Director in breach of duty was a constructive trustee

The Court of Appeal has heard an appeal against a decision of a deputy judge that a director of a property company who had acquired property from the company in 1986 for £8,400 without disclosing the development potential of the property was in breach of duty and liable to account for the profits he made from the acquisition when he sold the land in two parts for £110,300 in 1988 and £122,500 in 1992, but was not a constructive trustee for it.

The Court of Appeal dismissed the director's appeal and allowed the company's cross-appeal. A director who obtained a company's property for himself by misuse of the powers with which he had been entrusted as a director was a constructive trustee.

Although not expressly appointed a trustee he assumed the duties of a trustee by a lawful transaction which was independent of and preceded the breach of trust: a director, on appointment to office, assumed the duties of a trustee in relation to the company's property (Belmont Finance Corp v Williams Furniture Ltd (No. 2) [1980] 1 All ER 393). The deputy judge had found that on the conveyance of the land to the defendant in February 1986 there was a failure by the defendant to comply with the statutory disclosure requirements of a director and he acted in breach of his fiduciary duties as a director in failing to ensure that the land was sold at its full value. His existing duties as a director required him to ensure that the land was not conveyed at all until the company had received and considered advice as to its value in the light of the change in planning potential. In those circumstances it was impossible to reach a conclusion that the defendant did not hold the development land as a constructive trustee and the deputy judge was wrong not to have so found.

The defence limitation failed under s.21(1)(b) of the Limitation Act 1980. There was no limitation period for a beneficiary under a trust to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee or previously received by the trustee and converted to his use - the position here. It was right that the director should account for the £110,300 received on the sale in 1988 and the £122,500 obtained on the further sale in 1992, in each case after bringing to the credit of that account a proportion of the purchase price of £8,400 and the cost of any works which led to an enhancement in the value of each part of the land.

JJ Harrison (Properties) Ltd v Harrison [2002] BCC 729.
Judgment delivered 27 November 200 and 11 October 2001

"Company Law Newsletter" 30th October 2002