Chapter 16: Liability of Strangers

Question 1

Multiple claims against different people

Answer 1

Sometimes, the claimant will have multiple potential claims against diferent people. While their
primary claim will be against the wrongdoer (ie the trustee or other fiduciary), sometimes it will
not be worthwhile making a claim against them or it may not be possible to fully recover from
them. The most obvious example is the case where they are in financial difculties or even
bankrupt and do not have professional indemnity insurance to satisfy the claim against them. In
such cases, it is useful to have someone else to sue.

Question 2

Liability of Strangers

Answer 2

There are two key claims that can be made against a ‘stranger’ to the trust:
(a) A claim for accessory liability (also known as ‘dishonest assistance’)
(b) A claim against the recipient of the traceable proceeds of a breach of trust (often known as
‘knowing receipt’)
In practice, such claims (particularly claims for accessory liability) are often made against
professional advisers to the trustee or fiduciary or, in the case of a breach by a company, against
employees or directors of that company

Question 3

Accessory liability

Answer 3

Accessory liability (also known as dishonest assistance) is a form of secondary liability which gives
a claimant the right to sue a third party for the loss caused by the trustee or fiduciary (as well as
any profit received by the third party). To establish dishonest assistance, it is necessary to show that the third party assisted the breach (by helping to plan it, carry it out or cover it up) and acted objectively dishonestly in doing so.

Question 4

Recipient Liability

Answer 4

The other way in which a stranger can be liable is receipt-based and allows the claimant to recover the amount of money beneficially received by a third party. Knowing receipt is available in cases where the third party has knowledge making it unconscionable for them to retain the funds. This requires an assessment of the circumstances and their level of knowledge.

Question 5

Recipient liability

Answer 5

It is important to note that if the recipient still has the property (or its traceable proceeds) the
claimant may choose to make a proprietary claim against the asset itself. Knowing receipt is more
useful in cases where it has been dissipated by the recipient, meaning a proprietary claim is no
longer available.

Question 6

Alternative Claims

Answer 6

Often, claims for accessory liability and recipient liability will be brought in the alternative against
the same defendant. This is because the requirements for the two are slightly diferent, so one
claim may succeed where the other fails.

Question 7

Remedy is also different

Answer 7

The remedy is also diferent, so sometimes it will be more beneficial to succeed in one claim or the
other. In particular, a claim for dishonest assistance may result in a greater remedy because the
assistant will be liable for the loss caused, whether or not they personally benefitted. A knowing
receipt claim is generally limited to the value of what has been beneficially received by the third
party.

Question 8

Introduction to Accessory Liability (Personal Claim)

Answer 8

When a trustee misapplies trust property, the beneficiaries have a number of potential claims.
One such claim is a personal claim against a person who dishonestly assisted or procured the
breach of trust. This claim is a form of accessory liability and is generally described as ‘dishonest
assistance’. Dishonest assistance is a fault-based claim: a defendant is only liable if their
assistance was dishonest.

Question 9

Apply to breaches of fiduciary duties

Answer 9

Dishonest assistance claims are not limited to the misapplication of trust property. They also
apply to breaches of fiduciary duties by a trustee. For example, a person who dishonestly bribes a
trustee to invest in a particular (authorised) investment is liable as a dishonest assistant.
Nor are these claims limited to trusts: they apply to breaches of duty by other fiduciaries.

Question 10

Requirements

Answer 10

In Group Seven Ltd v Nasir [2019] EWCA Civ 614, para 29, the Court of Appeal said that:
in order to find a person liable for dishonest assistance of a breach of trust, it is necessary to
establish that:
(a) there was a trust in existence at the material time;
(b) the trustee committed a breach of that trust;
(c) the defendant assisted the trustee to commit that breach of trust; and
(d) the defendant’s assistance was dishonest.
The same principles apply to breaches of fiduciary duty.

Question 11

Assistance

Answer 11

The defendant must assist the trustee or fiduciary in connection with the breach. It is sufcient if
the defendant assists the trustee or fiduciary to plan, commit, or cover up the breach.
The assistance must be more than minimal. And it must make the commission of the breach (or its
concealment) easier than it would otherwise have been. See, generally, Ultraframe (UK) Ltd v
Fielding [2005] EWHC 1638 (Ch) and Group Seven.

Question 12

More than minimal

Answer 12

The defendant cannot avoid liability by proving that the trustee or fiduciary would have
committed the breach even if the defendant had not assisted them. If the defendant assists, they
are liable.
It is also sufcient if the defendant procures or instigates the breach of duty: Eaves v Hickson
(1861) 30 Beav 136.

