A  Resulting Trust Arises where Property is Transferred under Circumstances which the Transferor does not Intend to Confer a Beneficial Interest upon the Transferee

Juletabi African Adventure Limited & another v Christopher Michael Lockley [2017] eKLR

Civil Appeal No. 75 of 2016

Court of Appeal at Mombasa

Alnashir Visram, W. Karanja & M. K. Koome JJA

November 23, 2017.

Reported by Kakai Toili

Company law – derivative suits – circumstances where one could institute a derivative suit – what were the circumstances where one could institute a derivative suit.

Property law – trusts – resulting trusts –where property was transferred under circumstances which suggested that the transferor did not intend to confer a beneficial interest upon the transferee - whether a resulting trust arose where property was transferred under circumstances which suggested that the transferor did not intend to confer a beneficial interest upon the transferee.

Property law – trusts – constructive trusts – circumstances where a court could presume a constructive trust - what were the circumstances where a court could presume a constructive trust.

Property law – trusts – constructive trusts vis a vis resulting trusts – what was the distinction between a constructive trust and a resulting trust.

Civil Practice and Procedure – pleadings – plaint – particulars of claims in a plaint – failure to list particulars of a claim in a plaint – effect of failure to list particulars of a claim in a plaint - what was the effect of not listing particulars of a claim in a plaint - Civil Procedure Rules, 2010, order 2 rule 10

Locus standi – definition of locus standi - The right to bring an action or to be heard in a given forum- Black’s Law Dictionary, 9th Edition at page 1026

Trust – definition of trust - the right, enforceable solely in equity, to the beneficial enjoyment of property to which another holds legal title; a property interest held by one person (trustee) at the request of another (settlor) for the benefit of a third party (beneficiary) - Black’s Law Dictionary, 9th  Edition

Brief Facts:

The 1st Appellant was incorporated on June 28, 2006, The Respondent held 60% of the shareholding while the 2nd Appellant held 40%.  Both the 2nd Appellant and the Respondent agreed that the 2nd Appellant would take charge of the business operations as well as management of the 1st Appellant.  It was further agreed that the Respondent would provide the initial capital of running the company which he did by depositing the amount into the 2nd Appellant’s wife, bank account. 

In the year 2007, the 2nd Appellant informed the Respondent that the 1st Appellant was in need of a four wheel drive vehicle in order to conduct its business properly. The Respondent credited 15,500 into the 1st Appellant’s account at Imperial Bank Limited for the said purchase. The said sum was advanced to the 1st Appellant and it was agreed that it would be offset by the 1st Appellant paying him 50% of its profits until the same was paid in full.  It was pursuant to the said advance that motor vehicle registration number KAM 634J was purchased and registered in the 1st Appellant’s name. Nevertheless, no payments were ever made to the Respondent.

Still in 2007 the Respondent requested the 2nd Appellant to help him identify a suitable parcel of land in Diani to purchase. The Respondent made substantial deposits into the 1st Appellant’s account for that purpose and requested the 2nd Appellant to undertake the transaction on his behalf.  However, when the purchase was completed the 2nd Appellant registered the parcel in favour of the 1st Appellant instead of the Respondent. 

Thereafter, the Respondent learnt that the 2nd Appellant and his wife had opened a parallel competing company and that the vehicle which had been purchased for the 1st Appellant’s purposes had been converted to the said competing business. The Respondent requested the 2nd Appellant to release the logbook of the vehicle and the title deed of the parcel with a view of facilitating the transfer of the said properties to him. Despite the 2nd Appellant agreeing to do so he failed and refused to honour his word.

 Perturbed by the 2nd Appellant’s actions the Respondent filed a suit in the High Court claiming among others that the 1st Appellant was holding the properties in trust for him. The Trial Court in a judgment dated August 21, 2015 allowed the Respondent’s suit. Aggrieved by the decision the Appellants filed the Appeal

Issues:

1. What were the circumstances where one could institute a derivative suit?
2. What were the circumstances where a court could presume a constructive trust?
3. Whether a resulting trust arose where property was transferred under circumstances which suggested that the transferor did not intend to confer a beneficial interest upon the transferee
4. What was the distinction between a constructive trust and a resulting trust?
5. What was the effect of not listing particulars of a claim in a plaint?

