The Court of Appeal has dismissed a knowing receipt claim against a bank for receipt of shares, which were transferred to the bank in breach of trust, on the basis that the claimant did not have a continuing proprietary interest in the relevant shares: Byers & Ors v The Saudi National Bank  EWCA Civ 43.
The decision provides helpful clarification as to the elements required to make good a claim in knowing receipt. It confirms that liability for knowing receipt arises from the recipient’s knowledge of the fact that it has received trust property which has been transferred in breach of trust. This includes where a recipient has received the property without knowing that it was transferred in breach of trust and only later discovers the fact. Once the recipient acquires such knowledge, it makes it unconscionable for the recipient to retain the property and imposes a duty on the recipient to treat the property as if they are a trustee of it and to restore it to the trust. This contrasts with liability for dishonest assistance, where liability is fault-based and arises from the recipient’s dishonesty in assisting a trustee to commit a breach of trust (or assisting a fiduciary to commit a breach of fiduciary duty).
A key battleground in the present case, was whether a continuing proprietary interest in the relevant property is required for a claim in knowing receipt claim. In the view of the Court of Appeal, a defendant cannot be liable for knowing receipt if it takes the property free of any interest of the claimant. In this case, given the claimant had failed to prove at trial that its beneficial interest in the shares continued under local law following transfer to the bank, the claim in knowing receipt failed.
We consider the decision in more detail below.
The background to this decision is more fully set out in our blog post on the High Court decision, here.
In summary, Saad Investments Company Limited (SICL) was a Cayman Island registered company and the beneficiary of certain Cayman Island trusts. Trust property included shares in five Saudi Arabian companies (the Shares). In July 2009, SICL went into liquidation.
In breach of trust, the trustee of the Cayman Island trusts transferred the Shares to a bank based in Saudi Arabia (the Bank). The purpose of the transfer was to discharge part of a debt owed by the trustee to the Bank.
The liquidators of SICL, the claimants, subsequently brought a claim for knowing receipt against the Bank, on the basis that the Bank knew (or ought to have made / was reckless in failing to make inquiries which would have revealed) that the trustee held the Shares on trust for SICL and that the transfer was in breach of trust.
High Court decision
The High Court’s reasoning is discussed in our previous blog post.
In summary, the High Court found in favour of the Bank and dismissed the claim. It held that a claim in knowing receipt where dishonest assistance is not alleged will fail if, at the moment of receipt, the beneficiary’s equitable proprietary interest is destroyed or overridden so that the recipient holds the property as beneficial owner of it. In the absence of a formal allegation of dishonesty against the Bank, and given the claimants’ failure to prove that SICL’s beneficial interest continued under local law despite receipt of the Shares by the Bank, the claim failed.
The claimants appealed to the Court of Appeal. The claimants argued that they did not need to have a continuing proprietary interest in the Shares to succeed in their knowing receipt claim.
Court of Appeal decision
The Court of Appeal found in favour of the Bank and dismissed the appeal by the claimants. In summary, it held that a continuing proprietary interest in the relevant property is required for a knowing receipt claim to be possible. A defendant cannot be liable for knowing receipt if he took the property free of any interest of the claimant. Absent a continuing proprietary interest in the Shares at the time of the registration, the claim in knowing receipt failed.
We consider below some of the key issues considered by the Court of Appeal in relation to the knowing receipt claim.
Accessory liability and the distinction between knowing receipt and dishonest assistance
The Court of Appeal highlighted that the starting point for establishing accessory liability for breach of trust is the well-known statement of principle in Barnes v Addy (1874) LR 9 Ch App 244:
- Strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.
The Court of Appeal then went on to note the distinction between knowing receipt and dishonest assistance:
- Liability for dishonest assistance arises where a person dishonestly procures or assists in a breach of trust or fiduciary duty. While the standard by which the law determines whether a mental state is objective, negligence does not suffice. For a defendant to be liable for dishonest assistance, his mental state has to have been such as by ordinary standards would be characterised as dishonest (as per Barlow Clowes International Ltd v Eurotrust International Ltd  UKPC 37 and Ivey v Genting Casinos (UK) Ltd  UKSC 67). However, there is no requirement that the defendant should have received property to which the trust or fiduciary obligation has ever attached.
