Knowing receipt is a personal liability for knowingly handling (and potentially disposing of) another’s trust property in breach of trust.
The defendant can still be liable even if the receiver does not still hold the trust asset anymore.
Elements:
Beneficial Receipt
Receipt can be of either the trust property or its traceable proceeds. This chain will be broken by a bona fide purchaser for value without notice.
Trust Property EG: T holds a car on trust for B. T transfers car to X, who then transfers to Y.
Traceable Proceeds EG: T holds £1000 on trust for B. T transfers £1000 to X. X purchases insurance policy from the £1000. X transfers the policy to Y.
The recipient must have received the trust property for their own use or benefit.
In Agip Africa, AA was being defrauded by its chief accountant. Money was taken from AA’s bank account and paid into the account of another bank. Question of whether the banks could be liable.
The court held that the banks cannot be liable because, although they received the property, it wasn’t received for their benefit. Therefore, banks can only be liable where the trust property reduces or discharges a customer’s overdraft.
This position assumes a bank is acting purely for their customers. It is rather unrealistic to say that banks do not use money in accounts to their own benefit (they credit it to accounts and then invest the customers' money to make a profit).
Also, it is questionable why policy concerns should protect banks. The banks which fall within the remit of knowing receipt would also have to have knowledge (and therefore not be innocent).
Knowledge
Different Types of Knowledge: [1]
Actual knowledge.
Wilfully shutting one’s eyes to the obvious (wilful blindness).
Willfully and recklessly failing to make such inquiries as an honest and reasonable man would make.
Knowledge of circumstances which would indicate the facts to an honest and reasonable man.
Knowledge of circumstances which will put an honest and reasonable man on inquiry.
The recipient's state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt.
In BCCI v Akindele, A entered into a fraudulent agreement with BCCI. BCCI sold shares to A (in breach of fiduciary duty) with the promise to buy them back at a high interest rate (created a cash injection without balance sheet debt). BCCI collapsed and liquidators of BCCI sued A for knowing receipt to recover the ~$6.6m paid to A.
The CA moved away from Baden knowledge approach to broader unconscionability test. A’s knowledge was not enough to make transaction unconscionable, so the liquidators has no means of recovery.
Nourse LJ: ‘A test in that form, though it cannot, any more than any other, avoid difficulties of application, ought to avoid those of definition and allocation to which the previous categorisations have led. Moreover, it should better enable the courts to give commonsense decisions in the commercial context in which claims in knowing receipt are now frequently made.’
The unconscionability test can be hard to apply – it is hard to say where it lies within the different types of knowledge. There is no consensus on when unconscionability arises.
‘while Akindele tells us what question we should be asking, it offers few clues as to how it should be answered.’ [2]
The test allows for greater flexibility than a strict rule. This flexibility allows justice in individual cases, to the detriment of certainty and arbitrariness.
Remedies:
Compensation for losses.
Account of profits. [3]
A beneficiary would assert a proprietary claim to demand return of asset if the recipient still has it.
Potential Justifications for Third-Party Liability:
Preventing Wrongdoing:
The orthodox view is that knowing receipt as just another mechanism to protect equitable property rights.
Correcting Unjust Enrichment:
Arguably, knowing receipt is equities version of dealing with unjust enrichment. [4]
This argument is premised on the idea that the defendant is liable to give up any benefits derived from the trust property, whether or not they acquired it wrongfully, because it is for the benefit of the beneficiary.
However, knowing receipt and unjust enrichment are two distinct claims. Common law unjust enrichment is strict liability, subject to the exceptional defence of change of position. Knowing receipt is not strict liability though (due to knowledge requirement) and generally does not fit well with unjust enrichment claims.
Some scholars have argued that there should be two alternative knowing receipt claims: one strict liability (for unjust enrichment), the other not (knowledge requirement for preventing wrongdoing). [5] There is little judicial backing for this - it may be too harsh on the defendant, or simply just remove an unconscionable gain they made.
There has been little support for this justification in the case law, [6] with most of the authority agreeing that recipient liability is based on wrongdoing and thus requires fault. [7]
The Real Trustee:
Under this view, the knowing recipient is viewed as more than merely a recipient, but a new trustee over the property. [8]
Resources:
References:
[1] Baden v Société Générale pour Favoriser le Developpement du Commerce et de l'Industrie en France [1983] BCLC 325 [2] Webb and Akkouh, Trusts Law (5th edn, Bloomsbury Publishing 2017) 361 [3] EG: Akita Holdings v AG of the Turks and Caicos Islands [2017] UKPC 7 [4] Birks [5] Nicholls, Birks [6] EG: Twinsectra Ltd v Yardley [2002] UKHL 12 (Millett LJ in obiter) [7] EG: Westdeutsche Landesbank Girozentrale v Islington London BC [1996] AC 669, 707 (Browne-Wilkinson LJ); Bank of Credit and Commercial International (Overseas) Ltd v Akindele [2001] Ch 437; Williams v Central Bank of Nigeria [2014] UKSC 10 [8] Mitchell, Waterson
Cases Mentioned:
Agip (Africa) Ltd v Jackson [1990] EWCA Civ 2 (Millett J)
Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2000] EWCA 502
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