High Court considers distinction between liability for dishonest assistance and knowing receipt in failed claim against bank

The High Court has dismissed a claim brought by the liquidators of an investment company against a bank for knowing receipt, in circumstances where the investment company’s shares were transferred by a trustee (in breach of trust) to the bank, and used by the bank to discharge part of a debt owed by the trustee to the bank: Byers & Ors v Samba Financial Group [2021] EWHC 60 (Ch).

One of the key issues before the court was whether the claimants’ claim in knowing receipt must fail, where the beneficiary’s interest in the shares was extinguished by the transfer (as per local Saudi Arabian law, which was applicable to the property). Such a question does not arise in relation to English property under the general law of England and Wales, but may arise (as in this case) where under the foreign law applicable to the property, the transferee’s title may trump the interest of the beneficial owner and knowledge of that interest is irrelevant.

In summary, the court found 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. In the absence of a formal allegation of dishonesty against the bank, and given the claimants’ failure to prove that the investment company’s beneficial interest continued under local law despite receipt of the shares by the bank, the claim failed.

The judgment is noteworthy for its analysis of the distinction between liability for dishonest assistance and knowing receipt, both of which are common types of claim made against financial institutions. Historically, there has been some blurring of the line between the two causes of action, further complicated by references to “dishonest receipt” in certain judgments. The decision provides the following helpful clarification:

1. Dishonest assistance is truly fault-based. It arises from the dishonesty of the defendant in assisting a trustee to commit a breach of trust (or assisting a fiduciary to commit a breach of fiduciary duty). From the perspective of financial institutions, it is important to note that such liability, if established, may result in vicarious liability for the employer of the individual defendant. For example, in Bilta (UK) Ltd (in Liquidation) v Natwest Markets plc & Anor [2020] EWHC 546 (Ch), the parent bank and its indirect subsidiary were found vicariously liable for the dishonest assistance of carbon credit traders employed by the subsidiary).
2. Knowing receipt unconnected with dishonesty is different, at least at the moment of receipt. The recipient is not liable in such a claim for wrongly agreeing to receive the property. The knowing recipient’s liability depends on their knowledge that the property they receive is trust property and is to be dealt in that way. The principal duty of a knowing recipient is to deal with the property once received as if they are a trustee of it and to restore it to the trust; it would be unconscionable for them to do otherwise.

The decision is considered in more detail below.

Background

Saad Investments Company Limited (SICL) was a Cayman Island registered company and the beneficiary of certain Cayman Island trusts. Trust property included shares in five Saudi Arabian companies (the Shares). In July 2009 SICL went into liquidation.

In September 2009, Mr Al Sanea (the trustee) in breach of trust transferred the Shares to a bank, based in Saudi Arabia (the Bank). The purpose of the transfer was to discharge part of a debt which Mr Al Sanea owed to the Bank. Mr Al Sanea’s account was then credited by the Bank with the market value of the Shares on the day of the transfer; in the region of 801 Saudi Riyals (USD $318 million).

The liquidators of SICL, the claimants, subsequently brought a claim for knowing receipt against the Bank seeking compensation for the value of the Shares transferred to it. The claimants’ case was that the Bank received trust property with knowledge of a breach of trust. Alternatively, the Bank ought to have made (or was reckless in failing to make) inquiries, which would have revealed that the Shares were held by Mr Al Sanea on trust for SICL and that the transfer was in breach of trust.

One of the key issues before the court (which is the focus of this blog post) was whether - if SICL’s interest in the Shares was extinguished by the transfer (as per Saudi Arabian law) - the claimants’ claim in knowing receipt must fail (as per English/Cayman Islands law). This involved the important question of whether a transferee, who upon receipt obtains title to the property free from a beneficiary's equitable proprietary interest, can nonetheless be personally liable in equity for knowing receipt because they received the property with sufficient knowledge that the transfer was a breach of trust.

Such a question does not arise in relation to English property under the general law of England and Wales, but may arise (as in this case) where under the foreign law applicable to the property, the transferee’s title may trump the interest of the beneficial owner and knowledge of that interest is irrelevant.

Decision

The High Court found in favour of the Bank and dismissed the claim. In summary, the court held 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.

We consider below some of key issues considered by the court in relation to the knowing receipt claim.

The claimants’ arguments

The key arguments articulated by the claimants were as follows:

• There should in principle be a personal remedy and it was irrelevant whether under Saudi Arabian law the transfer of the Shares to the Bank extinguished SICL’s proprietary interest in them, as the Bank received the Shares for its own purposes with sufficient knowledge that they had been transferred in breach of trust.
• Under Saudi Arabian law the effect of the registration of the Bank as the owner of the Shares did not deprive SICL of the ability to assert its equitable interest against the Bank.
• That liability in knowing receipt arises from the wrongful receipt of property by the transferee, i.e. it is a fault-based liability. The transferee knows (sufficiently) that the property belongs to another and that it has been wrongly transferred to them. The transferee therefore is not entitled, as against the beneficiary to receive and retain the property for itself.

No allegation of dishonesty

The court said that although the claimants at times came close to alleging the Bank was an accessory to the theft of the Shares, they did not allege dishonesty as would be required to establish liability as a constructive trustee for dishonest assistance in a breach of trust. Also, the court noted that an allegation that a person has failed recklessly to make the enquiries that an honest person would have made is not an allegation of dishonesty. The fact that there was no allegation of dishonesty underpinned the rest of the court’s analysis of the claim.

Distinction between liability for dishonest assistance and knowing receipt

The court commented that the claimants’ arguments failed to draw a sufficiently clear distinction between liability for dishonest assistance and knowing receipt.

The court underlined that a defendant can be liable for both dishonest assistance and knowing receipt, but as a matter of law the distinction is clear. In the court’s view, dishonest assistance is truly fault-based – the equity arises from the dishonesty of the defendant in assisting a trustee to commit a breach of trust.

Knowing receipt unconnected with dishonesty is different, at least at the moment of receipt. The recipient is not liable in such a claim for wrongly agreeing to receive the property. The knowing recipient’s liability depends on their knowledge that the property they receive is trust property and is to be dealt in that way. The principal duty of a knowing recipient is to deal with the property once received as if they were a trustee of it and to restore it to the trust; it would be unconscionable for the recipient to do otherwise.

Approach to knowing receipt claim where there is no dishonesty

The court explained that a knowing receipt claim that does not allege dishonesty requires the claimant to have a continuing proprietary basis for it (as per Macmillan Inc v Bishopsgate Investment Trust plc (No.3) [1995] 1 WLR 978).

A claimant must be able to assert that the defendant received the property and was obliged to deal with it as if they were a trustee of it. If the recipient was from the outset entitled to deal with the property as their own, the claim cannot succeed. In the present case, the claimants needed to prove that SICL’s proprietary interest in the Shares was not extinguished at the moment of receipt by the Bank; but the claimants failed to do so. The knowing receipt claim therefore failed.

Permission to Appeal

The court granted the claimants permission to appeal to the Court of Appeal on the knowing receipt issue.

Note: On 13 December 2021, a hearing took place before the Court of Appeal.