PastPaperHero | Remedies against third parties: recipient and accessory liability

Learning Outcomes

This article examines the bases upon which third parties may become liable for breaches of trust or fiduciary duty in SQE1 problem questions, including:

Recipient liability (knowing receipt) and accessory liability (dishonest assistance), and when each is the correct cause of action on the facts
Criteria for establishing liability under each head, breaking down the essential elements examiners expect you to identify
Distinction between beneficial receipt and ministerial/agency receipt and why beneficial receipt is required for knowing receipt, especially for banks and solicitors
The Akindele unconscionability test and its application, including wilful blindness, failure to inquire, and the status of Baden categories
Elements of dishonest assistance and the interaction between the objective dishonesty test (Ivey v Genting Casinos) and the defendant’s knowledge and beliefs at the time of the assistance
Role of tracing in proprietary claims against recipients and its general unavailability against accessories, with focus on mixed funds and election between remedies
Limitation periods, equitable defences, and when equitable claims to recover trust property or its proceeds are not time-barred
Techniques for applying these principles to SQE1-style single best answer MCQs and short scenarios, including eliminating distractor options and spotting red-flag facts

SQE1 Syllabus

For SQE1, you are required to understand the principles governing the liability of third parties who receive trust property or assist in a breach of trust. It is likely that you will need to identify the correct basis of liability in given scenarios and apply the relevant tests for knowledge or dishonesty. An appreciation of third-party liability is important in trusts and equity practice, with a focus on the following syllabus points:

the distinction between recipient liability (knowing receipt) and accessory liability (dishonest assistance)
the requirements to establish knowing receipt, focusing on the test for knowledge/unconscionability
the requirements to establish dishonest assistance, focusing on the objective test for dishonesty
how these principles apply in practical scenarios involving breaches of trust or fiduciary duty.
the role of tracing in recipient liability and why it is not required for accessory liability
the difference between beneficial receipt and ministerial/agency handling of funds
available defences and limitation rules relevant to claims against third parties.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

Which of the following best describes the basis for recipient liability (knowing receipt)?
1. The third party dishonestly assisted in the breach of trust.
2. The third party received trust property knowing it was transferred in breach of trust, making retention unconscionable.
3. The third party negligently advised the trustee, leading to a breach.
4. The third party was an innocent volunteer who subsequently discovered the breach.
What is the current test for dishonesty in accessory liability (dishonest assistance) following Ivey v Genting Casinos?
1. Whether the defendant subjectively believed their actions were honest.
2. Whether the defendant acted with actual knowledge of the breach.
3. Whether the defendant's conduct was dishonest by the objective standards of ordinary decent people, taking into account the defendant's knowledge and beliefs.
4. Whether the defendant was merely negligent in assisting the breach.
A solicitor receives funds into their client account from a trustee. The solicitor has strong suspicions, based on the trustee's unusual behaviour and vague explanations, that the funds are being transferred in breach of trust, but deliberately avoids asking further questions. Could the solicitor be liable for knowing receipt?
1. No, because the solicitor did not have actual knowledge.
2. No, because the solicitor did not directly benefit from the funds.
3. Possibly yes, if their wilful blindness to the obvious facts makes retention of the benefit (eg, their fees paid from the funds) unconscionable.
4. Possibly yes, but only if the beneficiaries can prove the solicitor was dishonest.

Introduction

When a trustee or fiduciary breaches their duty, causing loss to the trust or principal, the primary claim lies against that trustee or fiduciary. However, sometimes the trustee/fiduciary may be insolvent or untraceable. In such circumstances, beneficiaries or principals may seek remedies against third parties who were involved in the breach. Equity provides two main avenues for establishing third-party liability: recipient liability (often termed 'knowing receipt') and accessory liability ('dishonest assistance'). This article focuses on the criteria required to establish liability under each head, particularly the tests for knowledge and dishonesty.

Key Term: Actual Knowledge
Direct awareness or conscious understanding that a transaction involves a breach of trust or fiduciary duty.

Key Term: Constructive Knowledge
Knowledge that a person is presumed to have because, based on the facts known to them, a reasonable person would have either realised the true situation or made inquiries that would have revealed it. Categories (ii) to (v) of the Baden scale are often considered types of constructive knowledge.

Key Term: Unconscionability
In the context of knowing receipt, this refers to whether the recipient's knowledge of the circumstances surrounding the receipt of trust property makes it against conscience for them to retain it.

Key Term: Dishonesty (in Equity)
For accessory liability, dishonesty is determined objectively. The court ascertains the defendant's actual knowledge and beliefs about the relevant facts, and then assesses whether their conduct was dishonest by the standards of ordinary decent people. The defendant's own view of their honesty is irrelevant.

Recipient Liability (Knowing Receipt)

Recipient liability arises where a third party receives trust property (or its traceable proceeds) which has been transferred to them in breach of trust or fiduciary duty. The recipient is required to restore the property or its value to the trust if their state of knowledge regarding the breach makes it unconscionable for them to retain the benefit.