Question 13

Dishonestly (Objective Standard)

Answer 13

A person who assists a trustee or fiduciary to commit a breach of duty is only liable if they act
dishonestly. In Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378, Lord Nicholls said (at 389) that ‘acting
dishonestly, or with a lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances’. This approach to dishonesty was endorsed and more fully elaborated by the Supreme Court in Ivey v Genting Casinos (UK) Ltd [2017] UKSC 67. Lord Hughes
JSC said (at para 74):

Question 14

Fact-finding Tribunal must first ascertain

Answer 14

When dishonesty is in question the fact-finding tribunal must first ascertain (subjectively) the
actual state of the individual’s knowledge or belief as to the facts. […] When once his actual
state of mind as to knowledge or belief as to facts is established, the question whether his
conduct was honest or dishonest is to be determined by the fact-finder by applying the
(objective) standard of ordinary decent people

Question 15

Objective Standard determined by judge

Answer 15

In the context of civil proceedings, the judge is the ‘fact-finder’. The standard of ordinary decent
people is determined by the judge.

Question 16

Key case: Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378

Answer 16

Facts: The claimant airline appointed a company to sell tickets for its flights. The company agreed
to hold the proceeds from the sale of the tickets on trust for the claimant. In breach of trust, the
company applied the proceeds for its own purposes. The company went insolvent.
The defendant was the company’s managing director and principal shareholder. The claimant
sued him for dishonest assistance.

Question 17

Key case: Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378

Answer 17

Held: The defendant was liable. He knew that the proceeds from the sale of the tickets were held
on trust. And he caused the company to apply them for its own purposes and in breach of its duty
to the claimant.
Lord Nicholls observed (at 389) that honest people do not misappropriate or misapply other
people’s property, nor do they assist others to do so.

Question 18

Key case: Starglade Properties Ltd v Nash [2010] EWCA Civ 1314

Answer 18

Facts: Larkstore Ltd held money on trust for the claimant as part of a broader commercial
arrangement. Nash was Larkstore’s sole director. Nash knew that Larkstore was unable to pay its
debts. He caused Larkstore to pay the trust money to Larkstore’s unsecured creditors. He did so to ‘frustrate’ the claimant, because he considered that the claimant had unfairly imposed the commercial arrangement on Larkstore. Nash did not know that there was a trust. He believed that the claimant was an unsecured creditor of Larkstore. His object was to reduce the
assets available for distribution in a winding up. The claimant sued Nash for dishonest assistance.

Question 19

Key case: Starglade Properties Ltd v Nash [2010] EWCA Civ 1314

Answer 19

Held: Nash was liable. He caused the company to misapply the trust property and he did so
dishonestly.
Morritt C said that the ‘deliberate removal of the assets of an insolvent company so as entirely to
defeat the just claim of a creditor’ was inconsistent with ‘ordinary standards of honest commercial
behaviour’.
It did not matter that Nash was unaware that the arrangement between Larkstore and the
claimant had given rise to a trust. Objectively, a trust had arisen and had been breached by
Larkstore. Nash had assisted the breach of trust and was found to have done so dishonestly

Question 20

Remedies: Not required to show direct link

Answer 20

A dishonest assistant is liable for the loss occasioned by the breach which they assisted. The
claimant is not required to show a direct link between the assistance and the loss. ‘What must be
shown is that the conduct assisted the breach of trust and that but for the breach of trust the loss
would not have occurred’: Group Seven.

Question 21

Potentially liable for profits (Real and effective cause)

Answer 21

A dishonest assistant is also potentially liable for profits they acquire by reason of their
participation in the breach: Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908. But the
claimant must demonstrate that their participation was the ‘real’ or ‘effective’ cause of the profits.
The simple ‘but for’ test is not sufficient.

Question 22

No automatic right

Answer 22

Moreover, the claimant does not have an automatic right to the assistant’s profits. The court has a
discretion to grant or withhold the remedy. The court withholds the remedy where it would be
disproportionate in relation to the form and extent of the assistant’s wrongdoing.

Question 23

Key case: Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908

Answer 23

Facts: The defendant negotiated with the claimant’s agent to charter some ships. As a result of
the negotiations, the claimant chartered the ships to the defendant. The terms of the charters
were favourable to the claimant.
During the negotiations
* The agent was being paid secret commissions by charterers of the claimant’s other vessels in
connection with earlier transactions; and
* The agent was diverting part of those commissions to the defendant

Question 24

Key case: Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908

Answer 24

Held:
* The agent’s negotiations with the defendant were a breach of his fiduciary duty to the
claimant (because the agent was conflicted);
* The defendant assisted the breach by participating in the negotiations; and
* The defendant’s assistance was dishonest because he was aware of the secret commissions
that were being paid to the agent (and, in part, redirected to him).

