UK Supreme Court clarifies basis of ‘knowing receipt’ claims arising from breach of fiduciary duty

"The law on 'knowing receipt' has perplexed judges and academics alike for several decades" – Lord Burrows (paragraph 99).

In a decision with significant implications for claims involving fraud and breach of fiduciary duty - especially in the context of insolvency or financial distress - the Supreme Court late last year held in Byers and others v Saudi National Bank [2023] UKSC 51 that a claim in knowing receipt will only succeed if the claimant had an equitable interest in the property at the time the defendant received the property, in the knowledge that the property was transferred in breach of trust. In other words, the claimant must have a continuing proprietary right in the property in order to claim against the recipient in knowing receipt.

This alert explores why and when this will matter in practice, and explores some of the effects of the decision. How will it affect, say, the legal remedies available to a company (or its liquidators) whose assets have been appropriated or dissipated by directors? As explained further below, there were also important related questions that the Court deliberately left open for determination at a later date.

Introduction – what is knowing receipt?

As a preliminary point, and as explained in the Supreme Court's judgment, it is worth remembering that rules relating to breach of trust apply equally to breaches of other fiduciary duties such as those owed by company directors. In this sense, the principles arising from this decision extend to circumstances where a director or other fiduciary effects a transfer of funds or assets in breach of fiduciary duty. Even where the director was not holding those funds or assets on an express trust for the company, it is said that a constructive trust arises at the moment of transfer, i.e. the law treats the recipient as though they were holding the property on trust for the victim company (subject to defences). Such a breach of fiduciary duty could involve fraud or dishonesty on the part of the director, although this is not always necessary.

If property is transferred in breach of fiduciary duty, the two most obvious targets for recoveries are usually the trustee or company director who committed the breach, or the recipient of the assets. Often these are the same person.

A claim against the recipient in knowing receipt (sometimes also referred to as unconscionable receipt) is available when a trustee transfers property beneficially owned by the claimant to the defendant in breach of fiduciary duty, and the defendant was aware of the breach before dissipating or disposing of the property. After disposal, dissipation, or destruction of the property by the defendant, the claimant can no longer pursue a proprietary claim, but the defendant remains personally liable as though they were a trustee of the property, with the claimant as beneficiary. The doctrine of knowing receipt imposes upon the defendant personal obligations to restore the property to the beneficial owner and to act as its custodian in the meantime. This includes accounting for any profits arising out of the asset during that period.

In Byers v Saudi National Bank, the claimants' claim in knowing receipt failed, despite the fact the defendant transferee knew, at the time it received the property, that the asset had been transferred to it in breach of trust. At the time of trial, the defendant still held the property and, ordinarily, a proprietary claim to the property would subsist. However, in this case, the question of title to the property was governed not by English law but by Saudi Arabian law, under which the defendant had absolute title, with the claimant having no equitable title in the property, so that there were no grounds to bring a proprietary claim. Importantly, the Supreme Court held that the "lack" of beneficial ownership also prevented a claim for knowing receipt.

Background

The appellants were Saad Investments Co Ltd ("SICL") and its joint liquidators. SICL was the beneficial owner of shares in five Saudi Arabian companies, held on trust for SICL by its founder and director, Mr Maan Al-Sanea. The trusts were governed by Cayman law.

In breach of trust, Al-Sanea transferred those securities to a Saudi Arabian financial institution, Samba Financial Group ("Samba"), to discharge personal debts he owed to Samba. Samba gave no disclosure in these proceedings and so Samba was deemed to have known, when it received the securities, that they had been held by Al-Sanea on trust for SICL.

Importantly, the transfer by Al-Sanea to Samba was governed by Saudi law, in which there is no distinction between legal and beneficial ownership. Therefore, unlike the position as it would have been under English law or the law of many common law jurisdictions, following transfer of the securities to Samba and their registration in Samba's name, it could not be said that SICL had any equitable title in the shares. Any equitable interest that might have existed had been extinguished by the transfer.

Samba was the sole defendant at the time of trial, although subsequently Saudi National Bank became the successor in title to the assets and liabilities of Samba.

The issue before the Supreme Court

The trial judge and the Court of Appeal held that the registration of Samba as the owner of the securities was fatal not only to any proprietary claim by SICL but also to a personal claim in knowing receipt against Samba. The sole issue on appeal was whether a claim in knowing receipt is contingent on the claimant having an equitable interest in the asset at the time of the transfer.

SICL and its liquidators appealed, submitting that a claim in knowing receipt does not require any continuing equitable interest, and that it sufficed that Samba knew the securities were transferred to it in breach of trust such that it would be unconscionable for Samba to retain them for its own benefit.

Judgment

The Supreme Court dismissed the appeal, unanimously holding that a claim in knowing receipt cannot succeed once the claimant's equitable interest in the property has been extinguished or overridden.

The Court's judgment was based on the following principles on which all Judges were in agreement.

