
renew the caveats, but the judge refused, holding that the Crown had no equitable interest in the
properties. The Court of Appeal of New Zealand, applying an English Court of Appeal decision
without considering its merits, dismissed the Attorney-General's appeal.
On the Attorney-General's appeal to the Judicial Committee:-
*325 Held, allowing the appeal,
(1) that a gift accepted by a person in a fiduciary position as an incentive for his breach of duty
constituted a bribe and, although in law it belonged to the fiduciary, in equity he not only became
a debtor for the amount of the bribe to the person to whom the duty was owed but he also held
the bribe and any property acquired therewith on constructive trust for that person; that if the
value of the property representing the bribe depreciated the fiduciary had to pay to the injured
person the difference between that value and the initial amount of the bribe, and if the property
increased in value the fiduciary was not entitled to retain the excess since equity would not allow
him to make any profit from his breach of duty; and that, to the extent that they represented
bribes received by the first respondent, the New Zealand properties were held in trust for the
Crown, and the Crown had an equitable interest therein (post, pp. 330G, 331B-C, E, H-332A,
339B).
Keech v. Sandford (1726) Sel.Cas.Ch. 61 and Phipps v. Boardman [1967] 2 A.C. 46, H.L.(E.)
applied.
Dictum of Lord Chelmsford in Tyrrell v. Bank of London (1862) 10 H.L.Cas. 26, 59-60, H.L.
(E.); Metropolitan Bank v. Heiron (1880) 5 Ex.D. 319, C.A. and Lister & Co. v. Stubbs (1890)
45 Ch.D. 1, C.A. disapproved.
(2) That the Court of Appeal of New Zealand was not bound by a decision of the English Court
of Appeal but was entitled to review it on its merits and to refuse to follow it if it was considered
to be wrong (post, p. 338E-G).
Dictum of Lord Scarman in Tai Hing Cotton Mill Ltd. v. Liu Chong Hing Bank Ltd. [1986] A.C.
80, 108, P.C. explained.
Hart v. O'Connor [1985] A.C. 1000, P.C. distinguished.
Decision of the Court of Appeal of New Zealand [1992] 2 N.Z.L.R. 385 reversed.
APPEAL (No. 44 of 1992) with leave of the Court of Appeal of New Zealand by the Attorney-
General for Hong Kong, suing for and on behalf of the Government of Hong Kong, from the
judgment of the Court of Appeal of New Zealand [1992] 2 N.Z.L.R. 385 (Richardson, Hardie
Boys and Gault JJ.) dated 19 December 1991, reasons for judgment having been given on 12
December 1991, dismissing the Attorney-General's appeal from the judgment of Penlington J.
delivered on 13 September 1991 in the High Court of New Zealand at Hamilton refusing orders
in proceedings against the respondents, Charles Warwick Reid, his wife Judith Margaret Reid
and Marc Molloy that caveats registered by the Attorney-General against the title to three New
Zealand properties should not lapse.
The facts are stated in the judgment of their Lordships.
David Oliver Q.C. and Stephen Kos (of the New Zealand Bar) for the Attorney-General. The so-
called rule in Lister & Co. v. Stubbs (1890) 45 Ch.D. 1, that an employee who receives a bribe is
obliged to pay his employer its amount but does not hold the bribe on trust for his employer, who
thus cannot trace it into other property, is contrary to principle, policy and good order.
Metropolitan Bank v. Heiron (1880) 5 Ex.D. 319 was relied on by the Court of Appeal in Lister
& Co. v. Stubbs, which in turn has been followed in subsequent cases. [Reference was made to
Powell & Thomas v. Evan Jones & Co. [1905] 1 K.B. 11; Attorney-General's Reference (No. 1
of 1985) [1986] Q.B. 491; Islamic *327 Republic of Iran Shipping Lines v. Denby [1987] 1
Lloyd's Rep. 367; Wilsons and Furness-Leyland Line Ltd. v. British and Continental Shipping
Co. Ltd. (1907) 23 T.L.R. 397 and Attorney-General v. Goddard (1929) 98 L.J.K.B. 743.]
In so far as the decisions in Metropolitan Bank v. Heiron, 5 Ex.D. 319, and Lister & Co. v.
