Full Judgment Text & Judicial Ruling

L* = Lira

L* = Lira

1994 S C M R 1431

[(19941 All ER 1)]

(Privy Council)

Present: Lord Templeman, Lord Goff of Chieveley, Lord Lowry, Lord Lloyd of Berwick and Sir Thomas Eichelbaum,

ATTORNEY‑GENERAL FOR HONG KONG‑‑‑Appellant

versus

REID and others‑‑‑Respondents

Decided on 11th November, 1993.

(a) Breach of trust‑‑‑

‑‑‑‑Bribe‑‑‑Bribe is a gift accepted by a fiduciary (a trustee, servant, agent etc.) as an inducement to him to betray his trust‑‑‑Fiduciary is accountable for the benefit he derives from the trust and the bribe is such benefit: ‑‑[Words and phrases].

(b) Breach of trust‑‑‑

‑‑‑‑ Bribe accepted by a trustee, servant, agent or other fiduciary cause loss or damage to the beneficiaries, master, or principal whose interests have been betrayed‑‑‑Amount of loss or damage may not be quantifiable.‑‑‑[Bribe].

(c) Bribe‑‑‑

‑‑‑‑ Acceptance of bribery by a policeman, prosecutor or any other person engaged in the administration of justice may cause loss or damage to Government.

(d) Breach of trust‑‑‑

‑‑‑‑Bribe‑‑‑Bribe money or property belongs to the recipient‑‑‑Equity which acts in personam insists that it is unconscionable for a fiduciary to obtain and retain a benefit in breach of duty‑‑‑Fiduciary who receives the bribe in breach of duty must pay and account for the bribe to the person to whom that duty was owed‑‑‑If bribe consists of property which increases in value or if a cash bribe is invested advantageously the fiduciary is accountable not only for the original amount or value of the bribe but for the increased value of the property representing the bribe because the equity considers as done that which ought to have been done‑‑‑Bribe whether received in cash or in kind is held on a constructive trust for the injured person: ‑‑[Bribe].

(e) Breach of trust‑‑‑

‑‑‑‑Bribe‑‑‑Giver of the bribe cannot recover it because he committed a crime when he paid the bribe.‑‑‑[Bribe].

(f) Breach of trust‑‑‑

‑‑‑‑Bribe‑‑‑If the property representing the bribe decreases in value the fiduciary must pay the difference between that value and the initial amount of bribe but if the property increases in value the fiduciary is not entitled to any surplus in excess of the initial value of the bribe.‑‑‑[Bribe].

(g) Bribe‑‑‑

‑‑‑‑ Government servant receiving bribe is liable to account for the bribery whether it is is cash or kind or property purchased with proceeds of bribe‑‑ Property purchase with proceeds of bribe are held in trust for a Government.

Notes

For the receipt by agents of secret profit and bribes, see 1(2) Halsbury's Laws (4th edn. reissue) paras 105‑108, and for cases of the subject, see 1(2) Digest (2nd reissue) 333‑350, 2683‑2809.

For constructive trusts and the rule that a trustee is not usually allowed to make a profit out of his trust, see 16 Halsbury's Laws (4th edn reissue) paras. 903, 909.

For circumstances in which an agent is a trustee and for profits arising from trust property or a fiduciary relationship, see 48 Halsbury's Laws (4th edn.) para 516, 590, and for cases on the subject, see 48 Digest (Reissue) 149‑151, 1174‑1189.

A‑G v. Goddard (1929) 98 LJKB 743; Boardman v. Phipps (1966) 3 All ER 721, (1967) 2 AC 46, (1966) 3 WLR 1009, HL, Caerphilly Colliery Co, Re, Pearson's Case (1877) 5 Ch D 336, CA; Canadian Oil Works Corp, Re, Hay's Case (1875) LR 10 Ch App 593, CA. Fawcett v. Whitehouse (1829) 1 Russ and M 132, 39 ER 51, LC, Hart v. O' Connor (1985) 2 All ER 880, (1985) AC 1000, (1985) 3 WLR 214, PC. Islamic Republic of Iran Shipping Lines v. Denby (1987) 1 Lloyd's Rep 367, Keech v. Sandford (1726) Cas temp King 61, (1558‑1774) All ER Rep 230, 25 ER 223, LC.; Lister & Co v. Stubbs (1890) 45 Ch D 1, (1886‑90) All ER Rep 797, CA; Metropolitan Bank v. Heiron (1880) 5 Ex D 319, CA; Morvah Consols Tin Mining Co, Re, McKay's Case (1875) 2 Ch D 1, CA; Powell & Thomas v. Evans Jones & Co (1905) 1 KB 11, CA. Reading v. A‑G (1951) 1 All ER 617, (1951) AC 507, HL. Regal (Hastings) Ltd. v. Gulliver (1942) 1 All' ER 378, (1967) 2 AC 134, HL; Sugden v. Crossland (1856) 3 Sm & G 192, 65 ER 620, V‑C. Sumitomo Bank Ltd v. Kartika Ratna Thahir (1993) 1 SLR 735, Singapore HC. Tai Hing, Cotton Mill Ltd. v. Liu Chong Hing Bank Ltd. (1985) 2 All ER 947 (1986) AC 80; (1985) 3 WLR 317, PC and Tyrrell v. Bank of London (1862) 10 HL Cas 26, 11 ER 934, ref.

