Contentious Trusts – Can the recipient of assets from a trust end up with a claim against them? UK Courts look at scope of Dishonest Assistance and Knowing Receipt

Court of Appeal gives Judgment clarifying Proprietary Interest requirements in Knowing Receipt claims - Byers v The Saudi National Bank [2022] EWCA Civ 43

Offshore companies being used to receive the proceeds of fraud can create very complex legal and logistical challenges. When such frauds do occur, the legal doctrines of Dishonest Assistance and Knowing Receipt can provide an effective way of seeking redress and recovering assets from offshore companies.

On 27 January 2022, the UK Court of Appeal dealt with a claim involving Knowing Receipt and unanimously dismissed an appeal brought by Saad Investments Company Limited (SICL) and its liquidators[1]. The Court of Appeal upheld the first instance decision of Fancourt J in January 2021 that a knowing receipt claim (where dishonest assistance was not alleged) could only be pursued where the claimant maintained a proprietary interest in the relevant trust property.

This decision dismissed SICL’s long-running claim that Saudi National Bank was liable in “knowing receipt” of trust property - by the time of the judgment the trust property had a market value in excess of £320 million - comprising shares in numerous Saudi Arabian banks.

Legal lesson

For the reader's information, dishonest assistance is a claim against a third party for personal liability arising from procuring or assisting a breach of trust of one or more trustees, which applies an objective test of honesty. Liability arises where the third party defendant has acted dishonestly and provided assistance to a trustee to enable a breach of trust (although the breach of trust does not itself have to be fiduciary in nature). The assistance provided by the third-party defendant must be more than minimal, although the third party does not have to know that a fiduciary duty by the trustee existed. Further, for accountability to be attributed to the third-party defendant, the trustee does not have to have acted dishonestly for the cause of action to be made out.

Knowing receipt is a separate equitable remedy which prevents a party from receiving and retaining property, to which they are not entitled, knowing that the transfer was of property which beneficially belonged to a third party/claimant. In order for this equitable claim to succeed, it is necessary for the defendant to have some degree of culpability; so there must be a transfer of property amounting to a breach of fiduciary duty owed to the claimant where the defendant’s state of knowledge makes it unconscionable for them to retain the property. So conversely to a claim of dishonest assistance, the claimant does not have to show that the defendant acted dishonestly when they received the property.

Points to Note

1. The decision should be noted by anyone dealing with interests in trust assets subject to English law but located in other jurisdictions, particularly in countries with differing legal systems, concepts of trusts and/or where ownership is determined by registration.

2. The Judgment helpfully clarifies the requirements for bringing a claim in knowing receipt, confirming beyond doubt that a continuing proprietary interest in misappropriated assets is required in order to establish liability for knowing receipt. Nevertheless, consideration of the practical issues that can arise in recovering assets are no less complicated.

3. In cases where the legal distinction overlaps or is blurred, if the defendant is liable for both dishonest assistance and knowing receipt, that fact does not close the gap on the difference between the two legal principles, namely that:

• Dishonest assistance is a truly fault based offence requiring the defendant to be dishonest in assisting a trustee to commit a breach of trust; and
• Knowing receipt is unconnected with dishonesty, at least upon receipt.

4. The case also provides useful clarification of the high threshold required for the Court of Appeal to review findings of fact at first instance, especially where a judge’s conclusions are based largely on their assessment of oral testimony at trial, including that of expert witnesses.

The Claim

The appellants were a Cayman Islands company and its joint liquidators. The company was the beneficiary of a Cayman Islands trust which owned the shares in companies in Saudi Arabia. The trustee had transferred the shares to a Saudi Arabian bank to discharge part of a debt that was owed to the bank. The appellants considered that the transfer was in breach of trust and pursued a knowing receipt claim against the bank.

The share transfer was governed by Saudi Arabian law, which unlike English law does not recognise a distinction between legal and beneficial ownership interests. As such, while its courts would recognise a form of ownership interest of the claimant prior to the transfer, the fact that the shares were registered in the bank’s name was conclusive of full and exclusive ownership rights vesting in the bank.

The Court of Appeal was specifically asked to consider whether:

1. whether the claimants’ interest in the disputed property had been extinguished so as to forfeit its rights to bring a claim against the defendant for knowing receipt

2. whether a claim for knowing receipt depends on a claimant maintaining a proprietary interest in the property in the hands of the defendant; and

3. whether that interest existed on the facts of the case.

The Court of Appeal agreed with Fancourt J's decision that as there was no subsisting beneficial ownership in the shares after the transfer, the claim in knowing receipt failed. The Court of Appeal found that while it might be legitimate to refer to knowing receipt as a species of equitable wrongdoing, it was not based wholly on fault. The defendant had to have received assets which were traceable as representing the assets of the claimant. Unconscionability had to coincide with possession of trust property for liability to arise.

At first instance, the High Court had considered the previous case law concerning the distinction between dishonest assistance and knowing receipt, two legal principles which can be confused. The parties did not appeal Fancourt J’s decision concerning the distinct legal difference between liability for dishonest assistance and for knowing receipt, and the first instance decision provides helpful authority on the issue[2].

The Court of Appeal also considered the issues of expert evidence of the law where the assets are located and provides useful guidance on how appellate courts should treat a trial judge’s assessment of such expert evidence on foreign law.

The appellants had argued that the judge had been wrong to find that the registration of the shares in the bank's name left the company without the form of ownership interest enjoyed prior to the transfer. Because of the different nature of Saudi Arabian law and practice, extensive expert evidence was required to determine that issue. The Court of Appeal confirmed that "The conclusions of the Judge in this case were reasonably open to him on the evidence he heard, and there is nothing in his clear and detailed reasoning which suggests he was wrong in his conclusions."

[1] Byers & Ors v The Saudi National Bank [2022] EWCA Civ 4: https://www.bailii.org/ew/cases/EWCA/Civ/2022/43.html

[2] Byers & Ors v Samba Financial Group [2021] EWHC 60 (Ch): https://www.bailii.org/ew/cases/EWHC/Ch/2021/60.html