The University of Hong Kong

Faculty of Law

LLB Equity & Trusts I & II, 2024-2025

TOPIC 4: PERSONAL LIABILITY OF TRUSTEES

Lecture Outline & Tutorial Worksheet

Rebecca Lee
October 2024
Faculty of Law, The University of Hong Kong
LLB Equity & Trusts 2024-25 © R Lee 2024

Student Learning Outcomes

By the end of this Topic:

1. Students should be familiar with the following:

a. the personal liability of trustees for breaches;
b. the availability of remedies of disgorgement (account of profits) and
compensation (restoration of loss) for different types of breach; and
c. the relevance of rules of causation and remoteness to different remedies.
2. Students will have the opportunity to apply the rules of causation in establishing
personal liability in equity, and to critique these rules where appropriate.
3. Students will have become more competent at case reading and problem solving.

NB. In addition to the prescribed textbook (HMM), materials marked with an asterisk are
essential reading. Except for HMM, all cases and materials are available from
ReadingList@HKUL via Moodle.

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Faculty of Law, The University of Hong Kong
LLB Equity & Trusts 2024-25 © R Lee 2024

I. Overview

1. What is a breach of trust?

2. Personal vs proprietary remedies

Liability of a defaulting trustee Liability of a third party

Personal See Topic 4 (Personal liability of trustees) See Topic 7 (Third party liability)
claims (1) Monetary remedies:
Beneficial recipient’s knowing interference
(i) equitable compensation
with beneficial interest:
(ii) account of profits Knowing receipt

Accessory liability:
(2) Non-monetary remedies:
Dishonest assistance
(i) rescission
(ii) injunction

Proprietary See Topic 5 (Proprietary liability of trustees See Topic 5 (Proprietary liability of trustees
claims – after and third parties) and third parties)
tracing and/or Misapplication of trust property in favour of Misapplication of trust property in favour of a
following the trustee himself: treating profitable third party: Lien or constructive trust
investments as made for the trust following tracing

3. Two types of personal remedies discussed in this topic: compensation (loss-based);

disgorgement (gain-based).

4. Election between inconsistent remedies: Tang Man Sit v Capacious Investments Ltd [1996]
1 All ER 193 (PC); applied recently in Mortgage Express v Lambert [2016] EWCA Civ 555

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Faculty of Law, The University of Hong Kong
LLB Equity & Trusts 2024-25 © R Lee 2024

II. Compensatory claims – equitable compensation

Prescribed reading:
HMM, Ch 13 at [13-002] – [13-122]; Ch 18 at [18-003] – [18-020]
Cases/materials marked with an asterisk (available from ReadingList@HKUL via Moodle if not
excerpted in HMM)

1. Equitable accounting vs Equitable compensation

(a) Traditional Equitable Accounting
• Taking an account: Falsification / Surcharge
• Operation of falsification and surcharge: *Libertarian Investments Ltd v Hall (2013)
16 HKCFAR 681 at [168] and [170]; *L Ho, ‘An Account of Accounts [2016] 28 SAcLJ
849.

(b) Moving towards ‘Equitable Compensation’

Two measures of liability:
• (1) restorative/substitutive if misapplied property (analogous to ‘falsification’)
• (2) reparative/compensatory if no misapplication (analogous to ‘surcharging’)
• see Interactive Technology Corporation Ltd v Ferster [2018] EWCA Civ 1594, [16]-
[21] per David Richards LJ; and most recently in *Auden McKenzie (Pharma
Division) Ltd v Amit Patel [2019] EWCA Civ 2291 at [35]-[36], per David Richards LJ.
• Optional reading on this distinction: C Mitchell, ‘Stewardship of Property and
Liability to Account’ [2014] Conv 215.

2. Remedial rules for equitable compensation

• Rules for causation, remoteness and foreseeability should depend on which of the
three types of breaches the case fall within: Bank of New Zealand v New Zealand
Guardian Trust Co Ltd [1999] 1 NZLR 664 at 687-688, per Tipping J.

• Three types of breaches of trust:

(1) Breaches (involving breach of the terms of the trust, disloyalty or a lack of care)
leading directly to damage to or loss of trust property (misapplication):
restorative/substitutive
(2) breaches involving disloyalty (no misapplication): compensatory/reparative
(3) breaches involving a lack of care (no misapplication): compensatory/reparative

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Faculty of Law, The University of Hong Kong
LLB Equity & Trusts 2024-25 © R Lee 2024

Tipping J’s categorisation was adopted by Ribeiro PJ in Libertarian Investments Ltd v

Hall (2013) 16 HKCFAR 681 [78]-[80], which was endorsed in *Zhang Hong Li v DBS
[2019] HKCFA 45 at [115]-[120] (‘Zhang v DBS’). Independently, David Richards LJ in
Auden McKenzie (Pharma Division) Ltd v Patel, above, also adopted this categorisation.

