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17 Jan 2024

Knowing receipt: No continuing equitable proprietary interest, no liability (Byers v Saudi National Bank)

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Intro

In Byers & Ors v Saudi National Bank [2023] UKSC 51, the Supreme Court has held that a claim for knowing receipt requires the claimant to have a continuing equitable proprietary interest in the assets at the time the defendant receives them.

The Supreme Court upheld the decisions of the High Court and Court of Appeal, dismissing an appeal by the liquidators of a Cayman Islands company, Saad Investments Company Limited (SICL), who sought to recover shares in Saudi Arabian companies worth over $300 million from a Saudi bank recipient, Samba Financial Group, subsequently merged into Saudi National Bank. Samba received the shares from one of its customers, Maan Al-Sanea, in part settlement of debts. The transfer was a breach of a Cayman Island law trust in favour of SICL.

However, the lex situs of the share transfer was Saudi law, under which Samba took good title despite the fact that it was deemed to be aware of the breach of trust. Accordingly, SICL did not have a continuing equitable proprietary interest in the assets at the time they were received and the claim in knowing receipt failed.

The Supreme Court reached its conclusion by applying equitable principles, as the case law did not provide definitive guidance.

Key takeaways

Lord Briggs noted that there was very limited authority on this point, and related authorities exhibited "a certain looseness in the use of language to describe equitable concepts such as constructive trusts, tracing, knowledge, and notice". Both he and Lord Burrows gave detailed judgments deciding the case by reference to fundamental equitable principles.

The Supreme Court's decision confirms that knowing receipt depends on the claimant's continuing proprietary equitable interest in the trust property in the recipient's hands. It is not enough for the claimant to show that the defendant received the assets with knowledge of the breach of trust; the claimant must also show that the assets were still subject to the trust and the claimant's equitable interest at the time of receipt.

The court also reaffirmed the distinction between knowing receipt and accessory liability for dishonest assistance, which does not require the claimant to have a proprietary interest or indeed for the defendant to have received trust property.

The decision highlights the importance of considering the nature of the assets involved in cross-border transactions involving trusts and equitable interests, especially where trust property is located in, or capable of being transferred to, a jurisdiction that does not recognise or protect equitable interests in the same manner as English law.

Background

The case arose from a complex and fraudulent scheme orchestrated by Mr Al-Sanea, who was the sole director and controller of SICL, a Cayman Islands company that was part of a group of companies known as the Saad Group. Mr Al-Sanea held shares in five Saudi Arabian companies on trust for SICL, but he transferred them to Samba, a Saudi bank, to partially settle his personal debts. During the litigation, the court found that at the time of the transfer, Samba was deemed to know that the shares were held on trust for SICL (a finding that followed from Samba's failure to comply with its disclosure obligations). However, as the shares were located in Saudi Arabia, Saudi law was the lex situs and determined the proprietary effects of the transfer. Saudi law did not recognise the concept of a trust or the existence of any equitable proprietary interests, and the effect of Saudi law was that SICL's equitable interest in the shares was overridden upon registration of the shares in Samba's name.

SICL's liquidators brought a claim against Samba for knowing receipt of the shares, alleging that the bank had received the shares in breach of trust and with knowledge of SICL's equitable interest. The High Court and the Court of Appeal ruled that SICL's claim for knowing receipt failed, since it did not have a continuing equitable proprietary interest in the shares at the time Samba received them. The High Court and Court of Appeal decisions are discussed further in our articles here and here.

The Supreme Court's decision

SICL's liquidators appealed to the Supreme Court. The key issue was whether an equitable claim in knowing receipt depends upon the claimant retaining an equitable proprietary interest in the property at the time it is transferred to the defendant.

This was a slightly unusual claim, in two respects: the defendant (i) was held to have known at the time of its receipt of the property that it was transferred in breach of trust; and (ii) was sued in knowing receipt without having transferred, destroyed or dissipated the property (which is commonly the reason for claims in knowing receipt). The reason for the latter was that the claimants had accepted that an equitable proprietary claim would have failed on the basis that Samba took good title under Saudi law.

SICL's liquidators argued that liability for knowing receipt did not depend on the existence of a continuing equitable proprietary interest, but on the unconscionable receipt or retention of the assets by the defendant.

The Supreme Court unanimously dismissed the appeal. Lord Hodge (with whom Lord Leggatt and Lord Stephens agreed) gave the leading judgment, adopting reasoning common to Lord Briggs and Lord Burrows.

The court applied the following principles to the facts of this case:

  • The transfer of property by a trustee in breach of trust to a bona fide purchaser for value acting in good faith and without notice of that interest ("equity's darling") extinguishes or overrides the equitable interest held in that property by the beneficiary of the trust.
     
  • If equity's darling later becomes aware that the property was transferred in breach of trust, that does not revive the equitable interest. That interest also is not revived should equity's darling transfer the property to a further recipient, who, at the time of the transfer, is aware that there has been a breach of trust (although if the transferee were the defaulting trustee, he or she would hold the asset on trust for the beneficiary in his or her original role as trustee).
     
  • A claimant cannot claim in knowing receipt in either of these two situations, because the transfer to equity's darling extinguished or overrode their equitable interest in the property.
     
  • A claim for dishonest assistance (i.e. a claim against a non-trustee who induces or assists the breach of trust by a trustee) is not comparable. A claim in dishonest assistance is ancillary to the trustee's liability and makes the assister liable as an accessory. That is very different to a personal claim in knowing receipt against a transferee, which is more closely linked to a proprietary claim for the return of the property.
     
  • The extinction or overriding of an equitable interest in property by the time the recipient receives the property prevents a claimant from bringing a proprietary claim against the recipient. Given the close link between a claim for knowing receipt and a proprietary claim, it would be logically inconsistent to allow a claim for knowing receipt to survive where a proprietary claim does not, in a case where (as here) the recipient has not dissipated or disposed of the property.

The Supreme Court concluded that, as Saudi Arabian law extinguished SICL's equitable interest in the shares at the time of their transfer to Samba, SICL could not claim for knowing receipt, despite Mr Al-Sanea's breach of trust and any knowledge of Samba's that the transfer was in breach of trust.

Lord Briggs and Lord Burrows set out their reasoning in separate judgments, with the primary difference being that Lord Briggs analysed a claim in knowing receipt as ancillary to a proprietary claim, usually pleaded where a recipient no longer held the trust assets. In contrast, Lord Burrows categorised a claim in knowing receipt as an equitable proprietary wrong. Both recognised equitable principles of priorities, which required equity to balance the interests of an innocent beneficiary with the need to respect the public interest in certainty of title to property and the primacy of the lex situs in regulating title.

[Dan Smith, partner at Stephenson Harwood LLP, acted on this matter before the Supreme Court, Court of Appeal and High Court whilst at a previous firm]

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Rebecca Garrick

Rebecca Garrick
Senior knowledge lawyer

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