Liability of Strangers Flashcards
Liability of strangers
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.
1.2 Accessory liability
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.
1.3 Recipient liability
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.
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.
1.4 Alternative claims
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 different, so one
claim may succeed where the other fails.
Liability of strangers 16
The remedy is also different, 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.
Accessory liability
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.
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.
2.2 Requirements
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.
2.2.1 Assistance
The defendant must assist the trustee or fiduciary in connection with the breach. It is sufficient 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.
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 sufficient if the defendant procures or instigates the breach of duty: Eaves v Hickson
(1861) 30 Beav 136.
2.2.2 Dishonesty
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):
172 Trusts Law
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.
In the context of civil proceedings, the judge is the ‘fact-finder’. The standard of ordinary decent
people is determined by the judge.
Remedies
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.
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.
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.
Requirements for a knowing receipt claim
In El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685, 700, Hoffmann 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
174 Trusts Law
3.2.1 Beneficial receipt
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 insufficient 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.
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.
The position is different 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.
3.2.2 The fault requirement: Knowledge
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.
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.
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.
The Baden scale
In Akindele, Nourse LJ conceded (at 455) that the ‘unconscionable’ test would present ‘difficulties
of application’ and this has proven to be true.
Confronted with a difficult, 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:
(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