(1) Breaches leading directly to loss of trust property (misapplication)

Measure of liability: restorative/substitutive (Zhang v DBS [117], [119]):

- (a) Causation: but-for test, ie the trustee is liable if the loss would not have
occurred but for the breach
• Target Holdings v Redferns [1996] 1 AC 421 (HMM)
- Traditional vs commercial trusts
- Date of assessment
- Cf Millett, ‘Equity’s place in the law of commerce’ (1998) 114 LQR 226.
• *AIB Group (UK) Ltd v Mark Redler & Co [2015] AC 1503 (HMM)
• *Auden McKenzie (Pharma Division) Ltd v Patel [2019] EWCA Civ 2291
- (b) Remoteness and foreseeability do not apply: the defendant is liable for losses
even if they are remote and unforeseeable: Zhang v DBS, citing Libertarian
Investment Ltd v Hall [2013] 16 HKCFAR 681

Relief from liability

- Exemption clauses in the trust deed
- Trustee Ordinance, s 60: discretionary partial or full relief for honest and
reasonable breaches.

(2) Breaches involving disloyalty (ie breach of fiduciary duty)

Measure of liability: compensatory/reparative

- (a) Causation: the plaintiff owes the burden to show that the breach was material
to the loss; he does not owe the burden to show but-for causation. The fiduciary
may show that the loss would have occurred even if there had been no breach
(Zhang v DBS, above at [118], citing Libertarian Investment Ltd v Hall).
• Zhang v DBS, above
• *Sim Poh Ping v Winsta Holding Pte Ltd [2020] 1 SLR 1199

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Faculty of Law, The University of Hong Kong
LLB Equity & Trusts 2024-25 © R Lee 2024

- (b) Remoteness: The fiduciary is liable for losses that are remote and
unforeseeable. The court will take into account post-breach events which affect
the extent of the loss (Zhang v DBS, above at [119])
• Canson Enterprises Ltd v Broughton & Co (1991) 85 DLR (4th) 129

Relief from liability

- Exemption clauses in the trust deed
- Trustee Ordinance, s 60: discretionary partial or full relief for honest and
reasonable breaches.

(3) Breaches involving negligence

Measure of liability: compensatory/reparative

- Causation & Remoteness: same rules on causation, remoteness & foreseeability
as those for common law damages for negligence: Zhang, above [120], citing
Libertarian Investment Ltd v Hall, above; Bristol and West Building Society v
Mothew [1998] Ch 1 at 17.
• Contrary view in *Youyang v Minter Ellison (2003) 212 CLR 484 at [39].

Relief from liability

- Exemption clauses in the trust deed
- Trustee Ordinance, s 60: relief for honest and reasonable breaches not applicable
to a breach of the duty of care, which involves failing to take reasonable care

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Faculty of Law, The University of Hong Kong
LLB Equity & Trusts 2024-25 © R Lee 2024

III. Disgorgement of gains – account of profits

Prescribed reading:
HMM, Ch 18 at [18-051] – [18-100]; Ch 18 at [18-116] – [18-117]
Cases/materials marked with an asterisk (available from ReadingList@HKUL via Moodle if not
excerpted in HMM)

1. General principle
• must account for all profits obtained by the use of his fiduciary position: Regal Hastings
Ltd v Gulliver [1967] 2 AC 134; Boardman v Phipps [1967] 2 AC 46

2. Limiting account of profits

a. Causation
• Murad v Al-Saraj [2005] EWCA 959; [2005] WTLR 1573 (HMM) at [67], [76] and
[83]; **Recovery Partners GP Ltd v Rukhadze [2023] EWCA Civ 305 at [34]-[36],
[76]: applied Murad v Al-Saraj, appeal heard by UKSC in July 2024.
• Cf position elsewhere: Hong Kong: *Kao Lee & Yip v Koo Hoi Yan [2003] 3 HKLRD
296 at [132]-[135], [144]; Australia: *Ancient Order of Foresters in Victoria Friendly
Society Ltd v Lifeplan Australia Friendly Society Ltd & Anor [2018] HCA 43 at [9],
[15]-[16], [88], [94]; Singapore: UVJ v UVH [2020] SGCA 49 at [88], noted Yeung &
Fee (2020) 26 Trusts & Trustees 916.
• Optional reading: M Conaglen, ‘Identifying the Profits for Which a Fiduciary Must
Accountʼ (2020) 79 CLJ 38

