Supreme Court confirms key elements of claim in knowing receipt in failed claim against bank

The Supreme Court has unanimously upheld the decisions of the Court of Appeal and High Court, dismissing a claim brought in knowing receipt against a bank and providing helpful clarification in respect of a number of key elements of the cause of action: Byers & Ors v Saudi National Bank [2023] UKSC 51.

In the present case, the claimants' shares were transferred by a trustee to the bank in breach of trust, in circumstances where the bank was aware of the breach of trust at the time and has not subsequently transferred, destroyed or dissipated the property. However (as held by the Court of Appeal and was common ground between the parties), the fact of the transfer from the trustee to the bank had the effect under the applicable foreign law of Saudi Arabia of giving the bank clear title to the shares, free from the claimants' beneficial interest in the property.

Finding in favour of the bank on the appeal, the Supreme Court confirmed the following key principles in respect of claims in knowing receipt:

1. A claim in knowing receipt cannot be made if a claimant’s equitable interest in the property in question has been extinguished by the time of the defendant’s knowing receipt of the property. This result is not altered by the defendant's knowledge that the transfer was in breach of trust.
2. In terms of timing, a claim in knowing receipt will be "killed off" at the same time as any proprietary claim in the property transferred, ie when the recipient receives the property, if that is sufficient to defeat a proprietary claim.
3. If the original knowing recipient subsequently transfers the property to a third party, in circumstances where the proprietary equitable interest has been extinguished, the second transfer will not give rise to liability in knowing receipt, either on the part of the original or secondary recipient, even where they have notice of the breach of trust (obiter).
4. The "knowledge" requirement of the cause of action cannot be satisfied by mere "notice" and will not be satisfied simply because it would be unconscionable for the recipient to retain the benefit of the property received. However, the Supreme Court declined to reach a conclusion as to whether constructive knowledge will be sufficient and suggested that the question of knowledge will require a distinct separate test, which was not formulated on this appeal.

The Supreme Court's judgment will be welcomed for its clarification of the requirements of knowing receipt, which is a common cause of action included in claims against financial institutions. However, a number of important elements are left unresolved by the present judgment and will require subsequent court guidance, including the precise test for "knowledge" in knowing receipt claims, and whether a claim in knowing receipt should be categorised formally as ancillary to a proprietary claim.

We consider the decision in further detail below.

Background

The background to this decision is more fully set out in our blog post on the High Court decision, here.

In summary, 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 breach of trust, the trustee of the Cayman Island trusts (Mr Al-Sanea) transferred the Shares to a bank based in Saudi Arabia (the Bank). The purpose of the transfer was to discharge part of a debt owed by Mr Al-Sanea, in his personal capacity, to the Bank.

The relevant law governing the transfer of Shares to the Bank was Saudi Arabian law, which does not recognise the distinction between: (i) legal title to property (being, in this case, the title held in the Shares by Mr Al-Sanea as trustee); and (ii) equitable interest in property (being, in this case, the interest in trust property held by SICL as beneficiary of the trust). As a result, the effect of the transfer under Saudi Arabian law was to extinguish SICL’s equitable interest in the Shares. The Bank therefore became the sole owner of the Shares following the transfer.

In July 2009, SICL went into liquidation. The liquidators of SICL, the claimants, subsequently brought a claim for knowing receipt against the Bank, on the basis that the Bank knew (or ought to have made / was reckless in failing to make inquiries which would have revealed) that the trustee held the Shares on trust for SICL and that the transfer was in breach of trust.

A key question in this dispute was whether the claimants needed to have a continuing proprietary interest in the Shares to succeed in their knowing receipt claim.

High Court decision

The High Court’s reasoning is discussed in our previous blog post.

The High Court found in favour of the Bank and dismissed the claim. It 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. In the absence of a formal allegation of dishonesty against the Bank, and given the claimants’ failure to prove that SICL’s beneficial interest continued under local law, the claim failed.

SICL appealed to the Court of Appeal.

Court of Appeal decision

The Court of Appeal’s reasoning is discussed in our previous blog post.

The Court of Appeal upheld the High Court's decision and found in favour of the Bank. It held that a continuing proprietary interest in the relevant property is required for a knowing receipt claim to be possible. A defendant cannot be liable for knowing receipt if it took the property free of any interest of the claimant. Absent a continuing proprietary interest in the Shares at the time of the registration, the claim in knowing receipt failed.

SICL appealed to the Supreme Court.

