Byers and others (Appellants) v Saudi National Bank (Respondent)

LORD HODGE (with whom Lord Leggatt and Lord Stephens agree):

1. I am very grateful to Lord Briggs and Lord Burrows for setting out the facts and for the reasoning by which they conclude that the appeal must be dismissed. They agree that a claim in knowing receipt cannot succeed once the claimant’s proprietary equitable interest in the property in question has been extinguished or overridden. I agree. Lord Briggs and Lord Burrows agree that the case law, although containing pointers in favour of their conclusion, does not provide a definitive answer in this case, and that they must decide the matter as a matter of equitable principle. Again, I agree. Because they have come to this conclusion by slightly different reasoning, it may be useful if I summarise what has been agreed as determining the outcome of the appeal. This is only a summary of agreed matters and the reader will find the reasoning in the judgments of Lord Briggs and Lord Burrows.

1. First, it is well established that 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 cestui que trust (the trust beneficiary) and this is so even if the trustee in so doing acts in breach of trust. (Lord Briggs paras 18 & 20, Lord Burrows para 156).

1. Secondly, 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. 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 beneficiary. (Lord Briggs paras 23-24, Lord Burrows paras 167-171.)

1. Thirdly, a claim in knowing receipt cannot succeed in the circumstances which I have outlined in paras 2 and 3 above because the claimant’s proprietary interest has been extinguished or overridden. (Lord Briggs 23-24, Lord Burrows para 172 & 201.)

1. Fourthly, this conclusion cannot be displaced by comparing the claim in knowing receipt to a claim for dishonest assistance. The latter claim is ancillary to the liability of the trustee and renders the assister liable as an accessory. The former claim is significantly different. A personal claim in knowing receipt against a transferee is closely linked to a proprietary claim for the return of the property. 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 (Lord Briggs paras 41-42, 46, Lord Burrows paras 145-149).

1. Fifthly, the extinction or overriding of a proprietary equitable interest by the time when the recipient receives the property defeats a proprietary claim. As Lord Briggs observes, given the close link between the proprietary claim and the personal claim in knowing receipt, 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. (Lord Briggs para 44, Lord Burrows paras 158-159, 172 & 201.)

1. Sixthly, applying this reasoning to the facts of this case, the operation of Saudi Arabian law, which was the law applicable to the property or the transaction, has the effect that Saad Investments Co Ltd’s (“Saad”) proprietary equitable interest was extinguished by Mr Al-Sanea’s transfer to Samba Financial Group (“Samba”) of the securities which he held in trust for Saad and the registration of those securities in Samba’s name. This is so, notwithstanding Mr Al-Sanea’s breach of trust and any knowledge which Samba had that the transfer was in breach of trust.

1. The difference in reasoning between Lord Briggs and Lord Burrows is that Lord Briggs analyses a claim in knowing receipt as ancillary to a proprietary claim while Lord Burrows categorises a claim in knowing receipt as an “equitable proprietary wrong”. This difference does not alter their shared conclusion that a claim in knowing receipt is precluded where the claimant’s proprietary equitable interest has been extinguished or overridden by the time when the recipient receives the property. In the absence of more focussed argument from the parties on this issue, I would prefer not to adopt Lord Burrows’ categorisation but would leave the argument as to categorisation for another case in which the matter is examined more fully in argument.

1. Subject to the above, for the reasons common to the judgments of Lord Briggs and Lord Burrows, I would dismiss the appeal.

LORD BRIGGS:

Introduction

1. This appeal is about the equitable personal claim in what is generally called knowing receipt. It usually arises where a trustee (“T”) transfers trust property beneficially owned by the claimant (“C”) to the defendant (“D”) in breach of trust, and D learns about that breach before disposing of the property by transfer to a third party or by dissipation or destruction of it. In such a case although, after disposal, dissipation or destruction of the property by D, C can no longer pursue a proprietary claim that D transfer the property to C, (or if appropriate back to T or to a new trustee), D incurs a personal liability to account or pay compensation to C as if D were a trustee of the property. From the moment when D learns of the breach of trust, D comes under a personal obligation to restore the trust property to its equitable owner, and to act as its custodian in the meantime. That obligation, together with the concomitant liability to account, is often described as a form of constructive trusteeship. The single issue to be decided on this appeal is whether an equitable claim in knowing receipt depends (among other things) upon C retaining an equitable proprietary interest in the property transferred to D at the time when it reached D’s hands before D either transferred, dissipated or destroyed the property. This case is (perhaps) unusual in that D knew at the time of its receipt of the property that T was transferring it in breach of trust and has been sued in knowing receipt without having transferred, destroyed or dissipated it. The proprietary claim to the property which would usually arise on those facts is defeated (as held by the Court of Appeal and is now common ground) by the fact that the transfer from T to D had the effect under the applicable foreign law of giving D clear title to the property, free from C’s beneficial interest in it.

1. The extended written and oral submissions on this issue (which have been of the highest order) have forced the court to revisit the most basic equitable principles which underlie a claim in knowing receipt, not least because it cannot be said that the issue has ever been squarely addressed by this court or its predecessor, although both sides rely on what they say are persuasive dicta. The question is: what purpose does equity’s imposition of knowing receipt liability fulfil? Is it the best available vindication of C’s continuing beneficial ownership of the subject property, when that interest has been interfered with or destroyed by D as legal owner after becoming aware of it, by a disposal of the property (by transfer, dissipation or destruction)? Or is it equity’s response to the apparent unconscionability of the recipient D treating the property as its own after learning that the property has been transferred to it in breach of trust? If the former, C’s continuing beneficial ownership of the property until its destruction (or impairment) by D’s disposal of the property may be said to be of the very essence of the claim. If the latter, then it may not matter that the method of transfer by T to D has, under the relevant applicable law, conferred upon D clean title to it, free from any antecedent equitable interests, including C’s earlier beneficial ownership.

The Facts

1. The facts which have given rise to this issue may be shortly stated. The appellants are Saad Investments Co Ltd (“SICL”), a company registered in the Cayman Islands, and its joint liquidators, Mr Mark Byers and Mr Hugh Dickson. The Grand Court of the Cayman Islands made a winding-up order against SICL on 18 September 2009 pursuant to a petition presented on 30 July 2009. The Cayman Islands proceedings were recognised by the English Court as foreign main proceedings pursuant to the Cross Border Insolvency Regulations 2006 (SI 2006/1030) by orders made on 20 August and 25 September 2009.

1. By a number of transactions between 2002 and 2008, a Mr Maan Al-Sanea (“Mr Al-Sanea”) came to hold shares in five Saudi Arabian companies (“the Disputed Securities”) on trust for SICL, under various trusts governed by Cayman Islands law (for these purposes being materially identical to English law).

1. On or about 16 September 2009, Mr Al-Sanea transferred the Disputed Securities to a Saudi Arabian financial institution, the Samba Financial Group (“Samba”) (“the September Transfer”), the purpose of the transfer being to discharge debts owed by Mr Al-Sanea to Samba. He did so in breach of trust. At the time of Samba's receipt of the Disputed Securities it knew that Mr Al-Sanea was holding the Disputed Securities on trust for SICL. A reasonable bank in Samba's position would have appreciated that (alternatively would or ought to have made inquiries or sought advice which would have revealed the probability that) the September Transfer was a breach of trust; and/or Samba recklessly failed to make such inquiries about the September Transfer and the Disputed Securities as an honest and reasonable bank would make.

