Lord Templeman, delivering the judgment of the Board, began from first principles of equity concerning the nature of fiduciary obligations. A fiduciary is a person who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the duty of loyalty: a fiduciary must not place himself in a position where his personal interest conflicts with his duty, and must not profit from his fiduciary position without the fully informed consent of his principal. These foundational rules find expression in cases such as Keech v Sandford (1726) Sel Cas Ch 61, in which a trustee who renewed a lease for his own benefit was compelled to hold it on trust for the beneficiary, demonstrating that the court will not permit a fiduciary to retain a benefit obtained by virtue of his position.
The same rigorous principle was affirmed in Boardman v Phipps [1967] 2 AC 46, where the House of Lords held that a solicitor acting for trustees who had acquired shares using information obtained in his fiduciary capacity was obliged to account to the trust for the profits made, notwithstanding the absence of any deliberate wrongdoing on his part. Lord Templeman treated Boardman v Phipps as illustrating the breadth of equity's insistence that a fiduciary shall not retain unauthorised profits, irrespective of whether the principal could have obtained those profits directly. In the present case, the fiduciary's conduct was far more culpable: Reid had actively solicited and received payments to betray his principal's interests.
Lord Templeman then addressed the central equitable maxim that equity considers as done that which ought to be done. When Reid received the bribe, he was, at that very moment, under an immediate equitable obligation to pay the money over to the Crown. Equity does not wait upon the performance of obligations; it treats the obligation as already discharged in substance. Accordingly, from the instant of receipt, equity treated the bribe money as belonging in equity to the Crown. The fiduciary, receiving property which in good conscience belonged to another, held it subject to a constructive trust arising by operation of law.
The Board considered the nature and source of the constructive trust engaged in these circumstances. A constructive trust is imposed by operation of law whenever a person receives or holds property in circumstances in which it would be unconscionable for him to retain it for his own benefit. The constructive trust in this context does not depend upon any agreement or upon the intention of the parties; it is the law's response to the unconscionable conduct of the fiduciary. The moment the bribe is received in breach of duty, the law imposes the trust automatically, and the fiduciary becomes a trustee of the sum received for his principal.
Lord Templeman turned to the decision in Lister & Co v Stubbs (1890) 45 Ch D 1 and subjected it to trenchant criticism. In that case, Cotton and Lindley LJJ had held that an employee who received secret commissions was not a trustee of those sums and that the employer's remedy was personal only. The Court of Appeal had reasoned that a trust could not arise where the money received was not the property of the employer at the time of receipt, and that there was a categorical distinction between an obligation to pay a debt and an obligation as trustee. Lord Templeman rejected this analysis as inconsistent with equitable principle. The distinction drawn in Lister v Stubbs between the debtor-creditor relationship and trusteeship could not withstand scrutiny when applied to a fiduciary who received property in direct breach of his duty of loyalty.
The practical consequences of confining the principal to a personal remedy were, in Lord Templeman's analysis, both unjust and unprincipled. If Reid were merely a debtor, the Crown would rank as an unsecured creditor in the event of his insolvency, competing with other creditors for a share of an insufficient estate. This would allow Reid's other creditors, who had no legitimate claim to the bribe proceeds, to benefit indirectly from his wrongdoing. Furthermore, if the bribe proceeds had depreciated, a personal claim would expose the principal to the risk of that depreciation; yet if the proceeds had appreciated — as had occurred here — the fiduciary would retain the benefit of that appreciation. Equity could not sanction so capricious an outcome.
The Board also addressed the argument that a proprietary remedy was inappropriate where the principal had never possessed the property and could not be said to have had any pre-existing proprietary interest in the bribe. Lord Templeman was unpersuaded by this objection. The constructive trust does not depend upon the principal ever having held the property; it arises because the fiduciary's receipt is infected by his breach of duty. The equitable obligation to account, imposed from the moment of receipt, is sufficient to generate the trust relationship. To hold otherwise would be to allow the fiduciary to profit from the very wrong he was bound to avoid.
Lord Templeman extended the constructive trust reasoning to property acquired with the bribe proceeds. Since equity treats the bribe money as belonging to the principal from the moment of receipt, any asset purchased with that money is equally impressed with the constructive trust. The fiduciary holds the substitute property on trust for the principal, who may trace into it. Where the substitute property has increased in value, the principal is entitled to the enhanced value: it would be contrary to principle to allow the wrongdoing fiduciary to retain the benefit of appreciation in property that was never rightfully his. The result followed inexorably from the finding that the bribe itself was held on trust.
As regards the properties held in the names of Reid's wife and his solicitor, the Board held that those parties held the properties as nominees for Reid and therefore as constructive trustees for the Crown. Where a fiduciary places trust property in the name of a third party who takes with notice of the trust, or who provides no consideration, the third party takes subject to the trust. Reid's wife and solicitor could assert no independent equitable interest that was capable of defeating the Crown's prior equitable claim.
Lord Templeman acknowledged that the decision would have significant implications in insolvency situations, since the recognition of a proprietary claim enables the principal to recover property ahead of the fiduciary's unsecured creditors. He did not regard this as an objection to the analysis; rather, it confirmed the correctness of the proprietary approach. A bribed fiduciary's creditors have no equitable claim to property that was never beneficially his. The wrongdoer's estate is diminished, but only to the extent that it was improperly augmented by the bribe.
The Board did not follow Lister & Co v Stubbs and effectively overruled it, though the Privy Council as a matter of strict constitutional doctrine does not formally bind the English courts. The Board's reasoning was framed as a restatement of fundamental equitable principle rather than a departure from it, reinforcing the view that Lister v Stubbs had been a regrettable deviation from sound equity rather than an authoritative development of it. The decision therefore restored coherence to the law governing the remedies available to principals in cases of corruption and breach of fiduciary duty.
Holding
The Privy Council held that a fiduciary who accepts a bribe in breach of his fiduciary duty holds that bribe on constructive trust for his principal from the moment of receipt. The constructive trust arises by operation of law immediately upon receipt and does not depend upon any pre-existing proprietary interest of the principal in the money received. The principal is entitled to a proprietary remedy and is not confined to a personal action against the fiduciary for the amount of the bribe.
Where the fiduciary has used the bribe proceeds to acquire other property, that property is held on the same constructive trust and the principal may trace into it. Where the property has appreciated in value, the principal is entitled to the benefit of that appreciation. The decision in Lister & Co v Stubbs (1890) 45 Ch D 1, insofar as it held that the principal's remedy was personal only, was inconsistent with equitable principle and was not to be followed.
Accordingly, the Attorney General for Hong Kong was entitled to a proprietary claim over the three freehold properties in New Zealand and their proceeds of sale. The appeal was allowed and the claim of the Attorney General was upheld in full.
Significance and Subsequent Application
Attorney General for Hong Kong v Reid [1994] 1 AC 324 represents one of the most significant developments in the law of constructive trusts and fiduciary remedies in the twentieth century. By establishing that bribes are held on constructive trust from the moment of receipt, the Privy Council confirmed that principals enjoy a proprietary — rather than merely personal — remedy against dishonest fiduciaries. This has profound practical consequences in insolvency situations, since a proprietary claim enables the principal to recover identifiable assets ahead of the general body of unsecured creditors. The decision elevated the principal's position dramatically and underscored equity's commitment to ensuring that wrongdoers derive no benefit from their breach of duty.
The decision's authority was not without subsequent controversy in English law. In Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, the English Court of Appeal declined to follow Reid, holding itself bound by Lister v Stubbs and other Court of Appeal authorities, and thus confined the principal to a personal remedy in the