Stubbs, 45 Ch.D. 1 were based on the supposition that there had to be some diminution of the
trust estate before a proprietary claim would lie, they were inconsistent with an earlier line of
authority exemplified by Keech v. Sandford (1726) Sel.Cas.Ch. 61. The basic rule is that a
person who is in a fiduciary relationship with another must not place himself in a position in
which his interest conflicts with his duty. If he does and derives a benefit as a result, he holds
that benefit on trust for the person to whom he owes the fiduciary duties. There is no reason in
principle for differentiating between fiduciary duties owed by an agent to his principal and those
owed by a trustee to his cestui que trust, although the normal fiduciary obligations of an agent
may be modified by contract, particularly in commercial cases. If an agent receives a bribe he
holds it on trust for his principal, who therefore has an equitable proprietary interest in the
money and any property acquired therewith. [Reference was made to Fawcett v. Whitehouse
(1829) 1 Russ. & M. 132; Sugden v. Crossland (1856) 3 Sm. & G. 192; In re Canadian Oil
Works Corporation (Hay's Case) (1875) L.R. 10 Ch.App. 593; In re Morvah Consols Tin Mining
Co. (McKay's Case) (1875) 2 Ch.D. 1; In re Caerphilly Colliery Co. (Pearson's Case) (1877) 5
Ch.D. 336; Nany-y-glo and Blaina Ironworks Co. v. Grave (1878) 12 Ch.D. 738; Eden v.
Ridsdales Railway Lamp and Lighting Co. Ltd. (1889) 23 Q.B.D. 368; Regal (Hastings) Ltd. v.
Gulliver (Note) [1967] 2 A.C. 134; Phipps v. Boardman [1964] 1 W.L.R. 993; [1965] Ch. 992;
[1967] 2 A.C. 46; Sumitomo Bank Ltd. v. Kartika Ratna Thahir [1993] 1 S.L.R. 735 and Sir
Peter Millett's article, 'Bribes and Secret Commissions' [1993] R.L.R. 7.]
It has been suggested that the rule in Lister & Co. v. Stubbs, 45 Ch.D. 1, should be retained on
grounds of policy, because of the effect a proprietary remedy may have on unsecured creditors,
or because a proprietary remedy is inappropriate except in circumstances where there has been
some erosion or diminution of the trust property. There is no logical distinction between breach
of a fiduciary duty by taking a bribe and any other breach of fiduciary duty in respect of which
there is a proprietary remedy. Furthermore, unsecured creditors would not be disadvantaged by
the removal from the insolvent's estate of an asset which he should never have had. The real
policy consideration is that the law refuses to endorse bribery, and so a person who takes a bribe
should not be allowed to benefit from it. Unless a proprietary remedy exists it will be more
difficult for the Crown to recover the bribes paid to the first respondent.
Antony White for the second respondent. The critical 19th century case is Tyrrell v. Bank of
London (1862) 10 H.L.Cas. 26, which supports the principle that a fiduciary who obtains a gain
by placing himself in a position where his duty and interest conflict cannot be allowed to keep
that gain, but the remedy is not a proprietary one. He has a duty to *328 account for the gain but
does not hold it on a constructive trust. Tyrrell v. Bank of London has only been cited in Nant-y-
glo and Blaina Ironworks Co. v. Grave, 12 Ch.D. 738, 742, but was referred to by Leggatt J. in
Islamic Republic of Iran Shipping Lines v. Denby [1987] 1 Lloyd's Rep. 367, 371.
Between Tyrrell v. Bank of London, 10 H.L.Cas. 26 and Metropolitan Bank v. Heiron, 5 Ex.D.
319, there was a series of cases relating to company promoters who received bribes by way of
shares in a company. In each case the court regarded the money used to acquire the shares, or the
shares themselves, as having originated from the company so as to be the property of the
company prior to the wrongful act. Accordingly, the company was held to have a proprietary
claim to the shares. [Reference was made to In re Canadian Oil Works Corporation (Hay's Case),
L.R. 10 Ch.App. 593; In re Morvah Consols Tin Mining Co. (McKay's Case), 2 Ch.D. 1 and
Goff and Jones, The Law of Restitution, 3rd ed. (1986, p. 657.] Metropolitan Bank v. Heiron, 5
Ex.D. 319 and Lister & Co. v. Stubbs, 45 Ch.D. 1 can be distinguished because in them the
bribes were not corporate property but were paid by a third party.
The true principle is that a fiduciary who acts in breach of his duties cannot be allowed to retain
any gain that he has made. If he uses it to make a further gain he should be deprived of that as
well, but by an action for debt and not by a claim based on any proprietary right. The cases
decided after Lister & Co. v. Stubbs, 45 Ch.D. 1, mainly support that proposition. [Reference
was made to In re North Australian Territory Co. (Archer's Case) [1892] 1 Ch. 322; Powell &
Thomas v. Evan Jones & Co. [1905] 1 K.B. 11; Attorney-General v. Goddard, 98 L.J.K.B. 743;
Attorney-General's Reference (No. 1 of 1985) [1986] Q.B. 491; Islamic Republic of Iran
Shipping Lines v. Denby [1987] 1 Lloyd's Rep. 367; Regal (Hastings) Ltd. v. Gulliver (Note)
[1967] 2 A.C. 134; Reading v. The King [1949] 2 K.B. 232; Reading v. Attorney-General [1951]
A.C. 507 and Mahesan s/o Thambiah v. Malaysia Government Officers' Co-operative Housing
Society Ltd. [1979] A.C. 374.] However, where a trustee makes a profit by misusing trust
property the beneficiary has a proprietary remedy: see Phipps v. Boardman [1964] 1 W.L.R. 993;
[1967] 2 A.C. 46. In Keech v. Sandford, Sel.Cas.Ch. 61, the original lease was trust property and
so the beneficiary was entitled to the new lease obtained by the trustee. There is a distinction
between a benefit which would have accrued to the principal if his agent had complied with his
duties and one which would not. A bribe falls within the latter category.