1. The governing law of the September Transfer was Saudi Arabian law, which does not recognise a distinction between legal and beneficial ownership as such. As a matter of Saudi Arabian law, the effect of the September Transfer (and in particular the registration of the Disputed Securities in Samba's name) was that SICL had no continuing proprietary interest in the Disputed Securities following the transfer. Samba retained the Disputed Securities and was the sole defendant at the time of the trial. Subsequently its assets and liabilities have become vested in the respondent the Saudi National Bank, but nothing turns on that.

The Issue before this Court

1. Samba (and now the respondent as the successor to its assets and liabilities) maintains, and has persuaded the courts below (Fancourt J [2021] EWHC 60 Ch and the Court of Appeal [2022] EWCA Civ 43; [2022] 4 WLR 22, consisting of Newey, Asplin and Popplewell LJJ) that the overriding of SICL’s equitable beneficial interest in the Disputed Securities by the registration of Samba as their owner was fatal not merely to any proprietary claim by SICL but also to a personal claim in knowing receipt against Samba. The appellants say that the claim in knowing receipt does not require any such continuing equitable interest in the property in dispute. All it requires is that Samba knew that the Disputed Securities were transferred to it in breach of trust, so that it would be unconscionable for Samba to use them for its own benefit.

1. The detailed analysis of this issue by both the courts below focussed primarily (and perfectly properly) on the state of the authorities, on the footing that if the requirement for a continuing equitable interest in the subject property was part of the ratio of an earlier decision, at least in the Court of Appeal or above, then they were bound by it. This court is not so bound, and in the light of some dicta in the reported cases which might be said to support the appellants’ case, I prefer to begin by considering the question as a matter of basic equitable principle. As will appear, that analysis leads me to a provisional conclusion that the courts below were right in the answer they reached. My own analysis of the authorities affirms that conclusion.

Basic Principles of Equity

1. It is convenient at the outset to set metes and bounds to this battlefield by describing some of the relevant equitable principles which bear on this issue, and which are either common ground or beyond realistic challenge. The first concerns the very nature of an equitable interest in property. By contrast with a legal interest or estate, which is good against all the world, an equitable interest is (statute or foreign law apart) good against all the world except a bona fide purchaser for value of the legal estate without notice of that interest, a person traditionally given the name equity’s darling. For brevity I will use that phrase in what follows. Thus, at common law (by which I include the principles of equity) an equitable interest in specific property is unaffected by the transfer of the property in breach of trust to a volunteer, or even to a purchaser for value if the purchaser has notice of the equitable interest (see Pilcher v Rawlins (1872) L.R. 7 Ch. App. 259 and as summarised by Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] A.C. 669, 705). If the interest in question amounts to full beneficial ownership then such a purchaser may have bought a pup, but their remedy will lie (if at all) only against the vendor or their own advisors.

1. The next basic principle concerns the ways in which an equitable interest in specific property (including full beneficial ownership) may cease to affect that property, without any consent or other action by the equitable owner. The first and most common is 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. This may be a power to dispose by way of sale, but it may include power to dispose to a volunteer (eg by the exercise of a power of appointment). In such a case the original equitable interest is said to be overreached. Typically the previous equitable interest of the beneficiary C in the subject property will transfer to the proceeds of its sale, but this is neither a condition for overreaching, nor an inevitable consequence, eg where the trustee disposes of the property by the exercise of a power of appointment which generates no proceeds at all (see the explanation by Peter Gibson LJ in State Bank of India v Sood [1997] Ch. 276, 281 by reference to Charles Harpum Overreaching, Trustees' Powers and the Reform of the 1925 Legislation [1990] CLJ 277).

1. Secondly, as already mentioned, the equitable interest will cease to affect the property on its sale to equity’s darling, even if the sale amounted to a breach of trust. I will call this the overriding rather than overreaching of the equitable interest. In that context the element in the requirement that the purchaser take the property “without notice” means without notice of the equitable interest which would otherwise continue to affect the property after the transfer. Notice (or even knowledge) that the property was previously subject to C’s equitable interest would not on its own be enough, unless the purchaser knew, or had notice, that the sale by the trustee was in breach of trust, and therefore incapable of overreaching that equitable interest. It is only if the purchaser has notice of an equitable interest which would not be overreached by the sale that he/she would lose the protection of being equity’s darling. Thus knowledge or notice that the transfer involved a breach of trust is generally the equivalent of knowledge or notice of a continuing equitable interest.

1. Thirdly, C’s equitable interest will cease to affect the subject property if the mode of disposition of the legal title is such that, under the law applicable either to the property or to the transaction, the transferee takes free of it, even if the property is transferred in breach of trust. This may occur in a purely English law context where the property in question is land and the proceeds of sale are paid to two trustees or to a trust corporation: see section 2 of the Law of Property Act 1925, or registered land where, in bare outline, Parliament has chosen to replace notice with registration as the governing criterion for the survival of most equitable interests (other than those supported by occupation). Or it may be the consequence of applicable foreign law, such as, in the present case, the law of Saudi Arabia in relation to the transfer of title to shares by registration: see Akers v Samba Financial Group [2017] UKSC 6; [2017] AC 424 discussed below. Again I will call this a form of overriding rather than overreaching, but there is no magic in the distinction.

1. It is common ground that the ability of C to vindicate his or her equitable interest by a proprietary claim, even while the property remains in the hands of D, will be defeated by any of the above types of transfer by the trustee (“T”) to D. This is for the very simple reason that all three types of transfer have the effect of destroying C’s equitable interest in the property. C simply cannot say to D: “give me back my property”. The property has become beneficially owned by D, free from (or in priority to) any proprietary claim by C. D can simply say: “no, it’s now mine”.

1. It is also well settled that the first two types of transfer also preclude any later claim against D in knowing receipt. The first of course involves no breach of trust or unconscionable conduct by anyone. But the second (transfer in breach of trust to equity’s darling) does, at least on the part of T. Nonetheless it is I think clear that after such a transfer, the subsequent acquisition by the transferee D of knowledge that the transfer had involved a breach of trust by T gives rise to no liability in knowing receipt. It is in issue whether this is because, after the transfer to D (being equity’s darling), D has a title freed for ever from C’s equitable interest, or because, having acquired the property as equity’s darling, later knowledge that a breach of trust was involved does not make it unconscionable for D to continue to treat the property as his/her own. The latter explanation is proffered by the appellants, the former by the respondent.

