Trustees live in the knowledge that they will be held to account for breaches of trust, unless (possibly) such breaches qualify as "judicious" breaches of trust.
The UKSC - looking into the point of liability for knowing receipt in equity - has ruled that a claim in knowing receipt cannot succeed if the claimant no longer has an equitable interest in the misappropriated property. The case, Byers and others v
We discussed claims for dishonest assistance and knowing receipt in our guide to secondary liability. We illustrated how claims in knowing receipt operate using the Byers case, on which the UKSC has now ruled, upholding the position arising out of the lower courts' decisions.
In this update, we consider the likely impact of this UKSC decision for international fraud cases, which fall under equitable principles as much as do express trusts or the roles of others with a fiduciary component to the law policing them, such as directors.
What was the issue?
The UKSC agreed to hear the appeal by
The question for the UKSC was whether a claimant pursuing a claim in knowing receipt against a defendant who has received trust property in breach of trust must demonstrate that they, the claimant, have a continuing equitable interest in the property. The appellant, SICL, argued this should not be a requirement, and that all that was necessary was that the defendant had knowledge of the breach of trust that rendered it unconscionable for the defendant to retain the trust property.
What did the Supreme Court decide?
In its judgment, the UKSC itself noted that the submissions by the opposing counsel "have forced the court to revisit the most basic equitable principles which underlie a claim in knowing receipt, not least because it cannot be said that the issue has ever been squarely addressed by this court or its predecessor" (
The UKSC concluded that a claimant must show a continuing equitable interest in the property if it is to sustain a claim in knowing receipt. Two UKSC justices produced judgments with slight differences in their analysis, but the court was unanimous in its conclusion that a continuing equitable interest was a requirement. The result on the facts of this case was that the appeal had to be dismissed.
The UKSC provided some comments on the comparison between knowing receipt and dishonest assistance claims. The court noted that there are important differences between the two, such that they were not comparable for the purposes of deciding this appeal. Dishonest assistance is a claim ancillary to a breach of trust by the primary wrongdoer, the trustee. But although knowing receipt is in a sense also ancillary, because it is a claim against someone other than the primary wrongdoer (the trustee who has acted in breach of trust), nonetheless knowing receipt is better understood as being similar to a proprietary claim because it attaches to the trust property.
What does this mean for "structural" trusts?
The decision serves as a reaffirmation of some important equitable rules and of the fiduciary principles which should guide the stewardship that trustees exercise over their assets. For anyone outside the common law world, the very clear speeches of the Justices (e.g. paras 18 - 28,
What does this mean for international fraud cases?
The appellants had suggested that requiring a continuing equitable interest would open the door to fraudsters routing misappropriated assets through jurisdictions where, as in this case, the law governing the transfers does not distinguish legal and beneficial ownership, thus extinguishing equitable proprietary interests where a legal transfer takes place. The appellants submitted that the fact the defendant knew the property it was receiving was being transferred in breach of trust should suffice for their claim, and to find otherwise would allow such deliberate ploys. This would be unattractive.
However, the UKSC did not accept that this would be a natural result of its ruling. It pointed out that "[m]ost cases of cross-border fraud will involve dishonesty by all concerned in a common design." As such, it felt that the "answer" to this argument was that claims in dishonest assistance were available to deal with any deliberate, dishonest wrongdoing. Dishonest assistance claims also do not require the defendant ever to have received the trust property. As such, we may see more claimants turning to dishonest assistance as a more attractive remedy to fraud. Possible fraud fact patterns could also sustain claims in the tort of conspiracy, which we have discussed in our previous series on "A guide to the tort of conspiracy in the 21st century".
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Macfarlanes
EC4A 1BD
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