Held:

1. On a first appeal from the High Court, the Court of Appeal had to reconsider the evidence, evaluate it itself and draw its own conclusions though it had to always bear in mind that it had neither seen nor heard the witnesses and should make due allowance in that respect. Secondly, that the responsibility of the Court was to rule on the evidence on record and not to introduce extraneous matters not dealt with by the parties in the evidence.
2. Whether or not the Respondent had the requisite standing turned on the nature of the claim before the Trial Court.  By dint of the rule in Foss vs. Harbottle there was no argument that the proper Plaintiff in any proceedings or action in respect of a wrong done to a company was the company itself.  That was based on the principle that a company was a legal personality distinct from its directors and shareholders.  However, there were exceptions to the rule which allowed a person to sue on behalf of the company.
3. There were four exceptions to the rule in Foss vs. Harbottle

1. Where the directors or a shareholding majority used their control of the company to paper over actions which would be ultra vires to the company or illegal.
2. If some special voting procedure would be necessary under the company’s constitution or under the Companies Act, it would defeat both if they could be sidestepped by ordinary resolutions of a simple majority, and no redress for aggrieved minorities would be allowed.
3. Where there was invasion of individual rights, such as voting rights.
4. Where a fraud on the minority was being committed.

In all those cases, a derivative action could be brought before the Court on behalf of the company where the wrongdoer was in control of the company or by the individual shareholder where his personal right was violated.

4. A derivative suit was basically brought on behalf of a company for wrongs committed against it or in other words for the benefit of the company. The nature of the suit instituted by the Respondent was not a derivative suit.
5. The Respondent did not institute the suit on behalf or for the benefit of the 1^st Appellant for perceived wrong(s) against it.  Rather, he filed the suit for his own benefit for wrongs committed against him by the Appellants, to wit, breach of trust. The Respondent did not require leave before instituting the suit.
6. What led the Defendants to submit that the Plaintiff’s claim did not have particulars as required under order 2 rule 10 of the Civil Procedure Rules, 2010 was because the Plaintiff did not draw out the Plaint as traditionally done by practitioners, where certain paragraphs were clustered together under the heading ‘particulars’. That practice had indeed become the norm form of usage but it did not mean that if one did not draw his claim in that manner his claim failed.
7. The onus lay on a party relying on the existence of a trust to prove it through evidence.  The law never implies, the Court never presumes, a trust, but in case of absolute necessity.  The Courts could not imply a trust save in order to give effect to the intentions of the parties.  The intention of the parties to create a trust had to be clearly determined before a trust would be implied.
8. The 1^st Appellant held the vehicle in trust for the Respondent. There was a detailed account and paper trail of the funds the Respondent had transferred to the 1^st Appellant’s account in respect of the motor vehicle and parcel of land. It was clear that the Respondent’s intention with respect to the funds transferred for the car was that the same was to be paid back by the 1^st Appellant. The Respondent had purchased the parcel of land for his own benefit. The fact that it was later registered in favour of the 1^st Appellant didn’t divest him of his interest thereon.
9. In the absence of an express trust, there are trusts created by operation of the law. They fell within two categories; constructive and resulting trusts. Given that the two were closely interlinked, it was pertinent to look at each of them in relation to the matter at hand. 
10. A constructive trust was an equitable remedy imposed by the Court against one who had acquired property by wrong doing. It arose where the intention of the parties could not be ascertained. If the circumstances of the case were such as would demand that equity treats the legal owner as a trustee, the law would impose a trust.  A constructive trust would thus automatically arise where a person who was already a trustee took advantage of his position for his own benefit.
11. Proof of parties’ intention was immaterial in constructive trusts, for the trust would nonetheless be imposed by the law for the benefit of the settlor. Imposition of a constructive trust was thus meant to guard against unjust enrichment.
12. A resulting trust was a remedy imposed by equity where property was transferred under circumstances which suggested that the transferor did not intend to confer a beneficial interest upon the transferee. That trust could arise either upon the unexpressed but presumed intention of the settlor or upon his informally expressed intention.
13. Unlike constructive trusts where unknown intentions could be left unexplored, with resulting trusts, courts would readily look at the circumstances of the case and presume or infer the transferor’s intention. Most importantly, the general rule is that a resulting trust will automatically arise in favour of the person who advanced the purchase money. Whether or not the property was registered in his name or that of another, was immaterial.
14. All indications were that a resulting trust arose as between the Respondent and the 1^st Appellant. A resulting trust automatically arose in favour of the person who advanced the purchase money.  Whether or not the property was registered in his name or that of another, was immaterial.  It was common ground that all the purchase money for both the vehicle and the parcel was advanced by the Respondent.  The parcel and vehicle were therefore held in trust for the Respondent by the 1^st Appellant.

Appeal dismissed with costs