A guide to secondary liability – part two: 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 Court of Appeal, “receipt of trust property is the gist of the action”.3
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 Saudi National Bank  EWCA Civ 43
In this case, the Court of Appeal recapped the test for knowing receipt, and confirmed that a claimant needs to have a continuing proprietary interest in the property in question when in the hands of the defendant in order to sustain a claim for knowing receipt (where dishonest assistance is not alleged). The relevant issue that arose was whether the claim for knowing receipt must fail if the third claimant’s rights in the relevant property had been extinguished on the transfer to the defendant.
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.$318m in value at the date of transfer, by a trustee whom the claimants’ alleged acted in breach of trust.
The Saudi Shares had been owned by a Cayman Islands trust of which the third claimant was the beneficiary. The trustee had transferred the Saudi Shares to the defendant to discharge part of a debt that he, the trustee, owed to the defendant bank (the Transfer). The claimants therefore considered that the Transfer had been in breach of trust and pursued a personal claim in knowing receipt against the defendant bank to recover compensation for the value of the Saudi Shares.
First Instance Decision
In the High Court, the trial judge (Fancourt J) dismissed the claim in knowing receipt on the basis that the bank had taken good title to the Saudi Shares as a matter of Saudi Arabian law. It was alleged that the defendant had knowledge that was sufficient in principle to establish the "knowledge" requirement for knowing receipt liability as we referred to above, namely that “the recipient’s state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt”.9
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 Macmillan Inc v Bishopsgate Investment Trust Plc (No.3)10 to support his finding that, "if the recipient was from the outset entitled to deal with the property as his [or her] own, the claim cannot succeed".11 In coming to his decision, Fancourt J considered and applied previous case law that established, for a claim in knowing receipt, the transfer cannot be one that gives the transferee good title in priority to the beneficiary’s (here, the third claimant’s) interest.12
Court of Appeal Decision
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 Court of Appeal unanimously agreed with Fancourt J. Approving the trial judge’s analysis, the Court of Appeal agreed that there was – in the words of Fancourt J – "a consistent line of case law, starting with Macmillan…" where it has either been decided that a claim in knowing receipt cannot succeed unless the claimant has a continuing proprietary interest in the impugned transfer or that has been assumed to be correct.
As explained by the Court of Appeal, in the Macmillan case, the defence of "bona fide purchaser for value without notice" was considered to provide a good defence not because the lack of notice defeated the unconscionability requirement (although it may well do), but because the defendants had taken good title to the trust assets and so the claimants did not have a beneficial interest in the property.
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  N.P.C 71,  4 WLUK 326, the Court 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  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. v Woodley Properties Ltd and others  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 Court of Appeal, 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" (emphasis added).16 What this highlights for claimants is that, if the defendant’s conduct was dishonest, a claimant may be able to get around any issues of proprietary interest by making out a claim for dishonest assistance in the alternative.
The Court of Appeal decision was appealed to the Supreme Court, and that appeal was heard in July 2023 with judgment awaited. For now, the Court of Appeal decision remains good law and provides helpful summary of the law of knowing receipt, and a useful reminder that if a claimant’s equitable interest has passed (either because the transfer is not itself a breach of trust or if the equitable interest has been overridden or extinguished because of the transfer), the claimant cannot successfully claim in knowing receipt where no dishonesty is alleged. However, alternative avenues such as a claim for breach of trust (against the transferor) or a claim for dishonest assistance (against the recipient) may be useful.
Whether the Supreme Court decision changes the landscape waits to be seen.
1El Ajou v Dollar Land Holdings plc  2 All ER 685 at 
2 Courtwood Holdings S.A. v Woodley Properties Ltd and others  EWHC 2163 (Ch)
3 Novoship (UK) Ltd v Mikhaylyuk  EWCA Civ 908,  QB 499 at 
4 Bank of Credit and Commerce International (Overseas) Ltd v Akindele  Ch 437 at 
5 Bank of Credit and Commerce International (Overseas) Ltd v Akindele  Ch 437 at 
6 Independent Trustee Services Ltd v GP Noble Trustees Ltd  EWCA Civ 195,  Ch 91 at 
7 Agip (Africa) Ltd v Jackson  Ch 265 at 
8 Bank of Credit and Commerce International (Overseas) Ltd v Akindele  Ch 437 at 
9 Byers and others v Saudi National Bank  EWHC 60 (Ch) at 
10  1 W.L.R 978,  12 WLUK 142, which decision was approved by the Court of Appeal
11 Byers and others v Saudi National Bank  EWHC 60 (Ch) at 
12 Lightning v Lightning Electrical Contractors Ltd  N.P.C 71,  4 WLUK 326 and Courtwood Holdings SA v Woodley Properties Ltd  EWHC 2163 (Ch),  10 WLUK 168
13 Byers and others v Saudi National Bank  EWCA Civ 43 at 
14 Byers and others v Saudi National Bank  EWCA Civ 43 at 
15 Byers and others v Saudi National Bank  EWCA Civ 43 at 
16 Byers and others v Saudi National Bank  EWCA Civ 43 at