Constructive Trusts and Insolvency

Abstract

In English law, the expression “Constructive Trust” appears to be used in two different senses. (1) It is used to mean a trust which arises ex lege, as opposed to ordinary trusts, which arise ex voluntate. (2) It is used to mean an obligation arising out of unjustified enrichment. This double meaning has been, and continues to be, the source of much confusion. In a mixed legal system, which has inherited enrichment law from the ius commune, there is no room for sense (2). What about sense (1)? Scots law, like South African law, has the institution of trust. South African law rejects the constructive trust. In Scots law it is sometimes said to exist. But it is argued that, if it does exist, it is only in certain exceptional circumstances. The constructive trust is a dangerous institution, because of its capacity to subvert other institutions. An example is insolvency law, where the effect of the constructive trust is to subvert the paritas creditorum. That fact, combined with its conceptual innocence, makes the constructive trust unsuitable for export.