1. Some help in answering that question as a matter of principle may be gained by focussing on the position of a transferee (“X”) of former trust property from equity’s darling (“D”) when X knows of the breach of trust committed by the transfer by T to D. It is well settled that, dishonesty apart, X nonetheless takes free of any claim (personal or proprietary) by the original beneficial owner (“C”), unless X is the original trustee (“T”) (see Wilkes v Spooner [1911] 2 K.B. 473, 483, and In re Stapleford Colliery Co; Barrow’s Case (1880) 14 Ch D 432 CA, discussed below). This must be because the transfer to D frees the property for all time from C’s beneficial interest. It has been overridden. D gets a clear title to the property, and so do D’s successors in title. But if the property comes back into the trustee T’s hands, T holds it on trust for C, not by way of knowing receipt but because that is what T always undertook to do. T’s re-acquisition of the property is treated as his making good the breach of trust in parting with it in the first place. Thus X may be a volunteer to whom D has given the property, but still takes free of C’s original beneficial interest, by the overriding effect of the transfer to D. In sharp contrast a volunteer (“V”) who receives a transfer direct from T (acting in breach of trust) immediately holds it subject to C’s equitable proprietary claim regardless of knowledge or notice, and to a personal claim in knowing receipt once V learns of the breach of trust.

1. By contrast the approach of the appellant, on which everything depends on the unconscionability of using property for one’s own benefit after receiving it in consequence of a known earlier breach of trust, would tend to expose X to a knowing receipt claim. X is not equity’s darling, and may even be a pure volunteer. X receives the property knowing of the breach of trust involved in its transfer by T to D. This approach would not treat C’s equitable interest as having been overridden, but merely suspended in its effect for as long as the property remained in the hands of equity’s darling D.

1. In my judgment this supposed suspensory effect of a transfer to equity’s darling is contrary to basic equitable principle. The whole purpose and effect of the doctrine of equity’s darling is to confer full beneficial ownership of the property upon the bona fide purchaser of the legal title for value without notice of an adverse equitable interest. The ordinary effect of a transfer of legal title to a purchaser is to confer beneficial ownership. Equity stops short of interposing equitable interests in derogation of that outcome, because it regards a bona fide purchaser of the legal title without notice as having the better right to ownership. The earlier equitable interest is overridden, once and for all. For equity to impose liability in knowing receipt upon equity’s darling, on subsequently learning of the breach of trust, or on a successor in title to equity’s darling, would seriously detract from the full beneficial ownership which equity treats a purchaser without notice as acquiring (see Harrison v Forth (1695) Prec. Ch. 51; 24 ER 26), and from the once and for all effect of the principle that an equitable interest may, in defined circumstances, be overridden.

1. I therefore consider it to be clear on basic equitable principle that 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.

1. It is thus only the third type of transfer, which may conveniently be called overriding by operation of law, that opens up the present battlefield. The question is, where the law applicable either to the property or to its transfer gives the defendant a clean title to it, and one which is good against any proprietary claim, can the aggrieved beneficiary still say, before or after the defendant has disposed of it for his own benefit: “you must return it to me, account to me or pay me equitable compensation for its loss”.

Uncertainties about Knowing Receipt

1. That question is by no means the only arguable uncertainty about the equitable principles relating to knowing receipt. It is convenient to mention three others, which are not for resolution on this appeal. The first is the relationship between knowing receipt and unjust enrichment, a matter about which the court requested, and received, brief oral submissions. It divides into two parts. The first is whether the pleaded and proven facts could support a claim in unjust enrichment, alongside a claim in knowing receipt. The second is whether the equitable doctrine of knowing receipt should be treated as subsumed in or replaced by unjust enrichment. Counsel were united in discouraging the court from exploring down either of those roads. Unjust enrichment had not been pleaded as a cause of action by the appellants, nor had its constituent factual elements been proved, nor had the respondent therefore been given the opportunity to advance any potential defences.

1. Counsel were also united in submitting that the general thrust of the judicial dicta in the reported cases was inimical to any subsuming or replacement of knowing receipt in or by unjust enrichment. Those dicta begin with Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 at 685A-D and end with the joint opinion of myself and Lord Sumption in DD Growth Premium 2X Fund v RMF Market Neutral Strategies [2017] UKPC 36; [2018] Bus LR 1595, 1610, para 58:

   This is not the occasion for that question to be further reviewed.

   “Conceptually these two proposed bases of recovery are very different. A common law liability in restitution depends on the defendant having been unjustly enriched by the receipt. The liability of a constructive trustee is essentially a custodial liability comparable to that of an express trustee, which is imposed on him because he has sufficient knowledge to affect his conscience”.

1. The second area of uncertainty is how the knowing receipt remedy, which in its traditional form depends upon there being an original trust of the relevant property and a split between legal title and beneficial ownership, works in relation to the many reported cases in which a company (or its liquidator) seeks to pursue the remedy after a transfer of company property at the behest of its directors acting in breach of fiduciary duty. In such a case the company starts out as legal and beneficial owner of the misapplied property. Courts of equity have proceeded upon an analogy between the control which directors as fiduciaries have over company property, and the title which trustees have to trust property, so that a misapplication of the company’s property by the directors leaves the beneficial ownership with the company, for the purpose both of equitable proprietary claims and claims in knowing receipt. The best-known attempts to explain this conundrum are to be found in Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555, 1575-1577 per Ungoed-Thomas J and in Belmont Finance Corpn v Williams Furniture Ltd (No 2) [1980] 1 All ER 393, 405, per Buckley LJ. It is not a point which arises for resolution in this case, because there was of course a traditional trust of the Disputed Securities at the outset, with a split between legal title and beneficial ownership between Mr Al-Sanea and SICL.

1. Nonetheless, as will appear, the absence of the traditional pre-existing trust basis for the application of a knowing receipt remedy in the cases of corporate misfeasance was prayed in aid by Mr Jonathan Crow KC for the appellants, in support of his main submission that knowing receipt has nothing to do with a continuing equitable proprietary interest of the claimant in the trust property after receipt by the defendant. For his part Mr Brian Green KC for the respondent initially submitted that to build a thesis on that anomaly in a case where it did not arise would be to let the tail wag the dog. Under further questions from the court, he submitted that the analysis in Belmont and Selangor demonstrated the court’s perception of a need to base knowing receipt liability on the recognition of a continuing equitable interest in the company. I will in due course explain why my own reading of those authorities leads me to the same conclusion.

1. The third area of possible uncertainty concerns the precise boundaries and content of the requirement to show what is now called “knowledge” necessary to trigger the recipient’s personal liability to account or pay equitable compensation under the doctrine of knowing receipt. It used to be called notice, even by some of the most distinguished equity judges, but it is now common ground that it is knowledge rather than mere notice that is required. This much is inherent in the phrase “knowing receipt”. The uncertainty lies on the boundaries of what may amount to knowledge, and in particular whether there is a category of knowledge called “constructive knowledge”. That uncertainty does not arise in this case, because the process whereby the appellant came to establish its factual case, involving as it did the barring of the respondent from contesting most of the pleaded facts due to its failure to give disclosure, produced the result that whatever was the knowledge precisely required, Samba had it. That part of the requirements for establishing liability in knowing receipt is therefore established beyond the respondent’s ability to challenge it.

1. But the submissions in the present appeal suggest that there may be a separate area of uncertainty, namely whether the knowledge requirement in a particular case is a flexible requirement based upon the concept of unconscionability, or whether there is a single fixed knowledge requirement which applies in every case. An inherent part of the appellants’ proposed definition of the basis of knowing receipt liability is an essentially flexible approach to the knowledge requirement, being that the state of knowledge must, on the facts of the particular case, be such as to render it unconscionable for the recipient to retain the property for its own use and benefit.

