Mar 22nd

A Matter of Equitable Principle: Knowing Receipt in Byers and others v. Saudi National Bank

Patrick Healy

The UK Supreme Court has released an important decision concerning the equitable doctrine of knowing receipt: Byers and others v. Saudi National Bank (“Byers”). Knowing receipt is an equitable personal claim. It arises where (1) trust property that has been transferred by a trustee to a defendant, (2) in breach of trust, (3) of which the defendant becomes aware before receiving the trust property and before disposing it either by transfer to a third party or by dissipation/destruction of the property. In such cases, where the trust property is subsequently disposed, destroyed or dissipated by the defendant, the beneficial owner of the property will no longer be able to pursue a proprietary claim to have the property transferred to her but will be able to maintain a personal, equitable, claim against the defendant to account or to pay compensation as if the defendant were a trustee of the property.

In Byers, the question to be decided by the UK Supreme Court was whether, in a situation where a trust asset has been transferred to a defendant in breach of trust, and the transfer confers unencumbered legal title to the asset on the defendant, can the defendant be held liable to the beneficiary under the trust for knowing receipt? ² The Court held unanimously that the answer was “no”: there can be no claim for knowing receipt in situations where the beneficiary under the trust has no continuing equitable proprietary interest in the asset received by the defendant.

Facts

The appellants were Saad Investments Co Ltd (“ SICL”), a company registered in the Cayman Islands, and its joint liquidators, Mark Byers and Hugh Dickson. Between 2002 and 2008 a Mr Al-Sanea came to hold shares in five Saudi Arabian companies on express trusts for SICL. On or about 16 September 2009, Mr Al-Sanea, in breach of trust, transferred these shares to Samba Financial Group (“Samba”) to discharge personal debts he owed to Samba.

At the time of Samba’s receipt of the shares, Samba knew that the shares were held on trust for SICL by Mr Al-Sanea. ⁴ It was later deemed to have been established, moreover, that a reasonable bank in Samba’s position would have appreciated that the transfer of shares was a breach of trust and/or that Samba had recklessly failed to make such inquiries about the transfer as an honest and reasonable bank would have made. ⁵

The law governing the transfer of shares was Saudi Arabian law, which does not recognise a distinction between legal and beneficial ownership. As a matter of Saudi Arabian law, SICL had no continuing proprietary interest in the shares following the transfer and the registration of the shares in Samba’s name. Samba was the sole defendant at the time of trial. Subsequently, its assets and liabilities became vested in the respondent, the Saudi National Bank. ⁶

¹ Byers and others v. Saudi National Bank, [2023] UKSC 51 (“Byers”).
² Byers, para. 99.
³ Byers, para. 201.

Procedural History

The Grand Court of the Cayman Islands made a winding-up order against SICL on 18 September 2009. ⁷ Together with its joint liquidators, SICL first issued proceedings against Samba on 14 August 2013 under section 127 of the UK Insolvency Act 1986, concerning “any disposition of the company’s property” made after the commencement of its winding up. That claim was dismissed. SICL and the liquidators then issued subsequent proceedings against Samba on May 31, 2017 alleging knowing receipt.⁸

⁴ Byers, paras. 14, 106.
⁵ Byers, paras. 14, 106, 109.|
⁶ Byers, para. 15.
⁷ Byers, para. 105.
⁸ Byers, para. 108.

The trial judge in the subsequent proceedings determined that the effect of Saudi Arabian law, as the law governing the transfer of the shares, was to extinguish SICL’s rights in the shares even if Samba had knowledge of SICL’s interest (“ the Saudi Arabian law issue”).⁹ He also held that the claim for knowing receipt must fail if SICL’s interest was so extinguished (“the law of knowing receipt issue”). SICL and the joint liquidators appealed the trial decision but their appeal was dismissed by the Court of Appeal, which agreed with the trial judge on both of these issues.¹⁰

The appellants then obtained permission from the UK Supreme Court to appeal solely in relation to the law of knowing receipt issue. ¹¹

Analysis

General Principles

The appeal was dismissed in separate, detailed reasons of Lord Briggs and Lord Burrows on the basis that the operation of Saudi Arabian law (the law applicable to the transfer of shares to Samba) had the effect of extinguishing SICL’s proprietary equitable interest in the shares. This was so notwithstanding Mr Al-Sanea’s breach of trust and any knowledge which Samba had that the transfer was in breach of trust.