APPEAL

The Attorney‑General of Hong Kong appealed, with the leave of the Court of Appeal of New Zealand given on 6th July 1992, from the decision of that Court (Richardson, Hardie toys and Gault JJ) delivered on 12th December 1991 dismissing his appeal from the judgment of the Supreme Court of New Zealand (Penlington, J) delivered on 13th September 1991 whereby he refused to extend caveats registered on behalf of the Hong Kong Government against the titles to three properties registered in the names of the first respondents, Charles Warwick Reid and Judith Margaret Reid (as to two of the properties), and the second respondent, Marc Molloy (as to the third property), holding that the Crown as caveator could not as a matter of law establish an arguable case that it had a proprietary interest in the three properties. The interest claimed by the Hong Kong Government in the three properties was an estate or interest as beneficiary by virtue of a constructive trust created by the registered proprietors in applying moneys received by Mr. Reid in breach of his duties owed to the Hong Kong Government in the course of his employment as a Crown servant of the Government. The Attorney General's application for an order that the caveates should not lapse had been opposed by Mrs. Reid and Mr. Molloy but not by Mr. Reid, who agreed to be bound by the decision of the Court. The facts are set out in the judgment of the Board.

David Oliver QC and Stephen Kos (of the New Zealand Bar) (instructed by Herbert Smith) for the Attorney‑General for Appellant. .

Antony White (instructed by Simons Muirhead and Burton) for Respondent.

Dates of hearing: 4th, 5th, 6th October and 1st November 1993.

JUDGMENT

LORD TEMPLEMAN.‑‑‑Mr. Reid, a solicitor and New Zealand national, joined the legal service of the Government of Hong Kong and became successively Crown counsel, Deputy Crown Prosecutor and ultimately acting Director of Public Prosecutions. In the course of his career Mr. Reid, in breach of the fiduciary duty which he owed as a servant of the Crown, accepted bribes as an inducement to him to exploit his official position .by obstructing the prosecution of certain criminals. Mr. Reid was arrested, pleaded guilty to offences under the Prevention of Bribery Ordinance and was sentenced on 6th July 1990 to eight years' imprisonment and ordered to pay the Crown the sum of $HK12.4m, equivalent to $NZ2.5m, being the value of assets then controlled by Mr. Reid which could only have been derived from bribes. No part of the sum of $HK12.4m has been paid by Mr. Pied.

Among Mr. Reid's assets are three freehold properties in New Zealand. The trial judge's finding that the Attorney‑General for Hong Kong had established an arguable case that each of the three properties was acquired with moneys received by Mr. Reid as bribes has not been challenged. Two of the freehold properties were conveyed to Mr. Reid and his wife and one to Mr. Reid's solicitor, Mr Molloy. The three New Zealand properties were purchased for approximately $N7.5W,000. Their current value was not the subject of evidence before the New Zealand Court of Appeal. The total amount thought to have been received by Mr. Reid from bribes exceeds $NZ2.5m.

In the Courts of New Zealand Mrs. Reid and Mr. Molloy argued that part of the costs of the three New Zealand properties might not be derived from bribes. If so, the courts have ample means of discovering by means of accounts and inquiries the amount (if any) of innocent money invested in the properties and the proportion 'of the present value of the properties attributable to innocent money. It was also argued that Mrs. Reid might have beneficial interest in the properties. This also could be investigated in due course but it does not appear that either Mrs. Reid or Mr. Molloy was a bona fide purchaser of a legal estate without notice. For present purposes this appeal proceeds on the assumption that the freehold New Zealand properties were purchased with bribes received by Mr. Reid and are held in trust for Mr. Reid subject to the claims of the Crown in these proceedings.