1. The transfer of trust property to a bona fide purchaser for value without notice extinguishes or overrides the equitable interest of the beneficiary.
2. If a bona fide purchaser for value without notice subsequently becomes aware that the property was transferred in breach of trust, this does not resuscitate the claimant's equitable interest.
3. A claim for knowing receipt cannot succeed in such circumstances because the claimant's equitable interest has been extinguished or overridden.
4. This conclusion cannot be displaced by comparing the claim in knowing receipt to a claim for dishonest assistance.
5. Given that no proprietary claim exists without an equitable interest at the time the recipient receives the property, it would be logically inconsistent then for a personal claim in knowing receipt to survive.
6. Here, SICL's equitable interest was extinguished when Al-Sanea transferred the securities to Samba in breach of trust and registered those securities in Samba's name, notwithstanding Samba's knowledge of the breach of trust.

In reaching the Court's decision:

• Lord Briggs rejected the appellants' argument that liability in knowing receipt is underpinned by the need to enforce "obligations of conscience" rather than the claimant's equitable interest in the trust property, emphasising the need for certainty when it comes to title to property and observing the tension between this policy objective and the imposition of an obligation to restore property to someone else.
• Lord Briggs also commented on the absurdity if the claimant were unable to bring a proprietary claim where it did not have an equitable interest in the property, but were still able to bring a claim in knowing receipt which would in effect entitle the claimant to the same remedies and protection.
• Lord Burrows observed that although dishonest assistance and knowing receipt are both linked to another's wrong (breach of fiduciary duty), they are fundamentally different as, unlike dishonest assistance, knowing receipt is not a form of accessory liability and is not an accessory wrong. They are, however, both personal claims linked to and contingent upon a proprietary right.
• The Court confirmed that, in the context of misapplication of company funds by directors, a trust - best viewed as a constructive trust - arises at the moment of the transfer, splitting the legal and equitable title. The result is that legal title passes to the transferee but equitable title remains vested in the company.

Comment

Byers v Saudi National Bank is the first time the Supreme Court has considered whether it is a requirement for a claim in knowing receipt that the claimant must have an equitable interest in the trust property at the time of transfer. The position has been answered in the affirmative, regardless of whether knowing receipt is considered to be an equitable wrong or ancillary to the proprietary claim for return of the trust property. In reaching its decision, the Court was required to consider and reconcile various overlapping doctrines, policies, and lines of authority.

It will be interesting to see the extent of the implications of this decision in practice in cases involving a breach of fiduciary duty. The decision may be of particular relevance to liquidators investigating the affairs of companies and those involved in asset recovery, in the context of potential claims against directors who caused company assets to be transferred elsewhere in breach of their fiduciary duty as directors. In such circumstances concerning an English company, if the assets were dissipated with the purpose of defrauding creditors, they may also be recoverable from the recipient pursuant to section 423 Insolvency Act 1986 (which applies regardless of whether the company is insolvent), unless the asset was purchased in good faith for value without notice.

In common law systems, a trust beneficiary tends to retain an equitable interest in property transferred in breach of fiduciary duty (except where the property is transferred to a bona fide purchaser for value without notice) on which basis there would be no question that a claim in knowing receipt would subsist. In this sense, it could be said that the circumstances of this case were unusual: but for the fact that under Saudi law the registration of securities in someone's name is conclusive and determinative of legal title, with there being no concept of a separation of legal and equitable title, a claim in knowing receipt would have been available. In other words, if the transfer of those securities had been governed by the law of a common law jurisdiction, the point may not have arisen. Similarly, it may be uncommon for a recipient of property transferred in breach of fiduciary duty who knows the transfer amounts to a breach of trust not also to be a dishonest assistant and be liable as such. Such liability would be as an accessory, and would not require any proprietary interest in the asset. There therefore continue to be various routes available to claimants looking to recover assets lost due to a breach of fiduciary duty.

Accordingly, it might be said that the central point decided in this case may in practice be of limited application, relevant only where assets are transferred pursuant to a governing law that does not recognise concepts of legal and equitable title, thus extinguishing any equitable interest that might have existed or might have arisen.

But even in common law systems there are transfers capable of extinguishing equitable interests. What would be the position where, say, an interest in English land is transferred in breach of fiduciary duty and the transfer is registered under the Land Registration Act 2002 as to its legal title only? Would the equitable title be extinguished, as with the registration of a transfer of Saudi securities in this case? The Supreme Court expressly declined to decide whether a claim for knowing receipt would fail following such registration.

While Byers v Saudi National Bank confirmed a key requirement of the remedy, principles relating to knowing receipt will continue to develop and issues remain undecided. These include the issues outlined below, where further judicial clarification will be welcome.

• Unjust enrichment. The relationship between knowing receipt and unjust enrichment remains unclear; in particular, in the face of arguments that knowing receipt should be treated as subsumed within, or superseded by, the law of unjust enrichment. Are they alternative, overlapping, concurrent, or in fact the same causes of action? Unjust enrichment was not pleaded but the Supreme Court invited submissions on these issues, and whether on the facts of this case an unjust enrichment could subsist alongside a claim in knowing receipt. The Supreme Court did not decide the issue but counsel for both parties referred to authorities suggesting that conceptually the two bases of recovery are different. 
• The requisite knowledge. It remains unclear whether constructive knowledge is sufficient to give rise to liability for knowing receipt or whether actual knowledge is required. The issue did not arise in Byers v Saudi National Bank because Samba failed to comply with a disclosure order and was therefore limited to advancing only defences that could fairly be determined in the absence of documents.