1. This is not the occasion to wrestle, in the absence of it mattering, and of full submissions, with the first of those uncertainties, namely whether the requirement for knowledge may be satisfied by constructive knowledge. But the second uncertainty, whether the knowledge requirement imposes a distinct separate test or whether it is just a flexible aspect of the requirement to demonstrate unconscionability, does feed into the necessary analysis of the parties’ main submissions.

A Provisional Conclusion by reference to Basic Principle

1. Returning to the central issue, and again from the perspective of basic principle, the obvious question which arises, if a claim in knowing receipt is closed off as the result of the overreaching of the claimant’s equitable interest, or its being overridden by a transfer to equity’s darling, is why should the opposite result follow if the claimant’s equitable interest is overridden by a transfer which, under its proper law, is also designed to give the recipient a clean title? Mr Crow’s main submission in answer is that liability in knowing receipt is not about, or based on, matters of equitable title at all, but rather about equity’s historic role as the enforcer of the obligations of conscience. He backs up that submission by copious references to judicial dicta which, he says, make that clear in express terms. I will return to them later. Secondly he submits that, were liability in knowing receipt to be closed off by any form of overriding by foreign law, then the result would be a money launderer’s charter.

1. I have not found either of those submissions to be persuasive. Of course it is true that one of the fundamental purposes of equity is to impose carefully measured constraints upon unconscionable conduct otherwise permitted by the law: see eg Guest v Guest [2022] UKSC 27; [2022] 3 W.L.R. 911. And equity generally acts in personam rather than in rem. But equity nonetheless achieves that purpose by the laying down of well-understood principles (rather than hard rules) which have, over time, enabled purely equitable personal rights to harden into property rights, in the form of equitable interests, extending to full beneficial ownership. The classic example is an equitable lease. A person with an agreement for lease has an equitable in personam claim for specific performance against the contracting landlord which is now recognised as a full equitable property right: see Walsh v Lonsdale (1882) 21 Ch D 9.

1. The same applies to the rights of beneficiaries under a trust. While they may originate from a personal undertaking of the trustees to apply their legal rights in relation to specific property for the benefit of the beneficiaries, no one doubts that the beneficiaries’ rights are equitable interests in the trust property, which may be enforced where appropriate by both proprietary and personal claims, not only against the trustees, but also against anyone else into whose hands legal title to the trust property has passed. But the inexorable consequence of the hardening of equitable personal rights into interests in property is that they have to take their proper place in a sophisticated system of priorities which regulates the question which interests prevail where two or more come into apparent conflict. Thus competing equitable interests take priority generally from their respective dates of creation. But an equitable interest gives way to the later acquisition of the legal title by equity’s darling. And the priority of equitable interests under trusts is regulated by the principles of overreaching and overriding which I have described.

1. Three important features of equity’s respect for priorities need to be emphasised. The first is the essential fragility of a purely equitable interest, because of its vulnerability to being overreached, or overridden even by a trustee acting in breach of trust. The second is that the equitable principles are always vulnerable to being overridden or replaced by statute, as has happened under the English system of land registration, and by many Torrens systems overseas where registration is the origin, not merely the evidence, of title. The third is that equity recognises the need to balance its function to restrain unconscionable conduct, in the context of equitable property rights, by the need to respect the public interest in the certainty and therefore marketability of title.

1. While the regulation of unconscionable conduct may be the underlying purpose of many equitable principles, the extent to which unconscionability acts as a determining factor in the operation of those principles in particular cases varies widely. Where in the broken-down personal relations within a family a non-contractual promise to transfer property in the future has led to detrimental reliance, unconscionability may play a large part in moulding the remedy to be given to the reliant party: see again Guest v Guest (supra). But where the competition is between legal and equitable interests in marketable property the underlying objective of regulating unconscionable conduct needs to take second place to the established principles regulating priorities. The dictates of predictable title would be nullified if in every case of competing priorities the outcome depended on the endlessly variable views of different chancery judges about what the dictates of conscience required on the unique facts of that particular case. The same principled approach answers the appellants’ related submission that the knowledge requirement is only a flexible aspect of the need to demonstrate unconscionability. Issues as to priority in title to property need to be resolved on a more predictable basis than that.

1. The answer to Mr Crow’s second submission (about the money launderer’s charter) is that the parallel remedy based on dishonest assistance is not at all based upon any continuing equitable interest. The liability for dishonest assistance is a truly ancillary liability, ancillary that is to the breach of trust by the trustee, which renders the assister liable as an accessory to the same extent as the trustee. There is no requirement that the assister has even received trust property. Most cases of cross-border fraud will involve dishonesty by all concerned in a common design.

1. Knowing receipt is sometimes also called a form of ancillary liability, but it is not in my view ancillary to the liability of the trustee. Rather it is ancillary to the proprietary claim which will generally enable the continuing equitable beneficial owner to recover the trust property where it has passed into the hands of someone other than the trustee, without the equitable interest having been overreached or overridden. The personal remedy in knowing receipt comes to the rescue if the transferee then transfers, dissipates or destroys the property after learning of the breach of trust, so as to prevent the pursuit of a proprietary claim. In such a case the claimant’s equitable interest still subsisted at the time when the transferee learned of the breach of trust, so that the later transfer, dissipation or destruction of the property was a breach of the restorative and custodial duty which then bound him.

1. There is therefore in my judgment no principled answer to the question why a claim in knowing receipt should survive any process whereby the claimant’s equitable interest has been overreached or overridden, so as to give the transferee a clean title. There are powerful reasons of principle why it should not. First and foremost there is a deep-rooted contradiction between having clean title and being under an obligation to restore the property to someone else, to look after it in the meantime, and to account for any use of the property inconsistent with those duties. If the recipient is able to say “the property is mine” how can he or she be subject to duties designed to protect the equitable beneficial interest of someone else?

1. Secondly there is a serious lack of logic in the view that while overreaching or overriding may kill off the equitable interest necessary to maintain a proprietary claim, it nonetheless leaves in place a claim in knowing receipt, with the same liability to return the property to the claimant as if there was a proprietary claim. That is precisely the position alleged by the Appellants in the present case, since Samba had not transferred, dissipated or destroyed the Disputed Securities when the knowing receipt claim was introduced by amendment.

1. Thirdly the proposition that the overriding of any continuing equitable interest by a foreign law applicable to the property or to the transaction leaves intact the claim in knowing receipt fails to give appropriate respect to the primacy of that foreign law in regulating title to the property in the hands of the recipient. This is because it is destructive of the clean title to the property that the applicable foreign law may confer, and does confer in the present case. This factor was a weighty matter in the analysis of Fancourt J at first instance, and I consider that he was right to give it significant weight.