Question 25

Entitled to recover profits?

Answer 25

The defendant successfully exploited the charters and made a profit of $150 million. The issue was whether the claimant was entitled to recover the profit from the defendant. The Court of Appeal concluded that it was not. The court held (at para 114) that although the defendant’s assistance, ie his participation in the negotiations for the charters, was a ‘but for’ cause of the profit, it was not the real or efective cause:

Question 26

Disproportionate to deprive

Answer 26

What Mr Nikitin acquired as a result of his dishonest assistance (and also as a result of Mr Mikhaylyuk’s breach of fiduciary duty) was the use of the vessels at the market rate. That was merely the occasion for him to make a profit. The real or efective cause of the profits was the unexpected change in the market. […] Mr Nikitin made the profits “because he judged the market well.” The court also held (at para 119) that it would have been disproportionate to deprive the defendant of the profit given the form and extent of his own wrongdoing.

Question 27

Recipient liability Introduction to knowing receipt (Personal and fault based claim)

Answer 27

When a trustee misapplies trust property, the beneficiaries have a number of potential claims. One such claim is a personal claim against a recipient of the misapplied trust property or its traceable proceeds. This claim is generally described as ‘knowing receipt’ or ‘unconscionable receipt.’ Unlike proprietary claims against third parties, knowing receipt is a fault-based claim: a defendant is only liable if they had the requisite degree of knowledge.

Question 28

Not limited to trusts

Answer 28

Knowing receipt claims are not limited to trusts. They extend to other cases involving the misapplication of property by a fiduciary. For example, the misapplication of a company’s assets by its directors.

Question 29

Requirements for a knowing receipt claim

Answer 29

In El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685, 700, Hofmann LJ identified the following requirements for a knowing receipt claim: (a) A misapplication of trust property (or property held in another fiduciary capacity) (b) Beneficial receipt by the defendant of the misapplied trust property or its traceable proceeds (c) Knowledge on the part of the defendant that the property they received was misapplied trust property or its traceable proceeds

Question 30

Beneficial receipt

Answer 30

In Trustor AB v Smallbone (No 2) [2001] 1 WLR 1177, Morritt V-C said: the receipt by the defendant should be for his own benefit or in his own right in the sense of setting up a title of his own to the property so received. Receipt in a ‘ministerial’ capacity is insufcient for knowing receipt. For example, receipt of property by an agent on behalf of a principal does not expose the agent to a knowing receipt claim (although it may expose the principal to such a claim). The agent does not receive the property in their own right: they receive and hold it for the principal.

Question 31

Bank does not receive money beneficially

Answer 31

Where money is paid to a bank to be credited to an account which is in credit, the bank does not receive the money beneficially: Agip (Africa) Ltd v Jackson [1990] Ch 265, 292; Polly Peck International plc v Nadir (No 2) [1992] 4 All ER 769.

Question 32

Credited to be withdrawn

Answer 32

The position is diferent if the account to be credited is overdrawn. In such cases, the bank does receive the money beneficially to the extent that the payment reduces or discharges the customer’s indebtedness to the bank: Uzinterimpex JSC v Standard Bank plc [2008] EWCA Civ 819, paras 38-40.

Question 33

The fault requirement: Knowledge Requisite knowledge is key

Answer 33

A recipient of misapplied trust property (or its traceable proceeds) is not subject to a personal claim unless they had the requisite knowledge. If they dispose of the property, or dissipate it before they acquire such knowledge, they do not incur any personal liability: Re Montagu’s Settlement Trusts [1987] Ch 264.

Question 34

Must restore property to trust

Answer 34

However, as soon as the recipient acquires the requisite knowledge they must restore the property to the trust. If, instead, they dispose of the property, or dissipate it, they will be subject to a personal claim for the loss occasioned to the trust.

Question 35

Extend to cases where recipient acquired that knowledge

Answer 35

Knowing receipt claims are not limited to cases where the recipient had the requisite knowledge on the date of receipt. They extend to cases where the recipient acquired that knowledge after receipt but before they disposed of or dissipated the property. The leading authority on the knowledge required for the purposes of a knowing receipt claim is Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437.