A bribe is a gift accepted by a fiduciary as an inducement to him to betray his trust. A secret benefit, which may or may not constitute a bribe, is a benefit which the fiduciary derives from trust property or obtains from knowledge which he acquires in the course of acting as a fiduciary. A fiduciary is not always accountable for a secret benefit but he is undoubtedly accountable for a secret benefit which consists of a bribe. In addition a person who provides the bribe and the fiduciary who accepts the bribe may each be guilty of a criminal offence. In the present case Mr. Reid was clearly guilty of a criminal offence.

Bribery is an evil practice which threatens the foundations of any civilised society. In particular, bribery of policemen and prosecutors brings the administration of justice into disrepute. Where bribes are accepted by a trustee, servant, agent or other fiduciary, loss and damage are caused to the beneficiaries, master or principal whose interests have been betrayed. The amount of loss or damage resulting from the acceptance of a bribe may or may not be quantifiable. In the present case the amount of harm caused to the administration of justice in Hong Kong by Mr. Reid in return for bribes cannot be quantified.

When a bribe is offered and accepted in money or in kind, the money or property constituting the bribe belongs in law to the recipient. Money paid to the false fiduciary belongs to him. The legal estate in freehold property conveyed to the false fiduciary by way of bribe vests in him. Equity however which acts in personam insists that it is unconscionable for a fiduciary to obtain and retain' a benefit in breach of duty. The provider of a bribe cannot recover it because he committed a criminal offence when he paid the bribe. The false fiduciary who received the bribe in breach of duty must pay and account for the bribe to the person to whom that duty was owed. In the present case, as soon as Mr. Reid received a bribe in breach of the duties he owed to the Government of Hong Kong, he became a debtor in equity to the Crown for the amount of that bribe. So much is admitted. But, if the bribe consists of property which increases in value or if a cash bribe is invested advantageously, the false fiduciary will receive a benefit from his breach of duty unless he is accountable not only for the original amount or value of the bribe but also for the increased value of the property representing the bribe. As soon as the bribe was received it should have been paid or transferred instanter to the person who suffered from the breach of duty. Equity considers as done that which ought to have been done. As soon as the bribe was received, whether in cash or in kind, the false fiduciary held the bribe on a constructive trust for the person injured. Two objections have been raised to this analysis. First it is said that, if the fiduciary is in equity a debtor to the person injured, he cannot also be a trustee of the bribe. But there is no reason why equity should not provide two remedies, so long as they do not result in double recovery. If the property representing the bribe exceeds the original bribe in value, the fiduciary cannot retain the benefit of the increase in value which he obtained solely as a result of his breach of duty. Secondly, it is said that if the false fiduciary holds property representing the bribe in trust for the person injured, and if the false fiduciary is or becomes insolvent, the unsecured creditors of the false fiduciary will be deprived of their right to share in the proceeds of that property. But the unsecured creditors cannot be in a better position than their debtor. The authorities show that property acquired by a trustee innocently but in breach of trust and the property from time to time representing the same belong in equity to the cestui que trust and not to the trustee personally whether he is solvent or insolvent. Property acquired by a trustee as a result of a criminal breach of trust and the property from time to time representing the same must also belong in equity to his cestui que trust and not to the trustee whether he is solvent or insolvent.

When a bribe is accepted by a fiduciary in breach of his duty then he ‑holds that bribe in trust for the person to whom the duty was owed. If the property representing the bribe decreases in value the fiduciary must pay the difference between that value and the initial amount of the bribe because be should not have accepted the bribe or incurred the risk of loss. If the property increases in value, the fiduciary is not entitled to any surplus in excess of the initial value of the bribe because he is not allowed by any means to make a profit out of a breach of duty.

The courts of New Zealand were constrained by a number of precedents of the New Zealand, English and other common law courts which established a settled principle of law inconsistent with the foregoing analysis. That settled principle is open to review by the Board in the light of the foregoing analysis of the consequences in equity of the receipt of a bribe by a fiduciary.

In Keech v. Sandford (1726) Cas temp King 61, (1558‑1774) All ER Rep 230 a landlord refused to renew a lease to a trustee for the benefit of an infant. The trustee then took a new lease for his own benefit. The new lease had not formed part of the original trust property, the infant could not have acquired the new lease from the landlord and the trustee acted innocently, believing that he committed no breach of trust and that the new lease did not belong in equity to his cestui que trust. Lord King LC held nevertheless that `the trustee is the only person of all mankind who might not have the lease' (see Cas temp King 61 at 62, (1558‑1774) All ER Rep 230 at 231); the trustee was obliged to assign the new lease to the infant and account for the profits he had received. The rule must be that property which a trustee obtains by use of knowledge acquired as trustee becomes trust property. The rule must, a fortiori, apply to a bribe accepted by a trustee for a guilty criminal purpose which injures the cestui que trust. The trustee is only one example of a fiduciary and the same rule applies to all other fiduciaries who accept bribes.