1. Fourthly to align knowing receipt liability with dishonest assistance as a form of liability based upon fault arising from a connection with the breach of trust, but a lesser fault than dishonesty, appears to create a two-tier structure of fault-based ancillary liability with no apparent justification for doing so. By contrast the existence of a knowing receipt liability against a transferee of legal title where the transaction in issue did not clear off the claimant’s equitable interest, as ancillary to a proprietary claim which has only been lost to the claimant by the conduct of the recipient after learning of the breach of trust (and therefore the non-overreaching or overriding of that interest), makes logical sense and does good equity.

1. Finally, in the absence of any original fiduciary relationship between the claimant and the defendant, or other relationship giving rise to equitable obligations between them, or fraud, why should a transferee with a clear title unaffected by any equitable interest of the claimant have any liability in equity to the claimant? There is simply no equity between them capable of giving rise to an equitable claim. This may be little more than another way of expressing the first point, but it does accord closely with the prevailing analysis in the leading authorities.

The Authorities

1. The many reported cases on knowing receipt liability need to be read with a number of cautionary points in mind. The first is that, with one possible exception, all of those in which a liability in knowing receipt was established (and several where it was not) were cases in which the claimant did have a continuing equitable interest in the property in dispute at the time when the defendant learned of the breach of trust. Therefore the courts were not concerned even to consider, let alone decide, whether the continuation of such an equitable interest was a condition for liability.

1. Secondly, a significant group of cases (which I shall call the corporate cases) dealt with knowing receipt liability in the absence of any pre-existing traditional trust or, therefore breach of trust, or any pre-existing equitable interest. But they proceeded on the basis that a division between the former legal title and beneficial interest of the claimant company occurred at the moment of the breach of fiduciary duty by the directors in misappropriating the relevant company property, so that knowing receipt liability could be determined as if there had been both a trust of the property and a continuing beneficial interest in it, which the company continued to enjoy.

1. Thirdly there is to be found from time to time a certain looseness in the use of language to describe equitable concepts, such as constructive trusts, tracing, knowledge and notice, that can make it hard to be certain of the precise meaning of certain (sometimes famous) dicta from distinguished equity judges. And some of the dicta even appear sometimes to contradict dicta by the same judge in an earlier case.

1. All these cautionary points mean that care needs to be taken to analyse some of the relevant dicta, and in particular by close attention to context. When that is done I do consider that the authorities, taken as a whole, tend to support my foregoing analysis of the present question, and that the courts below were correct to reach the same conclusion.

1. Chronologically, the unavoidable starting point for any analysis of knowing receipt, and indeed for dishonest assistance, as equitable doctrines, is Barnes v Addy (1874) LR 9 Ch App 244. This is because, although Lord Selborne LC, giving the leading judgment in the Court of Appeal, plainly did not think he was making any new law but rather stating well-settled principle, he brought the twin doctrines to life as it were fully grown without enabling the reader to tell which earlier authorities he had in mind, and counsel for the successful respondent was not called upon.

1. The issue before the Court of Appeal was whether two solicitors, who had acted for trustees in connection with dispositions of the trust property in alleged breach of trust, could be made liable for the loss of the trust property at the suit of the beneficiaries, the trustee principally in default having gone bankrupt. The breaches of trust did not involve any overreaching or overriding of the beneficiaries’ equitable interests. More to the point the solicitors had neither received the trust property nor done anything dishonest. Lord Selborne’s concern was therefore to explain why the solicitors could not be made liable, rather than to lay down with any precision the conditions for liability in knowing receipt or dishonest assistance. His famous dictum is as follows, at pp. 251-252:

   “Now in this case we have to deal with certain persons who are trustees, and with certain other persons who are not trustees. That is a distinction to be borne in mind throughout the case. Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.”

1. One point deserves noting at this early stage. It is that, as the key criterion for liability in what is now called knowing receipt, Lord Selborne identifies those who “receive and become chargeable with some part of the trust property” rather than knowledge of the breach of trust or any other kind of fault. The implication is that the property should still be trust property in the recipient’s hands, rather than (for example) property which has been freed from any equitable interest of the beneficiaries by overreaching or overriding.

1. No analysis of the knowing receipt doctrine would be complete without some reference to In re Diplock [1948] Ch 465 in which numerous distributions were made in breach of trust by administrators in the mistaken belief that a gift to “charitable or benevolent objects” was a valid charitable residuary bequest. Personal and proprietary claims were made to recover the distributions for the benefit of the deceased’s next of kin. Mr Crow submitted that nowhere in the analysis of the personal claim by the Court of Appeal (at pp 478-479) is there any express statement about the need for there to be a continuing equitable interest in the claimant at the time when the defendant receives knowledge (there described as notice) of the breach of trust. But the defendants were, as the Court of Appeal pointed out, all pure volunteers so that the requirement for a continuing equitable interest was plainly satisfied. Furthermore, what we would now call the knowing receipt claim was not even argued at first instance, and only “somewhat faintly argued” in the Court of Appeal. In re Diplock therefore affords no significant assistance on the question before this court.

1. It is convenient now to look in more detail at the two main cases in which the doctrine of constructive trusts has been explained as being applicable to company property misapplied by directors in breach, not perhaps of trust, but of fiduciary duty. The first is Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555, a decision at first instance by Ungoed-Thomas J. After the assets of the subject company had been realised for cash, substantial parts of that cash were misapplied by the directors toward financing the purchase of the company’s shares, contrary to section 54 of the Companies Act 1948. At the direction of the Board of Trade the company sought to recover the money misapplied from the recipients, the directors and from the company’s bankers. The constructive trust claims against the banks were based upon dishonest assistance rather than knowing receipt (see p1580 F-G), so the case is not a useful repository of learning about the need for a continuing equitable interest of the claimant. But it contains the first in-depth analysis of how constructive trusteeship can be established in connection with the misapplication of company money. At pp1575-1577 the judge reaches the clear conclusion that, although not in all respects like trustees of a strict settlement, directors are to be regarded as trustees of company money under their control, so that a misapplication of it (ie other than for the proper purposes of the company) amounts to a breach of trust. After reviewing In re City Equitable Fire Insurance Co Ltd [1925] 1 Ch 407, 426, Russell v Wakefield Waterworks Co (1875) LR 20 Eq. 474,479, In re Lands Allotment Co [1894] 1 Ch 616, 631, 637-639 and In re Forest of Dean Coal Mining Co (1878) 10 Ch D 450, 452-453 he said:

   “So, in my view, in general as in this case, a credit in a company’s bank account which the directors are authorised to operate are moneys of the company under the control of those directors and are held by them on trust for the company in accordance with its purposes.”

1. Mr Crow drew our attention to passages in Ungoed-Thomas J’s judgment in which he described constructive trusteeship (of the Barnes v Addy type) as nothing more than a formula for equitable relief, (at p 1582), and constructive trust as arising because of the conduct complained of, (at p 1579), in support of his submission that knowing receipt was not concerned with the vindication of a continuing equitable interest. But these general observations, made in a case about alleged dishonest assistance, do not (and were not intended to) bear upon the question before this court.

