Liability of strangers to a trust

Question 1

Accessory Liability requirements?

Answer 1

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.’

Question 2

Can beneficiaries bring a claim against someone who assist the breach of the trust?

Answer 2

The beneficiaries of a trust can bring a personal claim against a person who dishonestly assists the trustee to commit a breach of trust

Question 3

How can someone assist the breach of a trust?

Answer 3

The assistant’s conduct must make the planning, commission or obfuscation of the breach easier for the trustee

Question 4

How dishonesty for accessory liability assessed?

Answer 4

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 5

In breach of trust, a trustee misapplies £100,000 of the trust fund. A solicitor dishonestly helps the trustee to misapply the money and move it offshore. Later, an accountant dishonestly helps the trustee to falsify the trust accounts.

Which one of the following statements is correct?

Neither the accountant nor the solicitor is liable as a dishonest assistant.

Both the accountant and the solicitor are liable as dishonest assistants.

The accountant is liable as a dishonest assistant but the solicitor is not.

The solicitor is liable as a dishonest assistant but the accountant is not.

Beneficiaries can sue only trustees in connection with a breach of trust.

Answer 5

Both the accountant and the solicitor are liable as dishonest assistants.

Both the solicitor and the accountant assisted the trustee and did so dishonestly. It is irrelevant that the accountant assisted after the breach: it is sufficient that the accountant assisted the trustee to obfuscate the breach.

Question 6

A company director commits a breach of fiduciary duty. The director is dishonestly assisted by an accountant. The breach causes the company a significant loss. The accountant makes a substantial profit as a result of the director’s breach.

Which one of the following statements is correct?

The accountant is liable for the profit if his participation in the breach was the real or effective cause of the profit.

The company can only sue the director in connection with the breach of fiduciary duty.

The accountant is liable for the profit if his participation in the breach was a ‘but for’ cause of the profit.

The company cannot sue the accountant for dishonest assistance because only trust beneficiaries can bring that type of claim.

The company can only recover losses in connection with the director’s breach of fiduciary duty.

Answer 6

The accountant is liable for the profit if his participation in the breach was the real or effective cause of the profit.

A dishonest assistant is only liable for profits if his participation in the breach was the real or effective cause of the profit: Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908.

Question 7

What are the requirements for recipient liability?

Answer 7

There are four requirements for a knowing receipt claim:
1.A misapplication of trust property or property held in another fiduciary capacity.
2.Beneficial receipt by the defendant of the misapplied property or its traceable proceeds.
3.Persistence of the claimant’s equitable proprietary interest in the property received by the defendant.
4.Knowledge of circumstances on the part of the defendant which makes it unconscionable for them to retain the benefit of the receipt.

However, the third party will not be liable where they only become aware that they received
trust property after they have disposed of that property. - will be liable if they gain knowledge before or during

Question 8

What is the test for knowledge for recipient liability?

Answer 8

• 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 9

Baden scale?

Answer 9

1
actual knowledge
2
willfully shutting one’s eyes to the obvious
3
willfully and recklessly failing to make such inquiries as an honest and reasonable man would make
4knowledge of circumstances which would indicate the facts to an honest and reasonable man

5
knowledge of circumstances which would put an honest and reasonable man on inquiry

Question 10

A trustee holds a painting on trust for a beneficiary. In breach of trust, the trustee gifts the painting to the owner of a private art gallery. The painting is delivered to the gallery by a courier hired by the trustee. The gallery owner and the courier are aware that the painting is misapplied trust property. The gallery owner sells the painting and dissipates the proceeds of sale.

Which one of the following statements describes the beneficiary’s rights?

The beneficiary can maintain a knowing receipt claim against the gallery owner but not against the courier.

The beneficiary can maintain a knowing receipt claim against the gallery owner and the courier.

The beneficiary can only sue the trustee for breach of trust.

The beneficiary can maintain a knowing receipt claim against the courier but not against the gallery owner.

The beneficiary cannot maintain a knowing receipt claim against the gallery owner or the courier.

Answer 10

The beneficiary can maintain a knowing receipt claim against the gallery owner but not against the courier.

Both the gallery owner and the courier possess knowledge sufficient for a knowing receipt claim. However, unlike the gallery owner, the courier’s receipt of the painting was ministerial only.

Question 11

Bona fide purchaser for value without notice?

Answer 11

If the third party paid for the property and
had no idea that the property belonged to a trust, then the third party takes that property
free from any equitable interests. No proprietary claim can be sustained against the third
party in this scenario (as a result, this third party is often referred to as ‘equity’s darling’).
Note that a personal claim in knowing receipt would also fail against equity’s darling
because they would not have the requisite degree of knowledge at the time of purchase
to make any subsequent retention of the property unconscionable.