Lister & Co. v. Stubbs, 45 Ch.D. 1, has been followed in Australia and New Zealand. [Reference
was made to Ardlethan Options Ltd. v. Easdown (1915) C.L.R. 285; Daly v. Sydney Stock
Exchange Ltd. (1986) 160 C.L.R. 371 and Police v. Leaming [1975] 1 N.Z.L.R. 471.]
The existence of an equitable proprietary interest in funds received by an agent in certain
circumstances was recognised in Lord Napier and Ettrick v. Hunter [1993] A.C. 713. Where the
line should be drawn is a question of policy. That case suggests that if a line of authority exists
the courts may be taken to have resolved this question of policy. Lister & Co. v. Stubbs, 45
Ch.D. 1 and the cases which followed it represent such a line of authority. A proprietary remedy
clearly exists when there is an *329 original proprietary basis from which the claim can be
traced. A deemed agency gain (a concept borrowed from Goode, Essays on the Law of
Restitution (ed. Burrows) (1991)) is the correct place to draw the line. If a fiduciary by a breach
of duty acquires for himself a benefit which ought to have been acquired for his beneficiary or
principal, he is deemed to have acquired it for such person, who, therefore, has a proprietary
right to it. However, where a benefit is obtained by a fiduciary acting wholly outside the scope of
his agency, or the ambit of his legitimate activities, no proprietary remedy exists. To draw the
line there gives the beneficiary or principal such proprietary rights as he would have obtained
had the trustee or agent fulfilled his fiduciary duties, but not proprietary rights which would
never have been obtained through fulfilment of those duties. Acceptance of a bribe is wholly
outside the scope of an agent's duties. That division is justified by reason of the position of all
third parties, not merely unsecured creditors.
The Crown has no proprietary interest in the properties allegedly purchased by the first
respondent with the bribes which he received, but the Attorney-General can apply to the court for
a Mareva injunction to prevent disposal of the properties pending trial of the action. [Reference
was made to S.C.F. Finance Co. Ltd. v. Masri [1985] 1 W.L.R. 876.]
Oliver Q.C. in reply. Tyrrell v. Bank of London, 10 H.L.Cas. 26 is an authority in favour of
proprietary claims. In Fawcett v. Whitehouse, 1 Russ. & M. 132, the money came from outside
the partnership, and in Sugden v. Crossland, 3 Sm. & G. 192, the money paid to the trustee did
not come from the trust. There is no distinction between a bribe emanating from the trust itself
and a bribe from an extraneous source. In Lister & Co. v. Stubbs, 45 Ch.D. 1, the employee
through his breach of trust acquired a benefit which ought to have been acquired for his
employers; it was not a case of a fiduciary acting wholly outside the scope of his authority. In In
re North Australian Territory Co. (Archer's Case) [1892] 1 Ch. 322 the money came from an
extraneous source. Phipps v. Boardman [1967] 2 A.C. 46 is consistent with Keech v. Sandford,
Sel.Cas.Ch. 61, because the solicitor was misusing his position as trustee.
Kos following. The Court of Appeal of New Zealand erred in concluding that it was bound to
follow the decision of the English Court of Appeal in Lister & Co. v. Stubbs, 45 Ch.D. 1, in spite
of differentiating local circumstances. Judgments of the English Court of Appeal are persuasive
authority only and do not bind the New Zealand Court of Appeal: see de Lasala v. de Lasala
[1980] A.C. 546. The New Zealand Court of Appeal misunderstood the dictum of Lord Scarman
in Tai Hing Cotton Mill Ltd. v. Liu Chong Hing Bank Ltd. [1986] A.C. 80, 108, because in Hart
v. O'Connor [1985] A.C. 1000 Lord Brightman did not state that the New Zealand Court of
Appeal was bound to apply English law.
The first and third respondents did not appear and were not represented.
Cur. adv. vult.
Representation
(S. S. )
END OF DOCUMENT
(C) 2007 Thomson/West. No Claim to Orig. US Gov. Works.