1. One looks almost in vain in Selangor v Cradock for an explanation of how there can be a trustee-beneficiary relationship between the directors and the company when both legal title and beneficial ownership are (as they almost invariably are) vested in the company. A little more help is to be derived from Belmont Finance Corpn v Williams Furniture Ltd (No 2) [1980] 1 All ER 393. That was a knowing receipt case, in the sense that, although dishonest assistance and knowing receipt were both pleaded, only the knowing receipt case succeeded, and that only in the Court of Appeal. It was another case of misappropriation of company money by its directors, in breach of section 54. Giving the leading judgment, Buckley LJ sought to explain how a Barnes v Addy type of constructive trust could arise in the absence of a pre-existing trust. At p 405 he said:

   “A limited company is of course not a trustee of its own funds: it is their beneficial owner; but in consequence of the fiduciary character of their duties the directors of a limited company are treated as if they were trustees of those funds of the company which are in their hands or under their control, and if they misapply them they commit a breach of trust (Re Lands Allotment Co, per Lindley and Kay LJJ). So, if the directors of a company in breach of their fiduciary duties misapply the funds of their company so that they come into the hands of some stranger to the trust who receives them with knowledge (actual or constructive) of the breach, he cannot conscientiously retain those funds against the company unless he has some better equity. He becomes a constructive trustee for the company of the misapplied funds.” (emphasis added).

1. Both Ungoed-Thomas J and Buckley LJ relied upon the same passage from the judgment of Kay LJ in In re Lands Allotment Co [1894] 1 Ch 616, 637-639, where he said:

   “I conceive that the directors of every company being the managing agents of a trading concern have considerable authority and power in dealing with outstanding debts due to the concern [. . .] but if they deal with the funds of a company, although those funds are not absolutely vested in them, but funds which are under their control, and deal with those funds in a manner which is beyond their powers, then as to that dealing they are treated as having committed a breach of trust […] directors are not always trustees. As directors they are not trustees at all. They are only trustees qua the particular property which is put into their hands or under their control, and which they have applied in a manner which is beyond the powers of the company, I conceive that qua such fund they are constructive trustees, or trustees by implication of law.”

1. The above dicta fall short of providing a completely neat and satisfying explanation of how the knowing receipt doctrine works in relation to the property of companies. It is common ground that there is no pre-existing trust or separation of legal title from beneficial interest for as long as legal title remains vested in the company. Mr Crow submits that the repeated application of the knowing receipt doctrine to such a situation demonstrates that a continuing equitable interest in the misapplied property cannot be an essential condition for its operation. In response, once he squarely addressed the point, Mr Green submitted that equity applied the knowing receipt doctrine by treating corporate property as subject to a trust by analogy. Later he firmed up his analysis by submitting that a trust, with a concomitant splitting of legal title from the company’s continuing beneficial interest in the misapplied property occurred at the moment of the transfer which constituted the misapplication. Legal title passed to the transferee, but the equitable beneficial interest remained with the company. Therefore the company retained the equitable interest sufficient to support a proprietary claim to the property or its traceable proceeds, and a knowing receipt personal claim against any recipient who had received the property with notice of the misapplication, subject to any overriding of its equitable interest in the meantime.

1. I consider that Mr Green’s final submission on this issue is correct. It best fits with all the dicta summarised above. First, the analysis in In re Lands Allotment speaks of the trust arising when the misapplication of company property takes place. The same analysis is also supported by Millett J in Agip (Africa) Ltd v Jackson [1990] Ch 265, 290 D-F. Secondly Ungoed-Thomas J is at pains to emphasise that this is a real trust and not just a breach of fiduciary duty treated like a breach of trust merely by analogy. Thirdly and decisively Buckley LJ implicitly recognises a continuing equitable interest remaining in the company after the transfer because of his acknowledgment that the company’s knowing receipt claim may be defeated by a recipient with a better equity. That would of course include equity’s darling, and that is I think what Buckley LJ had in mind.

1. This final point is, quite independently of the need to make sense of the corporate property problem, a clear indicator that a successful outcome to a knowing receipt claim depends upon a contest between equitable priorities, ie between a continuing equitable interest of the claimant and such interest as the recipient may have acquired. That is what Millett J said about a knowing receipt claim in Agip v Jackson (supra) at p 292 as part of his explanation contrasting knowing receipt and dishonest assistance. He said:

   “The basis of liability in the two types of cases is quite different; there is no reason why the degree of knowledge required should be the same, and good reason why it should not. Tracing claims and cases of ‘knowing receipt’ are both concerned with rights of priority in relation to property taken by a legal owner for his own benefit; cases of ‘knowing assistance’ are concerned with the furtherance of fraud.” (My emphasis).

1. The next important case on knowing receipt chronologically is In re Montagu’s Settlement Trusts [1987] Ch 264. The tenth Duke of Manchester received from trustees of a family settlement various family chattels which should have been held on trust. He disposed of some of them during his lifetime and after his death the eleventh Duke sought an account in respect of them on the basis of knowing receipt by the tenth Duke. The claim failed because Sir Robert Megarry VC decided that the tenth Duke lacked the requisite knowledge. The case is famous for Sir Robert’s conclusion that knowledge rather than mere notice was the required mental condition for knowing receipt. The tenth Duke was of course a pure volunteer in relation to the chattels which he received, so no question of overreaching or overriding of the interests of the beneficiaries could have arisen, nor therefore any doubt that those beneficiaries retained an equitable beneficial interest in the chattels sufficient if necessary to support a claim in knowing receipt.

1. Nonetheless Mr Crow placed reliance on the analytical basis whereby the Vice Chancellor reached his decision about the requirement for knowledge of the breach of trust. The judgment was given in two parts, on 21 December 1983 and 29 March 1985, with further argument on the constructive trust in between. The passages relied upon by Mr Crow all appear in the second judgment, but they need to be read in conjunction with this short dictum in the first, at p 272:

   “The question is not merely whether a person is to take a property subject to an equity but whether the full burden of trusteeship is to be imposed on him by construction of equity.”

   “It seems to me that one must be very careful about applying to constructive trusts either the accepted concepts of notice or any analogy to them. In determining whether a constructive trust has been created, the fundamental question is whether the conscience of the recipient is bound in such a way as to justify equity in imposing a trust on him.”

   “Third, there seems to me to be a fundamental difference between the questions that arise in respect of the doctrine of purchaser without notice and constructive trusts. As I said in my previous judgment, ante, pp 272H—273B:

   ‘The former is concerned with the question whether a person takes property subject to or free from some equity. The latter is concerned with whether or not a person is to have imposed upon him the personal burdens and obligations of trusteeship. I do not see why one of the touchstones for determining the burdens on property should be the same as that for deciding whether to impose a personal obligation on a man. The cold calculus of constructive and imputed notice does not seem to me to be an appropriate instrument for deciding whether a man's conscience is sufficiently affected for it to be right to bind him by the obligations of a constructive trustee.’

   I can see no reason to resile from that statement, save that to meet possible susceptibilities I would alter ‘man’ to ‘person’. I would only add that there is more to being made a trustee than merely taking property subject to an equity.”