In Fawcett v. Whitehouse (1829) 1 Russ & M 132, 39 ER 51 the defendant Whitehouse, intending to enter into partnership with the plaintiffs Shand and Fawcett, negotiated for the grant of a lease by a landlord to the partnership. The landlord paid Whitehouse L* 12,000 for persuading the partnership to accept the lease. Leach V‑C had said that Whitehouse

was bound to obtain the best terms possible for the intended partnership ... and that all he did obtain will be considered as if he had done his duty and had actually received the 12,000L* for the new partnership, as upon every equitable principle he was bound to do. I am of opinion, therefore, that this is what must be called in a court of equity a fraud on the part of the defendant. It was in fact selling his intended partner for 12,000L*. ....' (See 1 Russ & M 132 at 149, 39 ER 51 at 58.)

Leach V‑C made a declaration that Whitehouse `had received the 12,000L* on behalf of himself and the plaintiffs Shand and Fawcett equally, and that he was a trustee, as to one‑third part of that sum, for Shand, and as to another third part ... for the Plaintiff Fawcett' (see 1 Russ & M 132 at 135, 39 ER 51 at 52). An appeal to the Lord Chancellor was dismissed by Lord Lyndhurst LC. Although in that case, there was no need to trace the sum of L* 12,000 into other assets, the bribe of L* 12,000 was plainly held to be trust property.

In Sugden v. Crossland (1856).3 Sm & G 192, 65 ER 620 a trustee was paid h 75 for agreeing to retire from the trust and to appoint in his place the person who had paid the L* 75. Stuart V‑C said (3 Sm & G 192 at 194, 65 ER 620 at 621):

`it has been further asked that the sum of 75L*. may be treated as a part of the trust fund, and as such may be directed to be paid by Horsfield to the trustee for the benefit 6f the cestui que trusts under the will. It is a well‑settled principle that if a trustee make a profit of his trusteeship, it shall ensure to the benefit of his cestui que trusts. Though there is some peculiarity in the case, there does not seem to be any difference in principle whether the trustee derived the profit by means of the trust property, or from the office itself.'

This case is of importance because it disposes succinctly of the argument which appears in later cases and which was put forward by counsel in the present case that there is a distinction between a profit which trustee takes out of a trust and a profit such as a bribe which a trustee receives from a third party. If in law a trustee who in breach of trust invests trust moneys in his own name holds the investment as trust property, it is difficult to see why a trustee who in breach of trust receives and invests a bribe in his own name does not hold those investments also as trust property.

In Tyrrell v. Bank of London (1862) 10 HL Cas 26, 11 ER 934 a solicitor acting for a bank in negotiatiing the purchase by the bank of a building known as the Hall of Commerce acquired for himself an interest in a larger property which included the Hall of Commerce and then sold the Hall of Commerce to the bank at a profit. The House of Lords held that the solicitor was a trustee for the bank of his interests in the Hall of Commerce but was not a trustee for the bank of that part of the retained property which the bank never had any intention of acquiring. The solicitor was obliged to bring into account the value of the retained property in calculating the profit which the solicitor had made at the expense of the bank. No difficulty arises from the decision in this case but Lord Chelmsford said that, if the solicitor had been paid a sum of h 5,000 to induce the bank to purchase the Hall of Commerce at an excessive price, the bank could have recovered damages from the solicitor but could not have obtained the h 5,000 on the grounds that it belonged to the bank (see 10 HL Cas 26 at 59‑60, 11 ER 934 at 947). No reason was given and no authority cited for these observations, which were unnecessary for the decision of the appeal decision of the appeal before the House and which appear to be inconsistent with the authorities to which the Board have already referred.

In Re Canadian Oil Works Corp, Hay's Case (1875) LR 10 Ch App 593 the vendors of property to a company gave money forming part of the purchase price to a director of the company to enable him to subscribe for shares in the company. It was held that the money was the money of the company and that the shares registered in the name of the director were therefore unpaid. The judgment emphasised the rule that `no agent can in the course of his agency derive any benefit whatever without the sanction or knowledge of his principle': per James LJ (at 601).