- To establish a claim for knowing receipt, a claimant must show: first, a disposal of his assets in breach of fiduciary duty; secondly, the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiffs; and thirdly, knowledge on the part of the defendant that the assets he received are traceable to a breach of fiduciary duty (as per El Ajou v Dollar Land Holdings plc  2 All ER 685).
- The recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt. While a knowing recipient will often be found to have acted dishonestly, it has never been a prerequisite of the liability that he should (as per Bank of Credit and Commerce International (Overseas) Ltd v Akindele  Ch 437).
- A recipient need not necessarily have had any knowledge or even notice of any breach of duty at the point of receipt to be liable for knowing receipt. A person who has received trust property transferred to him in breach of trust can incur liability either if he received it with notice that it was trust property and that the transfer to him was a breach of trust or if he received it without such notice but subsequently discovered the facts. What matters is that the recipient’s state of knowledge should have become such as to make it unconscionable for him to retain the benefit of the receipt (as per Agip (Africa) Ltd v Jackson  1 Ch 265).
Mental element for establishing knowing receipt
The Court of Appeal noted that, as per Akindele, the mental element to establish liability for knowing receipt arises from the recipient’s knowledge of the fact that it has received trust property which has been transferred in breach of trust. This makes it unconscionable for the recipient to retain the property. Knowing receipt is not concerned with unconscionability of receipt, but with unconscionability of retention.
In the Court of Appeal’s view, liability for knowing receipt may arise where there has been no unconscionable conduct by the recipient. Indeed, a recipient could receive the property without knowing that it has been transferred in breach of trust and only later be informed of the fact. If the property is still in the recipient’s possession when they become aware of its provenance, the duty to deal with it as a constructive trustee immediately arises. Failure to do so will give rise to liability for knowing receipt, even where – up until the moment of knowledge – the recipient has done nothing unconscionable.
The requirement for a continuing proprietary interest
The Court of Appeal said that a continuing proprietary interest in the relevant property is required for a knowing receipt claim to be possible. A defendant cannot be liable for knowing receipt if he took the property free of any interest of the claimant. Absent a continuing proprietary interest in the Shares at the time of the registration, the claim in knowing receipt failed.
The Court of Appeal agreed with the High Court that such a conclusion was borne out by a consistent line of case law in which it has either been decided that a claim in knowing receipt cannot succeed unless the claimant has a continuing proprietary interest following the impugned transfer or that has been assumed to be correct. As per Lightning Electrical Contractors Ltd (2009) 1 TLI 35 the court could not grant relief against a transferee if under the lex situs the claimant’s equity was extinguished by the transfer. Also, as per Akers v Samba Financial Group  UKSC 6, where under the lex situs of the relevant trust property the effect of a transfer of the property by the trustee to a third party is to override any equitable interest which would otherwise subsist, that effect should be recognised as giving the transferee a defence to any claim by the beneficiary. Also, as per Courtwood Holdings SA v Woodley Properties Ltd  EWHC 2163, the foundation of a knowing receipt claim is that the assets do not belong in equity to the recipient and that what gives the equity to the claimants is the fact that the transaction which is impugned is not one which transfers a good title to the recipient.
The Court of Appeal also underlined that as per Macmillan Inc v Bishopsgate Investment Trust plc (No 3)  1 WLR 978, a bona fide purchaser without notice can defeat a continuing proprietary interest claim as it will have taken free of the claimant’s interest.
Accordingly, for the reasons above, the Court of Appeal found in favour of the Bank and dismissed the appeal by the claimants.
Permission to Appeal
The Court of Appeal refused the claimants’ application for permission to appeal to the Supreme Court.