At p 277 in the second judgment he said:

At p 278 he said:

Summarising his conclusions at p 285, the Vice-Chancellor set out eight principles. The first two deserve quoting:

1. These dicta certainly impose a higher mental element (knowledge rather than mere notice) as the criterion for imposing personal trustee-like liabilities on the recipient of trust property, by comparison with liability to answer a purely proprietary claim to the return of the property. But they come nowhere near to stating that the underlying requirement of a continuing equitable interest in the claimant which is of the essence of a proprietary claim is somehow dispensed with as a condition for the more burdensome personal liability in knowing receipt, viewed as at the time of receipt. That question simply did not arise in the Montagu case.

1. These dicta were in due course trenchantly affirmed by the Court of Appeal in Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437. But first it is necessary to consider the earlier decision of the Court of Appeal in El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685. At first instance ([1993] 3 All ER 717) a complex knowing receipt claim in respect of the proceeds of a fraud which had been laundered through several jurisdictions failed before Millett J because he found on the facts that the corporate recipient of the money lacked the requisite knowledge. The Court of Appeal reversed that decision for reasons concerned with the attribution of knowledge to corporations with which we are not here concerned. But in passing Hoffmann LJ provided the following short and often quoted description of the requirements of a knowing receipt claim, at p 700:

   Surprisingly both sides prayed this dictum in aid in support of their rival cases. It is therefore necessary to consider closely exactly what Hoffmann LJ meant by the words he used. He was proffering a general description of the conditions for establishing personal liability in knowing receipt, in a context in which the main issue before the Court of Appeal was whether the plaintiff could satisfy the third condition. The present case is about the second condition, namely whether the appellants can show that Samba beneficially received the Disputed Securities and whether they were “traceable as representing the assets of” SICL.

   “This is a claim to enforce a constructive trust on the basis of knowing receipt. For this purpose the plaintiff must show, first, a disposal of his assets in breach of fiduciary duty; secondly, the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff; and thirdly, knowledge on the part of the defendant that the assets he received are traceable to a breach of fiduciary duty.”

1. There is no doubt that Samba beneficially received the Disputed Securities. This is because it became common ground that “beneficial receipt” simply excludes a purely ministerial receipt, like that of a bank clearing money for a customer. Samba received the Disputed Securities in or towards settlement of a debt. The more difficult question, about which the parties diverged, is the meaning of the phrase “assets which are traceable as representing the assets of the plaintiff” and in particular the requirement imposed by the inclusion of “traceable”. Mr Green submitted that this necessarily required the plaintiff to show a continuing equitable beneficial interest in the assets at the time of their receipt by the defendant. Mr Crow submitted that “traceable” in this context merely required the plaintiff to show that the assets received by the defendant were the same as, or the proceeds of, the plaintiff’s assets, which he said was plainly satisfied in relation to the Disputed Securities.

1. There are also discussions along similar lines to those in the above cases in, for example, Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555, 1575-1577 (per Ungoed-Thomas J); in JJ Harrison (Properties) Ltd v Harrison [2001] EWCA Civ 1467, [2002] BCC 729, paras 25-26 (per Chadwick LJ); and in the Australian case of Bell Group Ltd v Westpac Banking Corp (No 9) [2008] WASC 239, (2008) 225 FLR 1, paras 4750 – 4804 (per Owen J).

1. My conclusion is that Mr Green’s use of analogy is consistent with the willingness of courts in past cases to decide that the relevant assets of the company are subject to a trust, best viewed as a constructive trust, prior to receipt by the defendant. It follows that the fact that there may be no trust at the start of the story (ie no express trust) does not undermine the principled analysis of knowing receipt put forward above.

1. Knowing receipt, directors and companies, and contractual principles

1. In respect of directors (or other officers) and companies there is an additional problem that merits consideration. It concerns the relationship between contractual principles and knowing receipt. It is highlighted by the case of Criterion Properties plc v Stratford UK Properties LLC[2004] UKHL 28, [2004] 1 WLR 1846 (“Criterion”). Although this case did not feature in the submissions at trial of either party, and was not mentioned by the courts below, this court requested, and has been assisted by, post-hearing written submissions on the relevance of the case. I have also been helped by a case-note on Criterion by Robert Stevens, “The Proper Scope of Knowing Receipt” [2004] LMCLQ 421 and by an article by Matthew Conaglen and Richard Nolan, “Contracts and Knowing Receipt: Principles and Application” (2013) 129 LQR 359.

1. Let us assume that a director has been acting in breach of fiduciary duty to a company in dealings with another party (D); and that a purported but invalid contract has been made and executed with D by the company. There are two main possible analyses of the relevant legal principles (even putting to one side the possibility that legal title in any tangible asset transferred to D has not passed to D so that there is a possible claim by the company for, for example, the tort of conversion).

1. First, as a matter of contract law, any purported contract between the company and D will be void where the director as agent has not bound the company because the director had neither actual nor apparent authority (taking into account the Companies Act 2006, section 40) to make the contract on behalf of the company. It is also conceivable that in some situations, although for ease of exposition I put these alternatives to one side in the analysis that follows, the contract is, for example, voidable (as where the director has made a misrepresentation to the company of which D had notice) or illegality affects the contract (eg the company may be providing financial assistance for the purchase of its own shares). Where the contract is void, the company may have (common law) restitutionary remedies against D in the law of unjust enrichment (imposing strict liability but subject to a change of position defence) to recover the value of benefits conferred on D under the void contract with the unjust factor being, for example, want of authority or failure of basis.

1. Secondly, and alternatively, it would appear that, where the purported contract is void, the company can claim an equitable proprietary remedy to recover the asset transferred to D or a personal remedy for knowing receipt by D of the asset transferred in breach of fiduciary duty.

1. On the facts of Criterion, Criterion, through its directors, had entered into a “poison-pill” agreement with a partner company, Oaktree. That agreement required Criterion, in certain events, to buy out Oaktree on favourable terms to Oaktree. The aim of the agreement was to put off a potential takeover of Criterion. Criterion subsequently sought to set aside the agreement which was an executory agreement. The lower courts thought that the correct principles to apply were those of the law on knowing receipt. That is, the directors had acted in breach of fiduciary duty to the company and, depending on its state of knowledge, Oaktree was a knowing recipient. The House of Lords held that that had been a wrong approach. The purported contract here was executory andthe sole question was whether that executory contract was valid. That was to be determined by contractual agency principles (and hence turned on whether the directors had actual or apparent authority to bind the company). It had nothing to do with knowing receipt not least because no assets of the company had been transferred to Oaktree. Lord Scott, giving the leading speech, said the following at para 27:

   It was further held that the issue of the directors’ authority was not one that could be resolved on the appeal before the House of Lords.

   “My Lords, I must express my respectful disagreement with the approach both of Hart J and of the Court of Appeal to the critical issue in this case. This is neither a case of ‘knowing receipt’ nor one of ‘knowing assistance’. The word ‘receipt’ in the expression ‘knowing receipt’ refers to the receipt by one person from another of assets. A person who enters into a binding contract acquires contractual rights that are created by the contract. There may be a ‘receipt’ of assets when the contract is completed and the question whether there is ‘knowing receipt’ may become a relevant question at that stage. But until then there is simply an executory contract which may or may not be enforceable. The creation by the contract of contractual rights does not constitute a ‘receipt’ of assets in the sense that a ‘knowing receipt’ involves a receipt of assets. The question whether an executory contract is enforceable is quite different from the question whether assets of which there has been a ‘knowing receipt’ are recoverable from the recipient. To confuse these two questions is likely to lead, and in the present case has, in my opinion, led, to further confusion. It is fair to say, however, that it appears to me that the courts below dealt with the case on the basis on which it was presented to them by counsel. It was indeed presented to your Lordships as being a case to which the principles of ‘knowing receipt’ ought to be applied.”

