Knowing receipt: not what you know but what you receive

The court concluded that it does, unless dishonesty is alleged (and it was not here).

The judgment addresses the impact of a change in ownership at the moment of receipt (due in this case to the operation of foreign law on a transfer of property). Of particular interest is the analysis of whether the claimant’s beneficial interest in the property immediately prior to the defendant’s receipt, combined with the recipient’s “sufficient knowledge” of a transfer in breach of trust, could be enough to establish liability.  

Background

Liquidators of a Cayman Islands registered company, Saad Investments Company Limited ("SICL"), brought a claim in knowing receipt to recover from a Saudi Arabian bank, Samba Financial Group ("Samba"), the value of shares in five Saudi Arabian companies that were transferred to Samba in breach of trust (the “Transfer”). There was no allegation of dishonesty against Samba. The claim proceeded against it as a “pure” knowing receipt claim, not a claim for dishonest assistance.  Due to non-compliance with disclosure orders, Samba was debarred from defending the claim except in relation to certain limited issues:

• Did Saudi Arabian law (the law governing the Transfer) operate to extinguish SICL’s interest in the shares at the moment of receipt (even if Samba had “sufficient knowledge”)?
• If SICL’s interest had been extinguished at the moment of receipt, was this fatal to the knowing receipt claim?

Continuing equitable interest

The key issue was whether a claimant seeking a personal remedy against a knowing recipient needs to have a continuing equitable interest in the property. 

SICL argued that it was not relevant whether under Saudi Arabian law Samba's title extinguished or overrode SICL's interest because Samba received the shares in the knowledge that they had been transferred in breach of trust. Knowing that the property belonged to another and that it had been wrongly transferred, SICL argued, meant that Samba was not entitled to receive and retain the property. 

However, Mr Justice Fancourt highlighted the importance of distinguishing between dishonest assistance and knowing receipt.  "The distinction between dishonest assistance and knowing receipt is often blurred as a matter of fact because a defendant can be liable for both dishonest assistance and knowing receipt; but as a matter of law the distinction is clear". 

Dishonest assistance is truly fault-based whereas liability for knowing receipt depends on knowledge that the property received is trust property and is to be dealt with in that way. Here, the court concluded that Saudi Arabian law operated to extinguish SICL’s interest in the shares at the moment at which Samba received them. Samba had, therefore, only ever held the property as a beneficial owner. On that basis, the court held that what Samba knew about the ownership of the property immediately prior to its receipt was irrelevant: “the claimant must be able to assert that the defendant received his property and was obliged to deal with it as if he were a trustee of it…If the recipient was from the outset entitled to deal with the property as his own, the claim cannot succeed."

The court acknowledged that liability as a knowing recipient in cases such as this will depend on the law applicable to the transfer of the property. Under English law, a beneficiary’s proprietary interest will remain undisturbed unless the recipient is “equity’s darling” (a bona fide purchaser who acquires property for value and without notice of any equitable rights) or the statutory equivalent. Where foreign law applies to the transfer (as here) the position will differ according to the operation of that law.

Knowing the future for knowing receipt?

Mr Justice Fancourt observed that, absent the decision in Macmillan v Bishopsgate¹ (which he held supported his finding in this case) there was no authority addressing this particular aspect of the law of knowing receipt. Further, he acknowledged the "scope for a difference of view…about the principle or principles that should apply on a 'pure' knowing receipt claim, in particular whether the beneficiary's ownership immediately prior to receipt together with the recipient's sufficient knowledge of a transfer in breach of trust should establish liability".

He concluded, however, that as the law stands, “authority and the greater weight of judicial observation” supported his conclusion. For now, therefore, absent any evidence of dishonesty, it is clear that a claimant in a “pure” knowing receipt claim needs to have an interest in the property received for the claim to succeed.