Liability to Strangers

Question 1

What are the two key claims that can be made against a ‘stranger’ to the trust?

Answer 1

• a claim for accessory liability (dishonest assistance)
• a claim against the recipient of the traceable proceeds of a breach of trust (knowing receipt)

Question 2

Is it wise to bring alternative claims of dishonest assistance and knowing receipt against the same defendant?

Answer 2

Yes - the requirements are slightly different so one may fail and the other succeed

Question 3

What is accessory liability/dishonest assistance?

Answer 3

Fault-based claim whereby claimant can sue third party for loss caused by trustee/fiduciary.

Question 4

Are dishonest assistance claims limited to claims for misapplication of trust property?

Answer 4

No - can extend to breaches of fiduciary duties

Question 5

What are the four requirements for dishonest assistance?

Answer 5

• there was a trust in existence at the material time
• the trustee committed a breach of trust
• the defendant assisted the trustee to commit that breach of trust and
• the defendant’s assistance was dishonest

Question 6

What requirements are there in relation to the form of assistance for dishonest assistance?

Answer 6

• assistance must be in connection to breach
• assistance can be in relation to plan, commit, cover up of breach or instigating breach
• assistance must be more than minimal - must make the commission of the breach easier than it would otherwise have been

Question 7

Is it a defence to say that fiduciary would have committed the breach anyway in relation to assistance for dishonest assistance?

Answer 7

No - will not be a valid defence

Question 8

What is ‘dishonesty’ for dishonest assistance?

Answer 8

Means not acting as an honest person would in the circumstances

Question 9

What is the test for dishonesty?

Answer 9

(1) what was the actual state of the individual’s knowledge or belief as to the facts (subjective)

(2) with the individual’s knowledge or belief of the facts in mind, were his actions honest or dishonest by the standard of ordinary decent people (objective)

Question 10

Is it dishonest to misappropriate or misapply other people’s property, or assist others to do so?

Answer 10

Yes - dishonest

Question 11

Will it be dishonest to deliberately remove assets of an insolvent company to defeat claims of creditors?

Answer 11

Yes - inconsistent with ‘ordinary standards of honest commercial behaviour’

Question 12

What must claimant show in order for dishonest assistant to be liable for loss in addition to four dishonest assistance requirements?

Answer 12

The claimant must show defendant’s conduct assisted the breach of trust and that but for the breach of trust the loss would not have occurred

Question 13

When will dishonest assistant also be liable for any profits they acquire by way of breach?

Answer 13

If claimant can demonstrate that their participation was the ‘real’ or ‘effective’ cause of profits

But for test not sufficient here.

Question 14

What discretion does the court have in deciding whether dishonest assistant should also be liable for any profits they acquire by way of breach?

Answer 14

Court can withhold remedy where it would be disproportionate in relation to form and extent of the assistant’s wrongdoing

Question 15

How does knowing receipt differ from other proprietary claims against third parties?

Answer 15

It is fault-based - defendant only liable if they had the requisite knowledge

Question 16

What are the three requirements for a knowing receipt claim?

Answer 16

• a misapplication of trust property (of property held in another fiduciary capacity)
• beneficial receipt by the defendant of the misapplied trust property or its traceable proceeds
• knowledge on the part of the defendant that the property they received was misapplied trust property or its traceable proceeds

Question 17

What is beneficial receipt in a knowing receipt claim?

Answer 17

The receipt by defendant must be for their own benefit or in his own right in the sense of setting up a title of his own to the property received

Question 18

What is insufficient for beneficial receipt in a knowing receipt claim?

Answer 18

Receipt in ministerial capacity - such as receipt by agent for principal

Question 19

What is the situation with money paid into a bank account and beneficial receipt for knowing receipt claim?

Answer 19

• if bank account is in credit, then not beneficial receipt on the bank’s part
• if bank account is overdrawn, then it is beneficial receipt on the bank’s part to extent it reduces or discharges debt

Question 20

When is knowledge required for a knowing receipt claim?

Answer 20

Must have requisite knowledge before they dispose of property for a successful claim

Can therefore be knowledge at time of receipt and anytime after that receipt before disposal

Question 21

Is dishonestly a requirement for knowing receipt?

Answer 21

No

Question 22

What form of knowledge is required for knowing receipt claim?

Answer 22

Knowledge that makes it unconscionable for beneficiary to retain the benefit of the receipt

Question 23

What is the Baden scale of knowledge?

Answer 23

(1) actual knowledge

(2) wilfully shutting one’s eyes to the obvious

(3) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make

(4) knowledge 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 24

What is the relevance of the Baden scale of knowledge in assessing knowledge for knowing receipt?

Answer 24

Knowledge in categories (1) to (3) would automatically make it unconscionable for defendant to retain money

Knowledge in categories (4) and (5) would render receipt unconscionable only if on the facts known to the 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 breach of trust