b. Imposing a time limit

• Warman International Ltd v Dwyer (1995) 69 ALJR 362: specific assets vs business
• *Kao Lee & Yip v Koo Hoi Yan [2003] 3 HKLRD 296 at [132]-[135], [144];
• *Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia
Friendly Society Ltd & Anor [2018] HCA 43

c. Equitable allowance
• Boardman v Phipps [1967] 2 AC 46
• *Recovery Partners GP Ltd v Rukhadze [2023] EWCA Civ 305 at [111]-[112], [116]-
[123]

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Faculty of Law, The University of Hong Kong
LLB Equity & Trusts 2024-25 © R Lee 2024

• Optional reading: M Harding, ‘Justifying Fiduciary Allowances’, in Andrew

Robertson & Tang Hang Wu (ed), The Goals of Private Law (Hart Publishing, 2009),
Ch 14

d. Profit-sharing agreement?
• *Recovery Partners GP Ltd v Rukhadze [2023] EWCA Civ 305 at [34]-[43] (obiter)

e. Unconscionable delay?
• Only if the delay renders it unjust to grant the relief: *Recovery Partners GP Ltd v
Rukhadze [2023] EWCA Civ 305 at [77]-[81]

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Faculty of Law, The University of Hong Kong
LLB Equity & Trusts 2024-25 © R Lee 2024

Topic 4: Personal Liability of Trustees

Tutorial 5
(23 Nov / 30 Nov)

You are expected to prepare detailed written notes to help you

participate in the class discussion.

Preparation

1. Read HMM and summarise the principles of all non-asterisked cases listed in the lecture
outline in one sentence, but the sentence should be as short as possible.
2. Read the asterisked cases, and make casenotes of all asterisked cases.
3. Prepare detailed written notes for tutorial discussion.

Feedback

The tutorial itself will be a feedback session. When you present your answers in class and
participate in the discussion, the tutor will point out the strengths and weaknesses of your
contribution and suggest ways of improvement. Feedback is not intended an occasion to
provide ‘model’ answers to students – there is no ‘model’ answer.

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Faculty of Law, The University of Hong Kong
LLB Equity & Trusts 2024-25 © R Lee 2024

Question

Brother Chan, a celebrity and managing director of Chanʼs Asian Noodles Co Ltd (‘CANʼ),
owned an 80% interest in CAN, whilst his sister, Sister Chan, director and head chef of CAN,
owned a 20% interest. Brother was a beneficiary in a discretionary trust, which held, among
other assets, US$10 million in Kowloon Bank. The trustees were Silly and Sloppy.

In July 2022, Brother asked Silly and Sloppy to invest US$10 million in Soleil coin, a crypto
currency, and to hold the investment for 6 months. Instead of doing so, Silly and Sloppy
transferred US$10 million to their personal accounts at the same bank, and quickly gambled
the funds away. In November 2022, the value of Soleil crypto plunged by 99%.

In March 2021, Brother was looking for restaurant premises in Wan Chai with a view to
opening a new branch of CAN. A friend of Sister introduced her to a premises in Causeway
Bay that was offered for lease at a very competitive rental, but the rental would be nearly
30% higher than that CAN budgeted for.

In September 2021, Sister rented the premises and began preparations to open her own
noodle shop to sell some new noodle dishes that she had just thought about. She kept this
plan and her new ideas about the noodle dishes from her Brother.

In September 2022, following news reports that chefs at CAN added ground poppy capsules
to soups served at the restaurant, customers ran a campaign to boycott CAN. That same week,
Sister quit her job, just two days before opening her new restaurant, NAN. Brother offered
Sister a 40% share of the net profits if she stayed on. Sister did not change her mind, taking
with her a team of staff, who resigned on the same day as Sister. Since then, noodle sales at
CAN have dropped from about 6,000 bowls to 3,000 bowls per month, and the company has
been suffering a net loss of $2 million per month.

In the first four months after it opened in September 2022, NAN received raving reviews and
served about 5,000 bowls of noodles per month, but it was only breaking even. However, in
January 2023, when the government lifted all social distancing rules for restaurant dining,
business volume almost doubled, yielding a net profit of $3 million per month at NAN. Brother
continued to operate CAN at a loss.

Brother approached you last week for advice.

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