Question 12

Wrongdoing recipient?

Answer 12

If the third party is an intermeddler or would have been guilty of
knowing receipt on the grounds that their conscience is affected, then the beneficiaries
can bring a proprietary claim against them to recover the property. As the third party is a
wrongdoer, the harsher tracing rules relevant to a trustee apply (‘everything is presumed
against a wrongdoer’).

Question 13

Innocent volunteer?

Answer 13

If the third party has no knowledge or notice of the breach of trust and
provided no consideration for the transfer of property, then a proprietary claim can still
be brought, but the tracing rules are the kinder rules that are applied against innocent
parties.

Question 14

Wrongdoing tracing rules?

Answer 14

(a) If the third party still holds trust property in its original form, the beneficiaries can assert a
proprietary claim against that property to recover it.
(b) If the third party has used trust property to buy something new, the beneficiaries can
assert a proprietary claim against that new property. This is a case of ‘clean substitution’
(see Chapter 13.4).
(c) If the third party has taken trust funds and mixed this with their own money to purchase
property in their own name, the beneficiaries can assert a proprietary claim against that
mixed asset. The beneficiaries can claim a proportionate share in the mixed asset or
assert an equitable lien over the mixed asset, depending on whether the mixed asset has
increased or decreased in value (see Chapter 13.5.1).
(d) If the third party has taken trust funds and paid this into their own bank account mixing
it with money of their own, before making various withdrawals from that bank account,
the beneficiaries will use the tracing rules of Re Hallett and Re Oatway to determine into
what forms of property they can trace (see Chapter 13.5.2).

Question 15

Innocent tracing rules?

Answer 15

(a) If the third party still holds trust property in its original form, the beneficiaries can assert a
proprietary claim against that property to recover it.
(b) If the third party has used trust property to buy something new, the beneficiaries can
assert a proprietary claim against that new property. This is a case of ‘clean substitution’
(see Chapter 13.4).
(c) If the third party has taken trust funds and mixed this with their own money to purchase
property in their own name, the beneficiaries can assert a proprietary claim against
that mixed asset. The beneficiaries will claim a proportionate share in the mixed asset
whether that asset has increased or decreased in value (see Chapter 13.5.3).
(d) If the third party has taken trust funds and paid this into their own bank account mixing it
with money of their own, before making various withdrawals from that bank account, the
beneficiaries will use the tracing rules of Clayton’s Case and Barlow Clowes v Vaughan to
determine into what forms of property they can trace

However, when it comes to the mixing of monies in a bank account, the innocent volunteer
might be able to assert a defence against the beneficiaries’ proprietary claim. If an innocent
third party receives trust money and uses that money to improve buildings they already
own, then the beneficiary will not be able to trace any interest into that improvement. This is
because either:
(a) that improvement has not increased the value of the third party’s land, such that the trust
money has in essence been dissipated; or
(b) that improvement has increased the value of the third party’s land, but it would
be inequitable to force the innocent third party to sell their property to realise the
beneficiary’s proprietary interest. If the beneficiary is allowed to enforce a lien over the
innocent third party’s land, the sale of the land will enable the beneficiary to recover their
money but deprives the innocent third party of their land. Whilst the third party would get
the balance of the sale proceeds, this is probably cold comfort for someone who might
be thrown out on the street. Trying to enforce the beneficiary’s proprietary interest will
lead to an inequitable result, which defeats any proprietary claim. This is often referred to
as the Re Diplock defence (following the Court of Appeal’s judgment in Re Diplock [1948]
Ch 465 where it was first established).

Question 16

Question 1
A doctor is a trustee. He stole £50,000 from the trust and paid this into the bank account of
an offshore company.
The doctor instructed the trust’s accountant to draw up some ‘inventive accounts’. She did
so. These accounts have hidden the doctor’s wrongdoing until now.
The offshore company has been wound up and the shareholders have since disappeared.
Which of the following claims is most likely to give the beneficiaries a positive outcome?
A A claim for knowing receipt against the accountant.
B A claim that the accountant has intermeddled in the affairs of the trust.
C A proprietary claim to recover any property that the accountant owns.
D A personal claim against the accountant for breach of trust.
E A claim for personal accessory liability against the accountant.

Answer 16

Answer
Option E is correct. The accountant has positively assisted the doctor’s breach of trust. If she
has acted dishonestly (which seems likely given the facts – she was instructed to draw up
‘inventive accounts’), a claim for personal accessory liability should be successful.
Options A and C are wrong. At no point has the accountant received trust property.
Option B is wrong. The accountant has not acted as if she were an expressly appointed
trustee, so she cannot be liable for intermeddling.
Option D is wrong. The accountant is not an expressly appointed trustee, so she is not herself
in breach of trust.

