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UK Supreme Court confirms knowing receipt test

Trustees live in the knowledge that they will be held to account for breaches of trust, unless (possibly) such breaches qualify as "judicious" breaches of trust. 

The UKSC - looking into the point of liability for knowing receipt in equity - has ruled that a claim in knowing receipt cannot succeed if the claimant no longer has an equitable interest in the misappropriated property. The case, Byers and others v Saudi National Bank [2023] UKSC 51, brings certainty to this aspect of knowing receipt claims and provides authority from the highest court level on deep fiduciary principles which is vital reading for practitioners across the legal and fiduciary industry.

We discussed claims for dishonest assistance and knowing receipt in our guide to secondary liability. We illustrated how claims in knowing receipt operate using the Byers case, on which the UKSC has now ruled, upholding the position arising out of the lower courts’ decisions.

In this update, we consider the likely impact of this UKSC decision for international fraud cases, which fall under equitable principles as much as do express trusts or the roles of others with a fiduciary component to the law policing them, such as directors.

What was the issue?

The UKSC agreed to hear the appeal by Saad Investments Company Limited (SICL) and its joint liquidators, who sought to argue that their claim against Saudi National Bank (SNB) in knowing receipt should be able to succeed even though SICL’s equitable interest in the misappropriated trust property (shares in five Saudi Arabian banks) had been extinguished. The original trusts were governed by Cayman Islands law (for these purposes materially identical to English law) and the trust property was transferred in breach of trust to satisfy debts of the trustee in Saudi Arabia.

The question for the UKSC was whether a claimant pursuing a claim in knowing receipt against a defendant who has received trust property in breach of trust must demonstrate that they, the claimant, have a continuing equitable interest in the property. The appellant, SICL, argued this should not be a requirement, and that all that was necessary was that the defendant had knowledge of the breach of trust that rendered it unconscionable for the defendant to retain the trust property.

What did the Supreme Court decide?

In its judgment, the UKSC itself noted that the submissions by the opposing counsel "have forced the court to revisit the most basic equitable principles which underlie a claim in knowing receipt, not least because it cannot be said that the issue has ever been squarely addressed by this court or its predecessor" (Lord Briggs, para. 11). Lord Burrows, giving the second speech, began: "The law on "knowing receipt" has perplexed judges and academics alike for several decades. In this case, we are required to examine some important aspects of that law in the context of a paradigm situation where, at the start of the story, there is a trust."

The UKSC concluded that a claimant must show a continuing equitable interest in the property if it is to sustain a claim in knowing receipt. Two UKSC justices produced judgments with slight differences in their analysis, but the court was unanimous in its conclusion that a continuing equitable interest was a requirement. The result on the facts of this case was that the appeal had to be dismissed.

The UKSC provided some comments on the comparison between knowing receipt and dishonest assistance claims. The court noted that there are important differences between the two, such that they were not comparable for the purposes of deciding this appeal. Dishonest assistance is a claim ancillary to a breach of trust by the primary wrongdoer, the trustee. But although knowing receipt is in a sense also ancillary, because it is a claim against someone other than the primary wrongdoer (the trustee who has acted in breach of trust), nonetheless knowing receipt is better understood as being similar to a proprietary claim because it attaches to the trust property.

What does this mean for "structural" trusts?

The decision serves as a reaffirmation of some important equitable rules and of the fiduciary principles which should guide the stewardship that trustees exercise over their assets. For anyone outside the common law world, the very clear speeches of the Justices (e.g. paras 18 – 28, Lord Briggs’ speech) can act as a training opportunity on both the conceptual split of ownership between legal and beneficial and how trustees are to apprehend it.

What does this mean for international fraud cases?

The appellants had suggested that requiring a continuing equitable interest would open the door to fraudsters routing misappropriated assets through jurisdictions where, as in this case, the law governing the transfers does not distinguish legal and beneficial ownership, thus extinguishing equitable proprietary interests where a legal transfer takes place. The appellants submitted that the fact the defendant knew the property it was receiving was being transferred in breach of trust should suffice for their claim, and to find otherwise would allow such deliberate ploys. This would be unattractive.

However, the UKSC did not accept that this would be a natural result of its ruling. It pointed out that "[m]ost cases of cross-border fraud will involve dishonesty by all concerned in a common design." As such, it felt that the "answer" to this argument was that claims in dishonest assistance were available to deal with any deliberate, dishonest wrongdoing. Dishonest assistance claims also do not require the defendant ever to have received the trust property. As such, we may see more claimants turning to dishonest assistance as a more attractive remedy to fraud. Possible fraud fact patterns could also sustain claims in the tort of conspiracy, which we have discussed in our previous series on “A guide to the tort of conspiracy in the 21st century”.

Tags

litigation, private client, civil fraud, trust disputes, article