Knowing receipt: Supreme Court untangles the issues

The Supreme Court’s recent decision in Byers and others v Saudi National Bank has clarified key elements of knowing receipt claims, marking a significant development in the law of personal equity ([2023] UKSC 51). The decision confirms that a claim for knowing receipt will fail where the claimant’s proprietary equitable interest has been extinguished or overridden by the time of the defendant’s knowing receipt of the property in question.

The dispute

The case concerned the transfer of shares in five Saudi Arabian companies from Mr Maan Al-Sanea to Samba Financial Group. Mr Al-Sanea acquired the shares between 2002 and 2008 and held them on trust through a company registered in the Cayman Islands, Saad Investments Company Limited (SICL). In breach of the trust, Mr Al-Sanea transferred his shares to Samba on or about 16 September 2009 in order to discharge debts that he owed to it. Shortly afterwards, SICL went into liquidation in the Cayman Islands.

English law distinguishes between legal ownership and equitable interest. In this case, Mr Al-Sanea held the legal title to the shares and SICL was the beneficiary. However, the law applicable to the property and transaction was Saudi Arabian law, which does not recognise this distinction. 

SICL and its joint liquidators, Mr Mark Byers and Mr Hugh Dickson, brought a claim of knowing receipt against Samba in May 2017, alleging that as Samba received the shares knowing that they were transferred in breach of trust, the shares should be restored or their value reimbursed. In April 2021, Samba’s assets and liabilities were transferred to Saudi National Bank.

The High Court dismissed SICL's case on the basis that, under Saudi Arabian law, SICL had no continuing proprietary interest in the shares following the transfer and Samba became the sole owner ([2021] EWHC 60). The Court of Appeal agreed, prompting SICL to appeal to the Supreme Court ([2022] EWCA Civ 43).

Supreme Court decision

The Supreme Court unanimously dismissed SICL’s appeal. The court had to decide the issues in the case based on equitable principles, as previous case law did not provide a definitive answer. Lord Briggs and Lord Burrows came to the same conclusion but for different reasons, while Lord Hodge set out a helpful summary of the agreed principles established by the court.

The court held that when a trustee transfers trust property to a bona fide purchaser for value without notice, this extinguishes the equitable interest of the trust beneficiary, even if the trustee acted in breach of trust. If the bona fide purchaser later becomes aware of the breach, the beneficiary's interest is not resuscitated. Moreover, subsequent transfers with awareness of the breach do not revive the proprietary interest. However, if the subsequent transferee is the defaulting trustee, it will remain bound by the trust obligations but hold the asset for the beneficiary.

A claim in knowing receipt is unsuccessful in these circumstances because the claimant's proprietary interest has been extinguished or overridden (see "Knowing receipt" below). The court distinguished a claim in knowing receipt from a claim for dishonest assistance. A claim for dishonest assistance renders the assister liable as an accessory, but a personal claim in knowing receipt is closely tied to a proprietary claim and arises when the transferee, who is not a bona fide purchaser for value without notice, no longer possesses the property.

The extinction of a proprietary equitable interest by the time that the recipient receives the property defeats a proprietary claim, as Lord Briggs emphasised in his judgment. He further added that the proprietary claim and personal claim in knowing receipt are so closely linked that it would be logically inconsistent for the law to allow the personal claim in knowing receipt to survive where the proprietary claim has been defeated by the lack of a continuing proprietary equitable interest.  

In this claim, the operation of Saudi Arabian law meant that SICL’s proprietary equitable interest was extinguished by Mr Al-Sanea’s transfer to Samba of the securities that he held in trust for SICL and the registration of those securities in Samba’s name. Therefore, SICL’s interest was extinguished under Saudi Arabian law, despite the trustee's breach of trust and Samba's knowledge (if any) that the transfer was in breach of trust.

While Lord Briggs saw a knowing receipt claim as ancillary to a proprietary claim, Lord Burrows categorised it as an equitable proprietary wrong. Nevertheless, both Lord Briggs and Lord Burrows agreed that a claim in knowing receipt is precluded where the claimant's proprietary equitable interest has been extinguished or overridden by the time that the recipient receives the property. Lord Hodge acknowledged this difference in categorisation but left this issue to be decided in future claims where it could be thoroughly examined in argument.

Practical implications

The issue of proprietary equitable interests when an asset has been transferred in breach of trust is without question an issue of great complexity. As Lord Burrows highlighted, the law on knowing receipt "has perplexed judges and academics alike for several decades". This landmark judgment provides a detailed and forensic analysis of the equitable principles that underlie a claim in knowing receipt; an analysis that, the court noted, had never previously been squarely addressed.

The decision provides welcome and clear guidance on how and why a claim for knowing receipt cannot succeed if a claimant has no continuing proprietary interest in the assets in question, unencumbered legal title to the asset having been transferred to a third party. This will be particularly relevant in the sphere of trust disputes where property is transferred in breach of trust.

Furthermore, the guidance on the difference between knowing receipt claims and claims for dishonest assistance may also prove helpful in situations where a continuing proprietary interest cannot be established. The judgment clearly explains that claims for dishonest assistance are secondary to the liability of the trustee and render the assisting party, which is not required to have received trust property, liable as an accessory.

The judgment raises a significant matter of public policy; namely, whether this decision will serve to encourage fraudsters seeking to acquire third-party assets to transfer those assets to parties that are in jurisdictions, such as Saudi Arabia, where the law does not recognise the difference between legal and beneficial ownership so that any proprietary interests that would otherwise be held are extinguished. Lord Burrows addressed this issue, saying that he would expect the relevant criminal system to be a far better disincentive to such acts of fraud than any civil system could achieve. In addition, insofar as English civil law is concerned, the decision does not suggest that a finding of equitable wrong is in any way solely dependent on the continuation of an equitable proprietary interest.

Knowing receipt

In El Ajou v Dollar Land Holdings PLC (No 1), the Court of Appeal summarised the three element of a knowing receipt claim:

• A disposal of the claimant's assets in breach of trust of custodial fiduciary duty.
• The beneficial receipt by the defendant of assets that are traceable as representing the claimant's assets.
• The defendant's knowledge that the assets received are traceable to a breach of fiduciary duty ([1994] 2 All ER 685).  

A claim in knowing receipt is a personal, rather than proprietary remedy. Therefore, the defendant is liable to restore the value of the assets to the claimant, rather than the assets themselves, although there may sometimes also be a concurrent proprietary claim where the assets can be traced. The main issue in Byers and others v Saudi National Bank was the extent to which knowing receipt depends on a continuing proprietary link between the beneficiary's assets and the assets received by the defendant; that is, whether the beneficiary still has an equitable interest in the assets at the time that the defendant receives them ([2023] UKSC 51). The Supreme Court confirmed that a continuing proprietary equitable interest is necessary. 

This was originally published in the January/February 2024 issue of PLC Magazine.