Lord Hodge (with whom Lord Leggatt and Lord Stephens agreed) concurred in the result. In brief reasons, he distilled the general principles applying to knowing receipt as follows:

the transfer of trust property by a trustee to a bona fide purchaser for value without notice extinguishes or overrides the proprietary equitable interest of the trust beneficiary; this is so even if the trustee acts in breach of trust;
if the bona fide purchaser for value without notice later becomes aware that the property was transferred in breach of trust, this does not resuscitate the claimant’s proprietary equitable interest. That interest also is not revived when the original purchaser transfers the property to a further transferee who, at the time of the transfer, is aware that there has been a breach of trust;
a claim in knowing receipt cannot succeed in the circumstances outlined immediately above because the claimant’s proprietary interest has been extinguished or overridden;
on the other hand, if the subsequent transferee were the defaulting trustee, he or she would not be released from the trust obligations but would hold the asset for the trust beneficiary;
a claim in knowing receipt is different to a claim for dishonest assistance, which is ancillary to the liability of the trustee and renders the assister liable as an accessory;
a personal claim in knowing receipt comes into play when the transferee, who is not a bona fide purchaser for value without notice, no longer has the property, such as when the transferee transfers, dissipates or destroys the property in question and thereby prevents a proprietary claim; and
the extinction or overriding of a proprietary equitable interest by the time when the recipient receives the trust property defeats a personal claim in knowing receipt by the trust beneficiary.¹²

⁹ Byers, paras 110-111; see [2021] EWHC 60 (Ch).
¹⁰ Byers, para. 112; see [2022] EWCA Civ 43.
¹¹ Byers, para. 113.

Overreaching and Overriding an Equitable Interest

There are two main ways in which an equitable interest in property can been defeated without any consent or other action by the equitable owner. First, where the trustee, in whom the legal title is vested, has power under the terms of the trust to dispose of the property free of the equitable interest. In such a case the original equitable interest is “overreached”. Second, on the sale of the property to a bona fide purchaser for value without notice of the equitable interest – “equity’s darling” – even if the sale amounts to a breach of trust. In the latter case, the equitable interest is “overridden.” ¹³

¹² Byers, paras. 2-6.
¹³ Byers, para. 19-20

What about the situation where equity’s darling subsequently transfers the trust property to a recipient who knows about the breach of trust in the original transfer? The appellants argued that an ultimate transferee would be liable in knowing receipt to the beneficial owner, even if they received the property from equity’s darling, if they knew of the breach of trust involved in the transfer of the property from the trustee to equity’s darling.

That approach would treat the beneficiary’s equitable interest not as overridden, but as merely suspended, as long as the property remained in the hands of equity’s darling. The suspended equitable interest, so the argument went, was capable of being fully reanimated when the property was subsequently transferred by equity’s darling to a transferee who had knowledge of the breach of trust by the trustee when completing the original transfer. ¹⁴

Lord Briggs rejected the supposed suspensory effect of a transfer to equity’s darling in these circumstances because equity regards a bona fide purchaser of the legal title without notice as having a better right to ownership than the original beneficial owner. In this situation “the earlier equitable interest is overridden, once and for all.” ¹⁵ For Lord Briggs, therefore, as a matter of basic equitable principle, “the remedy of knowing receipt has no role to play once the claimant’s equitable interest has either been overreached or overridden by a transfer to equity’s darling.”¹⁶ The appeal to the UK Supreme Court concerned a third scenario: whether a claim in knowing receipt could be maintained where the law applicable either to the property or to its transfer gives the defendant a clean title to it (which transfer Lord Briggs characterised as “overriding by operation of law”).¹⁷

The Lex Situs

The law governing the transfer of the shares was Saudi Arabian law (the lex situs), which does not recognise a distinction between legal and beneficial ownership. As a matter of Saudi Arabian law, therefore, the effect of the transfer was that SICL had no continuing proprietary interest in the shares. SICL’s equitable proprietary interest under the trust was overridden, or extinguished, by the registration transferring the shares to Samba.¹⁸ That registration had an effect in Saudi Arabian law that was equivalent to the situation in English law where the shares had been purchased by a bona fide purchaser of the legal title for value without notice.¹⁹ Unencumbered title had therefore passed to the defendant. Could a claim for knowing receipt survive in this situation?

¹⁴ Byers, para. 25.
¹⁵ Byers, para. 26.
¹⁶ Byers, para. 27.
¹⁷ Byers, para. 28

The Requirement of a Continuing Equitable Proprietary Interest

Counsel for the appellants had submitted that a personal claim for knowing receipt and a proprietary claim against the trust asset rested on different foundations. ²⁰ His main submission was that liability in knowing receipt is not about matters of equitable title at all, but rather about equity’s historic role as the enforcer of the obligations of conscience.²¹ On that basis, the argument went, all that was required for a claim for knowing receipt was Samba’s knowledge that the shares were transferred to it in breach of trust so that it would be unconscionable for Samba to use them for its own benefit.²²

This submission was not accepted. Lord Briggs and Lord Burrows both insisted that there was a fundamental link between the equitable personal and proprietary claims. Lord Briggs concluded that there would be a “serious lack of logic” in a situation where overreaching or overriding had extinguished the equitable interest necessary to maintain a proprietary claim but had left intact the wherewithal to maintain a personal claim in knowing receipt, with the same liability to return the property to the claimant as if there was a proprietary claim. ²³

¹⁸Byers, para. 107
¹⁹ Byers, para. 156.
²⁰Byers, paras. 158-159
²¹ Byers, para. 36.
²² Byers, para. 16.
²³ Byers, para. 44.

