In part one of this series, we examined how claimants who have been the victims of fraud facilitated by third parties may be able to recover the money or assets of which they have been defrauded from those third parties through a claim for dishonest assistance, which is a form of secondary liability. In this article we discuss another form of secondary liability that may be available to assist such claimants - knowing receipt.
This article is the final of a two part series. To listen to the full series in audio format, please click on the playlist below.
Read the first article in this series: A guide to secondary liability – part one: dishonest assistance.
What is knowing receipt?
To successfully claim for knowing receipt, the claimant must show that there has been:
- a disposal of their assets in breach of trust or in breach of fiduciary duty;
- the beneficial (as opposed to "ministerial") receipt by the third party (whom we'll call the "defendant") of assets which are traceable as representing the assets of the claimant; and
- knowledge on the part of the defendant that the assets they received are traceable to a breach of fiduciary duty.1
The first requirement, that there be a disposal of the claimant's assets in breach of trust or in breach of fiduciary duty, must be a disposition that is in and of itself a breach of trust (or breach of fiduciary duty); it is not enough that the disposition follows, and is caused by, other breaches of trust or fiduciary duty.2
With respect to the second requirement, the defendant must have received trust assets. It is not enough that the defendant has benefited from trust property. As noted by the
A helpful illustration of this point is the example where a trustee wrongly misappropriates trust money and spends it on a holiday for the defendant. In that case, the defendant has benefitted from trust property, but did not receive it; thus, there would be no claim in knowing receipt against the defendant (though a claim would lie in breach of trust against the trustee).
The third requirement, of knowledge, is the most complex. The defendant must know that the assets they received are traceable to a breach of trust or of fiduciary duty, and that knowledge must be such as to make it unconscionable for the defendant to retain the benefit of the receipt.4 However, unlike the position for dishonest assistance, while a knowing recipient will often be found to have acted dishonestly, dishonesty has never been part of the test for liability in knowing receipt.5
It is important that knowledge and possession coincides for liability to arise.6 However, a recipient need not have had knowledge of any breach of duty at the time of receipt to be liable for knowing receipt.
Case law has confirmed that a person who has received trust property transferred to them in breach of trust can incur liability even if they received it without notice that it was trust property, provided they subsequently discovered the fact.7 What matters is that the recipient's state of knowledge should have become such as to make it unconscionable for them to retain the benefit of the receipt.8
A recipient will not be liable if they no longer have the property by the time they learn of the relevant breach of duty. There must be some point in time when the recipient has both the property itself and knowledge of the breach.
As such, a claimant can still bring a knowing receipt claim against a defendant after the defendant has disposed of the relevant trust property provided the defendant had knowledge of the breach before that disposal. In fact, a claim for knowing receipt can be especially useful where the defendant no longer holds the trust property, as it offers a personal remedy where the property itself cannot be recovered by a proprietary claim to the assets themselves.
Case example:Byers and others v
In this case, the
Background
The first and second claimants were the joint liquidators of the third claimant. The claimants sought to recover from the defendant the value of shares transferred to it in breach of trust by alleging knowing receipt. The receipt relied on by the claimants was the legal transfer of shares in five Saudi Arabian banks (the Saudi Shares), which totalled c.
The Saudi Shares had been owned by a
First Instance Decision
In the
However, Fancourt J dismissed the claim because after the Transfer, the claimants no longer had a proprietary interest in the Saudi Shares.
Fancourt J relied on the decision of Millett J in
The claimants appealed the decision of Fancourt J by contending that they did not need to have a continuing proprietary interest in the Saudi Shares to succeed in their knowing receipt claim. They submitted that in finding otherwise, Fancourt J had wrongly introduced an additional requirement into the test for a knowing receipt claim.13
However, the
As explained by the
The Court of Appeal, like Fancourt J, also applied the following case law when holding that a continuing proprietary interest in the trust property is a prerequisite of a knowing receipt claim:
- in Lightning v
Lightning Electrical Contractors Ltd [1998] N.P.C 71, [1998] 4 WLUK 326, theCourt of Appeal took it that the English Court could not grant relief against a transferee if under the lex situs the claimant's equity (its beneficial interest in the trust property) was extinguished by the transfer; -
in Akers & Others v
Samba Financial Group [2017] UKSC 6,Lord Mance , giving the leading judgment, saw Macmillan as establishing that, 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; and -
in
Courtwood Holdings S.A. vWoodley Properties Ltd and others [2018] EWHC 2163 (Ch), Nugee J considered the foundation of a knowing receipt claim to be 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 succinctly concluded that "[i]f the law treats the receipt of the property as conferring unencumbered title on the recipient, it is difficult to see why retention should be regarded as unconscionable".14 The Court of Appeal said that the claimants' argument to the contrary "wrongly treats the knowledge element as unconscionability of receipt, whereas it is unconscionability of retention".15
It is notable that it was not part of the claimants' case that the defendant bank acted dishonestly. As a result, they could claim only in knowing receipt, and not dishonest assistance. Fancourt J emphasised the significance of this in his conclusions, endorsed by the
Conclusion
The Court of Appeal decision was appealed to the Supreme Court, and that appeal was heard in
Whether the Supreme Court decision changes the landscape waits to be seen.
Footnotes
1
2
3
4
5
6 Independent
7
8
9 Byers and others v
10 [1995] 1 W.L.R 978, [1993] 12 WLUK 142, which decision was approved by the
11 Byers and others v
12 Lightning v
13 Byers and others v
14 Byers and others v
15 Byers and others v
16 Byers and others v
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Macfarlanes
EC4A 1BD
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