Supreme Court sets out equitable basis of actions in knowing receipt

In Byers & Ors v Saudi National Bank [2023] UKSC 51, the Supreme Court set out the equitable principles underlying claims in knowing receipt, in particular where a transfer has been made in breach of trust. The decision provides a measure of guidance for banks and financial institutions who often receive such claims.

The Court confirmed that where there is a beneficial interest in trust property, once that equitable interest is extinguished, there will be no claim in knowing receipt against a subsequent legal owner to whom the trust property was transferred even if:

• The original transfer was in breach of trust;
• and/or the person in receipt of the trust property (ie the transferee) knew or became aware that it was transferred originally in breach of trust.

Background

Maan Al Sanea was the owner of the Saad Group, a multi-billion dollar conglomerate, specialising in construction, engineering, real estate and financial services. The investment company within the group was Saad Investments Company Limited (Saad). In 2009 the Group collapsed under allegations of fraud by Mr Al-Sanea, liquidators were appointed over some of the Group companies and litigation followed with global creditors seeking to recover their substantial losses.

Saad was the beneficiary of a trust which owned shares in five Saudi Arabian companies (the Shares). After the Group’s collapse, Mr Al Sanea, the trustee, transferred the Shares to a Saudi Arabian bank (Samba) to discharge debts that he owed personally. At the time of receipt, Samba knew that Mr Al Sanea was holding the Shares on trust for Saad. However, the share transfer was governed by Saudi Arabian law, which did not recognise a distinction between legal title to property (held by the trustee) and beneficial ownership (held by Saad).

Therefore, as a matter of Saudi Arabian law, the effect of the share transfer was that Saad had no continuing proprietary interest in the Shares once the transfer was complete.

In 2009, Saad went into liquidation. The claimants, who were the liquidators of Saad, subsequently brought a claim for knowing receipt against Samba, on the basis that Samba knew (or ought to have known or was reckless in failing to make inquiries to confirm) that the trustee held the Shares on trust for Saad and the transfer was in breach of trust. The aim was to seek recovery of the Shares for the benefit of Saad’s creditors.

The High Court, Court of Appeal and appeal to the Supreme Court

The High Court and Court of Appeal held that Saad’s equitable beneficial interest in the Shares was overridden by the registration of Samba as their owner under Saudi Arabian law. This was fatal not only to any proprietary claim by the claimants but also to a personal claim in knowing receipt against Samba.

The claimants appealed arguing that the claim in knowing receipt did not require any continuing equitable proprietary interest in the property in dispute – all it required was that Samba knew that the Shares were transferred to it in breach of trust, so that it would be unconscionable for Samba to use them for its own benefit.

The Supreme Court’s Decision

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

The existing case law did not provide a definitive answer to the issue, and so the Supreme Court reached its conclusion as a matter of equitable principles. In doing so (albeit with slightly varying reasoning), the Supreme Court held the following:

• The transfer of trust property by a trustee to a bona fide purchaser of the legal estate for value without notice extinguished the beneficiary’s proprietary equitable interest, even if the trustee acted in breach of trust.
• If that purchaser later became aware that the property was transferred in breach of trust, that did not revive the beneficiary’s proprietary equitable interest. This remains the case even if the original purchaser transfers the property to a further transferee, who was aware of the breach of trust at the time of transfer – the proprietary equitable interest of the beneficiary remained extinguished.
• Consequently, where there had been a transfer of trust property by a trustee to a bona fide purchaser of the legal estate for value without notice, a claim in knowing receipt by the trust beneficiary could not succeed because the claimant's proprietary interest had been extinguished.
• This conclusion could not be displaced by comparing a claim in knowing receipt to a claim for dishonest assistance (i.e. a claim against a non-trustee who assists a breach of trust by a trustee). Dishonest assistance is an ancillary liability linked to another’s wrong (i.e. to the breach of trust by the trustee), whereas a claim in knowing receipt is significantly different, being closely linked to a proprietary claim for the return of the property.

Whilst providing useful guidance, the Supreme Court noted several areas of uncertainty, in particular concerning the “knowledge” requirement in claims for knowing receipt.

The Supreme Court:

1. noted the accepted position that the “knowledge” requirement cannot be satisfied by mere “notice,” nor will it be satisfied simply because it would be unconscionable for the recipient to retain the benefit of the property received.
2. declined to reach a conclusion as to whether constructive knowledge would be sufficient, and suggested that the question of knowledge will require a distinct separate test which was not formulated on this appeal.

Key Takeaways

The facts of Byers are unique in that, although Samba knew the transfer of the Shares was made in breach of trust at the time of receipt, the effect of Saudi Arabian law, which governed the transfer, was to extinguish the equitable interest in the Shares. As noted by the Supreme Court, usually (and certainly in transactions governed by English law) an equitable interest will only be extinguished by a transfer made to a bona fide purchaser.

However, while the Supreme Court generally provided useful guidance, the question of what constitutes ‘knowledge’ (such that a purchaser is no longer bona fide) remains uncertain. Further clarification is required but, in the meantime, banks and financial institutions (who are often subject to actions in knowing receipt) should remain cautious and proactive in assessing transfers made by trustees and fiduciaries.