The Court of Final Appeal decision in Peconic Industrial Development Ltd v Lau Kwok Fai FACV 17/2008 has settled the general legal position that any claim against a “non-fiduciary” for his dishonest assistance in another person’s fraudulent breach of fiduciary duty must be commenced within 6 years after the cause of action has accrued.

The starting point: s.4 Limitation Ordinance (Cap. 347) (“LO”)

The formulation for the limitation period of a dishonest assistance action starts from identifying the nature of the action.  A cause of action based on dishonest assistance is not an action based on simple contract or tort.  Rather, it is a claim for equitable relief.  S. 4(7) LO provides that the limitation periods set out in s. 4 LO does not apply to any claim for an equitable relief, except where it is analogous to any claim for which a limitation period is applied under the Limitation Act 1980.  As such, a claim based on dishonest assistance is analogous to the economic tort of procuring a breach of contract or unlawful interference with economic and other interest.  Under s. 4(1)(a) LO, the limitation period for an action founded on tort is 6 years after the accrual of the cause of action.  Therefore, as a starting point, the limitation period for claiming dishonest assistance is 6 years. 

s.20 LO

The issue in dispute is whether a dishonest assister is a constructive trustee within the meaning of s.20 LO so that he is not entitled to plead a 6-year limitation defence.

S.20 LO provides that an action by a beneficiary to recover trust property or in respect of any breach of trust shall not be brought after the expiration of 6 years. However, there shall be no limitation period for an action by a beneficiary under a trust, being an action:

1. in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or
2. 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.

S. 2(1) LO defines “trust” and “trustee” as having the same meanings in the Trustee Ordinance (Cap. 29). S. 2 of the Trustee Ordinance stipulates that “trust” and “trustee” extend to “implied and constructive trust”.

2 kinds of constructive trustees

For the purpose of limitation, there are 2 kinds of constructive trustees (see, for example, Beckford v Wade (1805) 17 Ves Jun 87, 95-96 and Cattley v Pollard [2007] Ch 353, 360-376). 

First, there are persons who, without any express trust, have assumed fiduciary obligations in relation to the trust property, such as company director, purchaser on behalf of another or agent holding the property for a trustee (“fiduciaries”).  These fiduciaries are treated in the same way as express trustees and s.20 LO applies to them that no limitation period applies to their fraudulent breaches of trust.

Second, there are strangers to the trust who have not assumed any prior fiduciary liability but make themselves liable by dishonest acts of interference (“non-fiduciaries”).  They are described as constructive trustees but this is a fiction and “nothing more than a formula for equitable relief” (see Selangor United Rubber Estates Ltd v Cradock (No. 3) [1968] 1 WLR 1555, 1583).  The non-fiduciaries are not constructive trustees within the meaning of the law of limitation.

Decision of CFA

As confirmed by the Court of Final Appeal in Peconic Industrial Development Ltd, a dishonest assister is a constructive trustee of the second category and therefore s.20 LO does not apply to him. He is entitled to plead a 6-year limitation defence. 

CFA explained that the legal principle is not that the limitation defence is denied to people who were dishonest. It applies to claims based on ordinary common law fraud. The principle is that the limitation period is denied to fiduciaries but dishonest assisters are not fiduciaries. The liability of a dishonest assister is independent of the dishonesty of the trustee or other fiduciary.

Further, if it had been intended to include claims against dishonest assisters or other non-fiduciaries, the language of s.20 LO would have been much clearer.

This position is an outcome of the Court’s careful consideration of the legislative history, different statutory constructions and reference to authorities in the past 2 centuries, numerous text-book and academic writings.  Although this decision may sometimes lead to unjust outcomes (for example, in Peconic Industrial Development Ltd, 3 defendants were held liable for dishonest assistance but were allowed to escape liability as the action was held time-barred.  As a result, they avoided the liability to pay a total sum of over HK$1.5 billion), this is the price society has to pay for certainty and the rule of law.

Nevertheless, if there is any fraud or concealment of the facts relevant to the claim of dishonest assistance, liquidators may argue that the limitation period shall be postponed until the fraud or concealment was actually discovered or could, with reasonable diligence, have been discovered by the company under s. 26(1) LO.