Question 17

Question 2
A trustee steals £50,000 from a trust.
She transfers £20,000 of the money to her daughter who uses the money to pay off her
credit card debts.
She transfers the remaining £30,000 to her son who uses the money as a deposit towards
a flat.
The trustee and her son are facing bankruptcy proceedings.
Which of the following claims is most likely to give the beneficiaries a positive outcome?
A A claim for personal recipient liability against both the daughter and the son.
B A proprietary claim to recover trust property from both the daughter and the son.
C A claim for personal recipient liability against the daughter; a proprietary claim against
the son.
D A proprietary claim against the daughter; a claim for personal recipient liability against
the son.
E A claim for personal recipient liability against the daughter; a claim for personal
accessory liability against the son.

Answer 17

Answer
Option C is correct. The daughter has received trust property but has dissipated it by using
it to pay off her credit card debts. There is no point bringing a proprietary claim against
the daughter. However, depending on whether her state of knowledge as to the origins of
the money she received made it unconscionable for her to spend that money, a claim for
personal recipient liability might be successful.
The son has received trust property, which might be traceable into the flat. The
beneficiaries should therefore assert a proprietary claim against the flat. However, the
son is facing bankruptcy proceedings, and therefore there is unlikely to be any practical
purpose in bringing any personal claim against him.
The son’s bankruptcy means that bringing a personal claim against him would be
practically worthless. As a result, options A, D and E are wrong. (Option E is also wrong
because there is nothing on the facts to suggest that the son has assisted his mother’s
breach of trust.)
The fact that the daughter has dissipated the trust property she received renders
meaningless a proprietary claim against her. As a result, options B and D are wrong.

Question 18

Question 3
Two years ago, a trustee stole £80,000 from a trust fund.
She paid £40,000 into her boyfriend’s bank account. She combined the remaining £40,000 with
£40,000 of her own money to buy a Mercedes AMG coupe, which is now valued at £60,000.
Her boyfriend’s bank account already contained £10,000 of his own money. He used £10,000
from the account to pay off his extensive gambling debts. He used the remaining £40,000 to
purchase a sculpture for his garden. He was used to receiving large sums of money from the
trustee, who was then independently wealthy but now has been made bankrupt, so he did
not think anything was unusual when she transferred the sum of £40,000 to him.
Which of the following claims is most likely to give the beneficiaries the best outcome?
A Asserting an equitable lien over the Mercedes AMG coupe; a proprietary claim
asserting an equitable lien over the sculpture.
B Claiming a 50% share in the Mercedes AMG coupe; a proprietary claim asserting an
equitable lien over the sculpture.
C A personal claim for breach of trust against the trustee.
D Claiming a 50% share in the Mercedes AMG coupe; a claim for personal recipient
liability against the boyfriend.
E Asserting an equitable lien over the Mercedes AMG coupe; a claim for personal
recipient liability against the boyfriend.

Answer 18

Answer
Option A is correct.
This question is designed to remind you that beneficiaries can choose to bring claims against
both wrongdoing trustees and third parties as needed to ensure full recovery for the losses the
trust has sustained.
The trustee has mixed some trust money with her own money to purchase the Mercedes. This
car is a ‘mixed asset’. Given that it has decreased in value, the beneficiaries are best advised
to assert an equitable lien over the car to the full extent of their contribution towards that
asset, ie £40,000.
The boyfriend still has property – the sculpture – that the beneficiaries can trace into. As he
is an innocent volunteer (see below), the beneficiaries would have to use the kinder tracing
rules set out in this chapter. The beneficiaries would start by applying Clayton’s Case and
FIFO, which in this scenario would mean that the boyfriend’s own money was spent paying off
his gambling debts, whereas the trust money was used to pay for the sculpture enabling the
beneficiaries to assert an equitable lien over that sculpture.
Options B and D are wrong for suggesting that the beneficiaries should claim a 50% share in
the Mercedes coupe. Given that the car has gone down in value, this does not represent the
best outcome for the beneficiaries.
Option C is wrong. A personal claim against the trustee is now worthless given that
bankruptcy proceedings have been opened against her.
Options D and E are wrong for suggesting that the beneficiaries can bring a claim for
personal recipient liability against the boyfriend. The facts suggest that the boyfriend
was used to receiving lavish gifts from the trustee. He may not, therefore, have had the
requisite degree of knowledge about the origins of the money he received to have made
it unconscionable to spend it. The chances of a claim for personal recipient liability being
successful therefore look low.