In Re Morvah Consols Tin Mining Co, McKay's Case (1975) 2 Ch D 1 upon the application of the liquidator of an insolvent company a director was order to pay under section 165 of the Companies Act, 1862 compensation for his misfeasance in accepting 600 paid‑up shares in the company from the vendor of property to the company. Mellish, LJ said (at 5):

`Either as a matter of bargain or as a present to the agent of the purchaser, it was in consideration of a benefit which the vendor had received from the company's agents. Now it is quite clear that, according to the principles of a Court of Equity, all the benefit which the agent of the purchaser receives under such circumstances from the vendor must be treated as received for the benefit of the purchaser.'

A similar decision was reached in Re Caerphilly Colliery Co, Pearson's Case (1877) 5 Ch D 336, where a director received paid‑up shares from the vendor of property to the company. Jessel MR, referring to Sir Edwin Pearson the director in question, said (at 340‑341);

`That being the position of Sir Edwin Pearson, can he be allowed to say in a Court of Equity that he, having received a present part of the purchase‑money, and being knowingly in the position of agent and trustee for the purchasers, can retain that present as against the actual purchasers? It appears to me that, upon the plainest principles of equity and good conscience, he cannot ... he cannot, in the fiduciary position he occupied, retain for himself any benefit or advantage that he obtained under such circumstances. He must be deemed to have obtained it under circumstances which made him liable, at the option of the cestuis que trust to account either for the value at the time of the present he was receiving, or to account for the thing itself and its proceeds if it had increased in value.'

This is an emphatic pronouncement by the most distinguished equity judge of his generation that the recipient of a bribe holds the bring and the property representing the bribe in trust for the injured person.

Different reasoning and a different result followed in Metropolitan Bank v. Heiron (1880) 5 Ex D 319. That was a decision of a distinguished Court of Appeal heard and determined on one day, 5th August, perilously close to the long vacation without citation of any of the relevant authorities. An allegation of the receipt of a bribe by a director was considered in 1872 by the board of directors of the company and they decided to take no action. In 1879 the company sued to recover the bribe of L* 250 and it was held that the action was barred by the statute of limitations. James LJ said (at 323):

`The ground of this suit is concealed fraud. If a man receives money by way of a bribe for misconduct against a company or cestui que trust, or any person or body towards whom he stands in a fiduciary position, he is liable to have that money taken from him by his principal or cestui que trust. But it must be borne in mind that that liability is a debt only differing from ordinary debts in the fact that it is merely equitable, and in dealing with equitable debts of such a nature Courts of Equity have always followed by analogy the provisions of the Statute of Limitations, in cases in which there is the same reason for making the length of time a bar as in the case of ordinary legal demands.'

This judgment denies that any proprietary interest exists in the bribe. Brett IJ said (at 324):

`It seems to me that the only action which could be maintained by the company or by the liquidator of the company against this defendant would be an action in equity founded upon the alleged fraud of the defendant. Neither at law nor in equity could this sum of 250h. be treated as the money of the company, until the Court, in an action by the company, had decreed it to belong to them on the ground that it had been received fraudulently as against them by the defendant,'

This is a puzzling passage, which appears to mean that a proprietary interest in the bribe arises as soon as a court has found that a bribe has been accepted.

Cotton LJ said (at 325):

`Here the money sought to be recovered was in no sense the money of the company, unless it was made so by a decree founded on the act by which the trustee got the money into his hands. It is a suit founded on breach of duty or fraud by a person who was in the position of trustee, his position making the receipt of the money a breach of duty or fraud. It is very different from the case of a cestui que trust seeking to recover money which was his own before any act wrongfully done by the trustee.'

This observation does draw a distinction between moneys which are held on trust and are taken out by the trustee and moneys which are not held on trust but which the trustee receives in circumstances which oblige him to pay money into the trust. The distinction appears to be inconsistent with Keecli v. Sandford (1726) Cas temp King 61, (1558‑1774) All ER Rep 230 and with those authorities which make the recipient of the bribe liable for any increase in value. The decision in Metropolitan Bank v. Heiron (1880) 5 Ex D 319 is understandable given the finding that the fraud was made known to the company more than six years before the action was instituted. But the same result could have been achieved by denying an equitable remedy on the grounds of delay or ratification.

It has always been assumed and asserted that the law on the subject of bribes was definitively settled by the decision of the Court of…

Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.

Related Legal Research & Directories

• Browse all judgments from Supreme Court of Pakistan
• Search Pakistani statutes: Constitution of Pakistan 1973, PPC, CrPC, CPC & Family Laws
• Analyze this case with Al Wakeelo AI Legal Assistant