Is notice for the purpose of Guardian Trust liability really different to notice or knowledge necessary for constructive trusteeship? Quasi Benjamin orders to assist trustees in difficult situations

Abstract

The Court of Appeal in Finers v Miro1 considered a trust and underlying company structure established by Mr Carlos Miro with the assistance of Mr Melvyn Stein, partner with London solicitors Messrs Finers. The Court of Appeal described the effect of the arrangement to be that all assets were held to the order of Mr Stein on behalf of Mr Miro. Of course, in those days trustees and solicitors were not subject to the same due diligence obligations that exist today. The judgment records that Mr Stein understood the wealth placed into the structure to be derived from Mr Miro’s successful business activities (though there is also a reference to inheritance, but nothing turns on this). After the structure had come about, Mr Stein learned of a report of a sub-committee of the United States House of Representatives, suggesting Mr Miro’s participation in fraud involving an insurance company called Anglo-American Insurance Company (Anglo-American) licenced in Louisiana, United States. Mr Stein became concerned that if this were the case, the wealth placed in the trust derived from Mr Miro’s fraudulent activity, leading to possible adverse claims to that property and, more significantly for Mr Stein and his firm, personal liability based on constructive trust principles (in the event that Mr Stein exercised powers to benefit Mr Miro). Faced with this difficultly, the firm together with Mr Stein and two companies in the structure sought directions on whether those responsible for investigating the affairs of Anglo-American, and recovering assets, should be informed of the existence of the trust structure. The judge directed that they should. Mr Miro appealed unsuccessfully. An issue before the Court of Appeal was whether Mr Stein and his firm in fact faced possible constructive trustee liability from distributions to Mr Miro (without the risk of such liability the supervisory jurisdiction of the court would not be engaged). The Court of Appeal agreed with Mr Stein. Dillon LJ explained: There is no reason to doubt that when Mr Stein set up all these elaborate arrangements for the defendant he honestly believed that all the moneys and assets belonged to the defendant as a result of inheritance and success in business and that the defendant wanted to conceal his wealth from fear of political expropriation. There are, however, now grounds for suspecting that very much of this wealth may have been achieved by the defendant by fraud on the insurance company. The defendant denies that there has been any fraud or dishonesty whatsoever on his part against the insurance company or any one else, but it is conceded, for the purposes of this appeal, that the plaintiffs have grounds for believing that he may have acquired funds from the wrongful misappropriation of assets of the insurance company. The liquidator has started three actions, now consolidated, against the defendant and certain companies in the United States. In none of them is fraud alleged against the defendant. If the liquidator can establish the causes of action pleaded it would not be necessary for him to allege fraud. So far the liquidator has not made, or even suggested that he may have, any claim against any of the plaintiffs. Nonetheless, at any rate if the decision of Millett J. in Agip (Africa) Ltd. v. Jackson [1990] Ch. 265 is correct (as to which I express no opinion either way since these proceedings do not have the right parties for a decision of the point), there is an arguable case by English law that the plaintiffs have constructive notice of the fraud of the defendant if there was fraud and hold their various powers over the ‘property investments moneys and companies’ in question, or some part thereof, on a constructive trust for the liquidator. Furthermore it is arguable, if the judgment of Millett J. is correct, that if Mr. Stein, with the knowledge he has, exercises his powers under the schemes he has set up to transfer any of the property and money in question to the defendant, he may be regarded by an English court as having acted dishonestly so as to render himself, and possibly the firm, personally liable to the liquidator for the amount of the property and moneys transferred to the defendant, or for any loss so occasioned to the liquidator.2