Liability to Strangers Flashcards
What are the two key claims that can be made against a ‘stranger’ to the trust?
- a claim for accessory liability (dishonest assistance)
- a claim against the recipient of the traceable proceeds of a breach of trust (knowing receipt)
Is it wise to bring alternative claims of dishonest assistance and knowing receipt against the same defendant?
Yes - the requirements are slightly different so one may fail and the other succeed
What is accessory liability/dishonest assistance?
Fault-based claim whereby claimant can sue third party for loss caused by trustee/fiduciary.
Are dishonest assistance claims limited to claims for misapplication of trust property?
No - can extend to breaches of fiduciary duties
What are the four requirements for dishonest assistance?
- 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
What requirements are there in relation to the form of assistance for dishonest assistance?
- 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
Is it a defence to say that fiduciary would have committed the breach anyway in relation to assistance for dishonest assistance?
No - will not be a valid defence
What is ‘dishonesty’ for dishonest assistance?
Means not acting as an honest person would in the circumstances
What is the test for dishonesty?
(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)
Is it dishonest to misappropriate or misapply other people’s property, or assist others to do so?
Yes - dishonest
Will it be dishonest to deliberately remove assets of an insolvent company to defeat claims of creditors?
Yes - inconsistent with ‘ordinary standards of honest commercial behaviour’
What must claimant show in order for dishonest assistant to be liable for loss in addition to four dishonest assistance requirements?
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
When will dishonest assistant also be liable for any profits they acquire by way of breach?
If claimant can demonstrate that their participation was the ‘real’ or ‘effective’ cause of profits
But for test not sufficient here.
What discretion does the court have in deciding whether dishonest assistant should also be liable for any profits they acquire by way of breach?
Court can withhold remedy where it would be disproportionate in relation to form and extent of the assistant’s wrongdoing
How does knowing receipt differ from other proprietary claims against third parties?
It is fault-based - defendant only liable if they had the requisite knowledge
What are the three requirements for a knowing receipt claim?
- 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
What is beneficial receipt in a knowing receipt claim?
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
What is insufficient for beneficial receipt in a knowing receipt claim?
Receipt in ministerial capacity - such as receipt by agent for principal
What is the situation with money paid into a bank account and beneficial receipt for knowing receipt claim?
- 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
When is knowledge required for a knowing receipt claim?
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
Is dishonestly a requirement for knowing receipt?
No
What form of knowledge is required for knowing receipt claim?
Knowledge that makes it unconscionable for beneficiary to retain the benefit of the receipt
What is the Baden scale of knowledge?
(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
What is the relevance of the Baden scale of knowledge in assessing knowledge for knowing receipt?
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
