Scott & Ors v Honeyman-Scott

A defaulting trustee who has a beneficial interest in a trust fund is treated as having received that interest in advance to the extent of the breach. The trustee cannot receive further payments from the fund until the breach has been made good. The principle applies equally where the fund consists of an ongoing income stream rather than capital. It is not a discretionary method of enforcing a debt, so the court need not balance the trustee’s personal circumstances against the beneficiaries’ proprietary rights. Where the trustee’s vested interest under the estate remains intact and only the order of distribution is affected, there is no deprivation of possessions under Article 1 of the First Protocol to the Convention for the Protection of Human Rights.

The appellant was the widow and former administrator of the estate of James Honeyman-Scott. She had overpaid herself royalties over approximately 17 years. The Technology and Construction Court found that she owed the other beneficiaries £372,184, removed her as administrator and directed that no further payments be made to her from her half share of the residuary estate until the overpayment and costs were paid.

She renewed an application for permission to appeal, arguing that the equitable rule concerning a defaulting trustee should operate only as a discretionary enforcement mechanism. She relied on the appellant’s financial circumstances, analogies with insolvency and enforcement legislation, and Article 1 of the First Protocol. The central issues were whether the rule applied to continuing royalty income and whether it unlawfully deprived her of property.

1. Application dismissed. Arden LJ held that the equitable principle stated in Re Dacre (1916) 1 Ch 344 applied. A trustee who has committed a breach of trust and has a beneficial interest in the trust fund is treated as having already received that interest to the extent of the default. The trustee cannot receive further trust payments until the breach has been made good.
2. The principle was not confined to reimbursement of a capital sum. It applied equally where the trust asset was an income stream from royalties which continued to produce income. The rule was not discretionary, and the court had no power to direct that only part of the continuing income be treated as received in anticipation.
3. The insolvency and enforcement provisions relied on by the appellant, including section 310 of the Insolvency Act 1986, section 6 of the Attachment of Earnings Act 1971 and section 11 of the Access to Justice Act 1999, addressed different circumstances. They concerned enforcement where the creditor had no proprietary interest in the sums being received and did not assist in applying the equitable rule.
4. Article 1 of the First Protocol did not provide a realistic ground of appeal. The appellant’s vested interest under the estate was not itself affected. The order merely required the other beneficiaries to receive sums which, as a matter of accounting, they already owned before further payments were made to the appellant. The royalties were not her possessions for Article 1 purposes unless and until she had made good the breach.
5. Clarke LJ agreed with Arden LJ and independently concluded that the appeal had no realistic prospect of success. There was no order for costs.

• Court of Appeal (Civil Division): On 17 December 2001, the renewed application for permission to appeal against the order of the Technology and Construction Court dated 11 July 2001 was dismissed. The lower court’s direction that no further royalties be paid to the appellant until the £372,184 overpayment and costs were discharged was left undisturbed.