Supreme Court decision

The Supreme Court unanimously dismissed SICL’s appeal. It held that a claim for knowing receipt cannot be made if a claimant’s equitable interest in the property in question has been extinguished by the time of the defendant’s knowing receipt of the property.

The leading judgment was delivered by Lord Hodge (with whom Lord Leggatt and Lord Stephens agreed), with Lord Briggs and Lord Burrows delivering concurring judgments. While the full panel agreed that the case law contained pointers in favour of the conclusion in this case, it did not provide a definitive answer, which was therefore decided as a matter of equitable principle (which was reached by slightly different reasoning in the different judgments).

Nature of an equitable interest in property

The Supreme Court summarised several well-established legal principles regarding the nature of an equitable interest in property, including the following:

• An equitable interest is good against all the world, except a bona fide purchaser for value (in contrast to a legal interest, which is good against all the world without exception).
• Accordingly, the transfer of trust property by a trustee (even if in breach of trust) to a bona fide purchaser for value, will extinguish any proprietary equitable interest.
• Even, if the bona fide purchaser later becomes aware that the property was transferred in breach of trust, this does not resuscitate the claimant’s proprietary equitable interest.
• A proprietary equitable interest, having been extinguished, is also not revived when the original purchaser transfers the property to a further transferee, who, at the time of the transfer, is aware that there has been a breach of trust.

As such, a claim in knowing receipt cannot succeed in these circumstances.

Close link between claims in knowing receipt and proprietary claims

The Supreme Court emphasised that knowing receipt claims are closely linked to a proprietary claim which attaches to the trust property. In particular:

• Knowing receipt claims come into play where the transferee is not a bona fide purchaser for value without notice, and a proprietary claim would fail because the recipient no longer has the property (eg because they have transferred/dissipated/destroyed the property after learning of the breach of trust).
• It would be logically inconsistent for the law to allow the personal claim in knowing receipt to survive where the proprietary claim has been defeated by the lack of a continuing proprietary equitable interest. This means the claims will be "killed off" at the same time, ie when the recipient receives the property if that is sufficient to defeat a proprietary claim.
• In terms of timing, if the proprietary equitable interest is extinguished at the time when the recipient receives the property (and so a proprietary claim would be defeated).

The panel did not reach agreement on the precise categorisation of claims in knowing receipt and proprietary claims. Lord Briggs analysed a claim in knowing receipt as ancillary to a proprietary claim (which Lord Hodge preferred) while Lord Burrows categorised a claim in knowing receipt as an “equitable proprietary wrong”. This difference did not alter their shared conclusion that a claim in knowing receipt is precluded where the claimant’s proprietary equitable interest has been extinguished or overridden by the time when the recipient receives the property.

The Supreme Court agreed that its conclusions could not be displaced by comparing the claim in knowing receipt to a claim for dishonest assistance (ie a claim against a non-trustee who induces or assists the breach of trust by a trustee). Liability for dishonest assistance is an ancillary liability - ancillary to the breach of trust by the trustee. It renders the assister liable as an accessory to the same extent as the trustee. There is no requirement that the assister has even received trust property. A claim in knowing receipt is significantly different, being closely linked to a proprietary claim for the return of the trust property.

"Knowledge" necessary to trigger liability for knowing receipt

The Supreme Court highlighted a number of areas of possible uncertainty concerning knowing receipt, including the precise boundaries and content of the requirement to show what is now called “knowledge” necessary to trigger the recipient’s personal liability to account or pay equitable compensation under the doctrine of knowing receipt.

The Supreme Court noted that it is now common ground that mere "notice" is not sufficient, but in the absence of full submissions on the point, declined to reach a conclusion as to whether the requirement for knowledge may be satisfied by constructive knowledge.

However, although the regulation of unconscionable conduct may be the underlying purpose of many equitable principles, the court was clear that the knowledge requirement will not be satisfied simply because it would be unconscionable for the recipient to retain the benefit of the property received (disagreeing with Nourse LJ in BCCI v Akindele [2000] EWCA Civ 502). The judgment suggests that the question of knowledge will require a distinct separate test, but did not need to consider the formulation of that test further on this appeal.

Applying this reasoning to the facts of the case

The operation of Saudi Arabian law, had the effect that SICL's proprietary equitable interest in the Shares was extinguished by Mr Al-Sanea’s transfer to the Bank and the registration of those Shares in the Bank's name.

This result was not altered by Mr Al-Sanea’s breach of trust and any knowledge which the Bank had that the transfer was in breach of trust.

Accordingly, the Supreme Court dismissed the appeal.