Question 36

Key case: Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437

Answer 36

Held: The defendant did not have knowledge of circumstances which rendered his receipt unconscionable and he was not liable to the company in knowing receipt. Nourse LJ reviewed the authorities and concluded that: * dishonesty is not a requirement for a knowing receipt claim; and * ‘[t]he recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt.’

Question 37

Did not have requisite knowledge at the date of agreement

Answer 37

He held that the defendant did not have the requisite knowledge on the date of the agreement. The transaction was structured in an entirely artificial way. But there was no reason for the defendant to question the form of the transaction. The company was part of a reputable banking group and (at the time) no one doubted the integrity of the group or its management

Question 38

No requisite knowledge at the date of payment

Answer 38

Nor did the defendant have the requisite knowledge on the date of the payment. By then, he was aware of rumours of financial irregularities within the group and that some directors had been arrested for money laundering. He also knew that many banks refused to transact with the group.

Question 39

Not a sufficient reason for questioning

Answer 39

Nevertheless, it ‘was not a sufcient reason for questioning the propriety of a particular transaction entered into more than two years earlier, at a time when no one outside [the group] had reason to doubt the integrity of its management […] the defendant was entitled to take steps to protect his own interest’ and there was nothing unconscionable in his seeking to do so.

Question 40

The Baden scale

Answer 40

In Akindele, Nourse LJ conceded (at 455) that the ‘unconscionable’ test would present ‘difculties of application’ and this has proven to be true. Confronted with a difcult, open-ended test, some judges have reverted to the familiar Baden scale of knowledge and have applied the Akindele test by reference to that scale. The Baden scale was articulated by Peter Gibson J in Baden v Société Générale pour Favoriser le Développement du Commerce et de L’Industrie en France SA [1993] 1 WLR 509, para 250. It comprises five types of knowledge:

Question 41

Steps to the Baden Scale

Answer 41

(a) Actual knowledge (b) Willfully shutting one’s eyes to the obvious (c) Willfully and recklessly failing to make such inquiries as an honest and reasonable man would make (d) Knowledge of circumstances which would indicate the facts to an honest and reasonable man (e) Knowledge of circumstances which would put an honest and reasonable man on inquiry

Question 42

Applying the Baden Scale

Answer 42

n Armstrong DLW GmbH v Winnington Networks Ltd [2012] EWHC 10 (Ch), Stephen Morris QC explained how the Baden scale should be applied in a commercial context. He said: the position, in a commercial context, can be summarised as follows: (1) Baden types (1) to (3) knowledge on the part of a defendant render receipt of trust property “unconscionable”. It is not necessary to show that the defendant realised that the transaction was “obviously” or “probably” in breach of trust or fraudulent; the possibility of impropriety or the claimant’s interest is sufcient. (2) Further Baden types (4) and (5) knowledge also render receipt “unconscionable” but only if, on the facts actually known to this defendant, a reasonable person would either have appreciated that the transfer was probably in breach of trust or would have made inquiries or sought advice which would have revealed the probability of the breach of trust.

Question 43

Morgan J followed same procedure as Group 7

Answer 43

Morgan J was prepared to follow this approach in Group Seven Ltd v Nasir [2017] EWHC 2466 (Ch). In Armstrong, the defendant was ofered the opportunity to purchase property. As the defendant had not had previous dealings with the seller, it implemented its ‘know your client’ (KYC) procedure. It emailed the seller and asked it to provide information to prove its ownership of the property. The seller replied to the email but did not include the information, which was ‘inherently suspicious and should have set alarm bells ringing’.

Question 44

Not to follow know your client process

Answer 44

Nevertheless, the defendant made a conscious decision not to follow its KYC procedure: it purchased the property from the seller and sold it on. Inevitably, the seller had stolen the property from the claimant. The claimant brought an action against the defendant for knowing receipt

Question 45

Receipt was unconscionable

Answer 45

Morris QC held that the seller held the property on constructive trust for the claimant (because it had stolen it from the claimant). The sale to the defendant was a breach of that trust. And the defendant’s knowledge rendered its receipt unconscionable:

Question 46

Relevant inquiries were made but not followed through

Answer 46

This was not just a case where the defendant failed to make inquiries that should have been made, but rather was a case where the relevant inquiries were made, but not followed through by awaiting a response to those inquiries. [The defendant] deliberately and consciously chose to take the risk that the [property] did not belong to [the seller] […] [The defendant’s] knowledge fell within, at least, Baden type (3), because [the defendant] wilfully and recklessly failed to make such further inquiries as an honest and reasonable man would have made in the circumstances[.]