Lord Burrows arrived at the same conclusion but from a slightly different starting point: his definition of knowing receipt as “a proprietary wrong that is constituted by the defendant knowingly interfering, by receipt or retention, with the equitable proprietary rights of the claimant.” ²⁴ It follows from the nature of the wrong so defined that that the claimant must have a continuing equitable proprietary interest in the asset when it is received or retained by the defendant with the requisite knowledge. Lord Burrows’ “principled answer” to the knowing receipt issue is that there will be no wrong of knowing receipt “where the transfer confers unencumbered title in the asset on the defendant recipient.”²⁵

In both sets of reasons, therefore, a personal claim in knowing receipt must be founded on the claimant having a continuing equitable interest in the property that has not been overridden or overreached by the time of transfer to the defendant. Where the equitable interest has been overridden or overreached at the time of transfer, the defendant takes unencumbered title in the property and a claim for knowing receipt is no longer tenable.

The Knowledge Issue

Knowing receipt requires knowledge on the part of the defendant rather than mere notice that trust property has been transferred in breach of trust – that requirement is inherent in the term “knowing receipt.” ²⁶ Beyond that high-level generalisation, however, the level of knowledge required to make a defendant liable for knowing receipt did not receive close scrutiny in Byers and is still something of an open question. This is because it was deemed to have been established that a reasonable bank in Samba’s position would have appreciated that the transfer of shares was a breach of trust and/or that Samba had recklessly failed to make such inquiries as an honest and reasonable bank would have made. The parties therefore agreed that, for the purposes of the appeal, Samba’s level of knowledge met the threshold required for a claim of knowing receipt.²⁷

²⁴ Byers, para. 151.
²⁵ Byers, para. 155.
²⁶ Byers, para. 33.

So, for example, the question whether constructive knowledge can comprise the required level of knowledge for knowing receipt was not argued or decided in Byers.²⁸ That issue remains to be decided on different facts.

A Launderer’s Charter?

Counsel for the appellants had argued that, were liability in knowing receipt precluded by any form of overriding by foreign law (such as by the operation of Saudi Arabian law in the case at bar), the result would be a money launderer’s charter. Fraudsters would be incentivized to route assets to third parties through jurisdictions where the law extinguishes equitable proprietary interests, such as Saudi Arabia, “thereby escaping the reaches of an English knowing receipt claim.” ²⁹

Lord Burrows addressed that concern by saying there was no reason to think that the English law on dishonest assistance would be an inadequate deterrent to such planning. ³⁰ Dishonest assistance is an accessory equitable wrong concerned with dishonestly procuring or assisting a breach of trust (or other fiduciary duty); unlike knowing receipt, a claim for dishonest assistance does not depend on the continuation of an equitable proprietary interest in the trust property.³¹

²⁷ Byers, para. 101.
²⁸ Byers, paras. 33, 35, 101.
²⁹ Byers, para. 173.
³⁰ Byers, para. 173.
³¹ Byers, paras. 41, 147, 173.

Lord Burrows also noted that accepting the appellants’ policy-based argument in this regard would require the English courts to depart from the principle of comity. ³²

Conclusion

There is considerable authority and logic in Lord Burrows’s conclusion that the policy concerns of the appellants should not diminish the force of the “principled view” that a claim for knowing receipt cannot succeed where unencumbered title in the asset has passed to the defendant. The policy arguments of the appellants, however, surely point to some unwelcome and uncomfortable implications of the outcome in Byers. As noted by Lord Burrows, the registration of the shares had an effect in Saudi Arabian law that was equivalent to the situation in English law as if the shares had been purchased by a bona fide purchaser of the legal title for value without notice. Samba therefore stood in a position analogous to that of equity’s darling, an incongruous situation when one considers the deemed fact that Samba had recklessly failed to make such inquiries about the share transfer as an honest and reasonable bank would have made.

A Note on Unjust Enrichment

In Byers, unjust enrichment had not been pleaded as a cause of action by the appellants and counsel were united in discouraging the court from exploring the possibility that knowing receipt should be treated as subsumed in or replaced by unjust enrichment.³³ This contrasts with the situation in Canada, where liability for knowing receipt is restitution-based.³⁴ Further, the knowledge issue has been settled in the Canadian law of knowing receipt: constructive knowledge is sufficient to ground liability for knowing receipt; on the other hand, liability for knowing assistance (the Canadian analogy to dishonest assistance) is fault-based and requires something more than constructive knowledge.³⁵

³² Byers, para. 173.
³³ Byers, paras. 29-30.
³⁴ Citadel General Assurance Co. v. Lloyds Bank Canada, [1997] 3 S.C.R. 805, paras. 47, 57; Gold v. Rosenberg, [1997] 3 S.C.R. 767, para. 41. I am grateful to John D. McCamus, Professor Emeritus at Osgoode Hall Law School, for his insight in this area. The issue is handled at greater length in chapter 36 of Professor McCamus’ treatise, with co-author Peter D. Maddaugh, The Law of Restitution (Looseleaf Edition: Thomson Reuters).
³⁵ Citadel General Assurance Co. v. Lloyds Bank Canada, [1997] 3 S.C.R. 805, paras. 45-48.

Patrick Healy is a barrister at Weintraub Huang LLP in Toronto and is the new author of the leading text The Law of Damages (Thomson Reuters).