1. All that is relatively straightforward. But, while agreeing with Lord Scott, Lord Nicholls, with whom Lord Walker agreed, went on to launch a more wide-ranging attack on the Court of Appeal’s decision in BCCI v Akindele, which, as we have seen (para 101 above), is the leading case on the modern test of knowing receipt being whether the receipt or retention is “unconscionable”. Lord Nicholls said at paras 3-4:

   “Unfortunately, in the courts below [the] ‘want of authority’ issue was approached on the basis that the outcome turned on whether Oaktree's conduct was unconscionable. This seems to have been the test applied by the Court of Appeal in Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 both to questions of ‘want of authority’ and to liability for what traditionally has been labelled ‘knowing receipt’.

   I respectfully consider the Court of Appeal in Akindele's case fell into error on this point. If a company (A) enters into an agreement with B under which B acquires benefits from A, A's ability to recover these benefits from B depends essentially on whether the agreement is binding on A. If the directors of A were acting for an improper purpose when they entered into the agreement, A's ability to have the agreement set aside depends upon the application of familiar principles of agency and company law. If, applying these principles, the agreement is found to be valid and is therefore not set aside, questions of ‘knowing receipt’ by B do not arise. So far as B is concerned there can be no question of A's assets having been misapplied. B acquired the assets from A, the legal and beneficial owner of the assets, under a valid agreement made between him and A. If, however, the agreement is set aside, B will be accountable for any benefits he may have received from A under the agreement. A will have a proprietary claim, if B still has the assets. Additionally, and irrespective of whether B still has the assets in question, A will have a personal claim against B for unjust enrichment, subject always to a defence of change of position. B's personal accountability will not be dependent upon proof of fault or ‘unconscionable’ conduct on his part. B's accountability, in this regard, will be ‘strict’.

   Either way, therefore, whether the … agreement is set aside or not, questions of unconscionability do not arise on Criterion's application for summary judgment.”

1. On the face of it, Lord Nicholls’ speech may be thought to indicate that the leading case of BCCI v Akindele (which concerned an executed contract) and all other cases on directors acting in breach of fiduciary duty to their companies, by entering into contracts with defendants under which the company’s assets have been transferred to the defendants, have been wrongly reasoned in so far as they have applied the law on knowing receipt.

1. If Lord Nicholls was going so far, in my respectful view he was going too far. The better view is that in these types of situations, there are various possible claims in line with the analysis set out in paras 191-192 above. For example, it may be decided that, applying contractual agency principles, the contract is void and, in respect of benefits conferred on the defendant by the company, there may then be (common law) restitutionary remedies reversing the defendant’s unjust enrichment at the company’s expense. But alternatively, if the contract is void, the company may choose to bring an equitable proprietary claim if the traceable asset is still retained or a personal claim for knowing receipt based on the defendant having knowingly received the company’s assets transferred in breach of fiduciary duty.

1. In any event, in BCCI v Akindele there would have been a complication in applying contractual principles. This was because the relevant payment was made by a third party rather than by the contracting company. The facts were that a contract was entered into between International Credit and Investment Co (Overseas) Ltd (“ICIC”) and Chief Akindele for the purchase of shares in BCCI Holdings. Another company within the BCCI Group, BCCI (Overseas) Ltd, paid Akindele $16.679 million owing under that contract. Unknown to Akindele, this was part of a fraudulent scheme by officers of the BCCI Group enabling BCCI Holdings to buy its own shares. The Court of Appeal dealt only with knowing receipt and did not embark on any contractual analysis. But given that the relevant purported contract was between ICIC and Akindele and not between BCCI (Overseas) Ltd and Akindele, it is understandable that the Court of Appeal confined its attention to the knowing receipt claim based on the breach of fiduciary duty by the directors of BCCI (Overseas) Ltd to that company by the transfer of the assets of that company to Akindele. For the same reason it is far from clear that Lord Nicholls’ criticism of the Court of Appeal can be supported. It would appear that Lord Nicholls’s reasoning has not subsequently been relied on in the case law as casting doubt on the approach to knowing receipt in BCCI v Akindele; and in Thanakharn v Akai Holdings Ltd [2010] HKCFA 64, at para 128, Lord Neuberger, sitting in the Hong Kong Court of Final Appeal, described Lord Nicholls’ criticism as “an uncharacteristically obscure remark”. It may be, therefore, that Homer nodded. Of course, this is not to deny that the “unconscionability” test adopted in BCCI v Akindele is unsatisfactory for the different reason set out in para 101 above.

1. The upshot for our purposes is that, as is common ground between the parties in their post-hearing written submissions, the Criterion case does not materially affect the issues in this appeal.

1. A footnote on unjust enrichment

1. I have made clear (see para 102 above) that the appellants have not sought to make any claim in the law of unjust enrichment. Nevertheless, in seeking to assist the court, Mr Crow, prior to the start of his main oral submissions, did helpfully indicate that, in principle, the appellants might have succeeded in an unjust enrichment claim had it been pleaded. He suggested that Samba had been enriched by the receipt of the shares, that that enrichment might be said to have been at the expense of SICL, and that the unjust factor might have been the “want of authority” of Mr Al-Sanea. If successful, it is clear that an unjust enrichment claim would impose strict liability, subject to the principal defence of change of position, so that the knowledge of Samba would have been irrelevant to establishing the prima facie claim (although it might have come back in as being relevant to the change of position defence).

1. That there should be such an unjust enrichment claim, separate from and lying alongside any claim for the equitable wrong of knowing receipt, was powerfully argued by, for example, Lord Nicholls and Peter Birks in their book chapters referred to in para 103 above (although for a contrary view, see, for example, Lionel Smith, “Unjust Enrichment, Property and the Structure of Trusts” (2000) 116 LQR 412). However, even if there had been a prima facie strict liability unjust enrichment claim on the facts of this case, it is arguable that, as a matter of policy, the registration of title in Samba’s name would have been a defence to the claim. This is because just as, in a three-party situation, bona fide purchase of a legal title for value without notice is a defence to an unjust enrichment claim (as recognised in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, 580) so one can argue that there should be an analogous defence to a claim for unjust enrichment where unencumbered title to the shares was conferred on the third party by registration of title. See generally Peter Birks, Unjust Enrichment 2^nd ed, (2005) pp 242-244; Charles Mitchell, Paul Mitchell, and Stephen Watterson (eds), Goff & Jones on Unjust Enrichment 10^th ed, (2022) paras 29-12 to 29-17.

1. Conclusion

1. I conclude that, where there has been the transfer of an asset to a defendant in breach of trust, there can be no claim for knowing receipt where the claimant, the beneficiary under the trust, has no continuing equitable proprietary interest in the asset received by the defendant.

1. For all these reasons, I would dismiss the appeal.