A helpful way to frame recipient liability is to recognise three common patterns in which a stranger can become accountable as a constructive trustee (drawing on the taxonomy often seen in teaching texts):

type 1: the stranger receives trust property knowing that its transfer to them is in breach of trust or fiduciary duty
type 2: the stranger receives trust property without notice of the breach but later learns the truth and then deals with it inconsistently with the trust
type 3: the stranger receives property knowing it is trust property (but without any breach at the time) and afterwards deals with it inconsistently with the trust.

In all types, liability only arises if the defendant received the property for their own benefit and their knowledge makes retention unconscionable.

Key Term: Beneficial Receipt
Receipt of property (or its traceable proceeds) for one’s own use and benefit. Handling funds merely as an agent or intermediary, without acquiring a personal benefit, is not beneficial receipt.

Establishing Knowing Receipt

To establish liability for knowing receipt, the claimant must demonstrate three elements:

disposal in breach of trust/fiduciary duty: There must have been a transfer of property in breach of a trustee's or fiduciary's obligations. For type 3, the breach arises later when the property is dealt with inconsistently with the trust.
beneficial receipt by the defendant: The third party must have received the trust property (or its traceable product) for their own use and benefit. Merely receiving property as an agent (eg, a bank processing a payment) is insufficient.
knowledge making retention unconscionable: The recipient must possess a level of knowledge about the breach that makes it inequitable or 'unconscionable' for them to retain the property.

The “beneficial receipt” element is critical. A solicitor or bank that merely processes a payment on a client’s instruction typically does not become a knowing recipient, even if suspicious circumstances are present, because the institution has no beneficial receipt (it acts as agent and does not take the money for itself). By contrast, if professional fees are paid out of misapplied trust funds into the professional’s account, the fees retained may constitute beneficial receipt of traceable proceeds. Assessing whether receipt is beneficial requires careful attention to the nature of the transaction and the recipient’s role.

Key Term: Agent (Ministerial Receipt)
Where a person receives and forwards funds or documents purely to carry out instructions, without acquiring beneficial ownership. Such ministerial receipt is not enough for knowing receipt.

The Knowledge Requirement

Historically, the level of knowledge required caused considerable debate, often framed around the five categories identified in Baden Delvaux v Société Générale [1993] 1 WLR 509:

Actual knowledge.
Wilfully shutting one's eyes to the obvious.
Wilfully and recklessly failing to make inquiries an honest person would make.
Knowledge of circumstances indicating the facts to an honest person.
Knowledge of circumstances putting an honest person on inquiry.

While helpful for analysis, modern authority has moved away from rigid categorisation. The more practical and authoritative approach stems from Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437. This case emphasises a single test:

The question is whether, in light of what the recipient knew and suspected, it would be unconscionable for them to retain the benefit of the receipt. This embraces:

actual knowledge of breach
deliberate shutting of eyes to the obvious (wilful blindness)
reckless failure to make inquiries that a reasonable and honest person would make in the circumstances.

Mere inadvertence or simple negligence is not enough. However, if the surrounding circumstances would compel an honest recipient to stop and inquire further, and the recipient intentionally avoids doing so, a court may find retention unconscionable.

A contemporary way to apply Akindele is to first identify the facts known to the recipient when they received or retained the benefit; second, to assess whether those facts were sufficiently indicative of a breach; and third, to ask whether an honest recipient would have acted differently (eg, refused the payment, sought clarification from the trustee, or segregated and held pending investigation). If the recipient’s conduct fell short and they retained a benefit, liability can follow.

Worked Example 1.1

Sarah received £50,000 from her friend, Tom, a trustee. Tom told Sarah the money was a 'temporary loan' from a 'special fund' he managed, needed urgently to cover a personal emergency, and that it would be repaid swiftly. Sarah knew Tom had faced financial difficulties recently. She accepted the money without asking about the 'special fund' or the terms of the trust. The transfer was a breach of trust. Is Sarah likely liable for knowing receipt?

Answer:
Possibly. While Sarah might not have had actual knowledge, the circumstances (urgent need, vague explanation of source, Tom's known difficulties) could be argued to have put an honest and reasonable person on inquiry. If a court finds her failure to inquire, combined with her knowledge, makes retaining the benefit unconscionable, she could be liable. Liability depends on whether her knowledge crosses the threshold of unconscionability, not just negligence.

Beneficial Receipt and Professional Intermediaries

Claims against banks and solicitors often turn on whether the firm acted merely as agent, or whether it obtained a benefit from the funds. A bank receiving and paying out money per a customer’s instructions is generally an agent with ministerial receipt; it is not a knowing recipient unless it acquires a proprietary benefit (eg, the misapplied funds are credited against the customer’s overdraft in a manner that confers a benefit on the bank). A solicitor who is paid fees from misapplied trust funds may be a beneficial recipient of the traceable proceeds to the extent of the fees retained, provided the Akindele knowledge threshold is met.

Key Term: Bona Fide Purchaser for Value Without Notice
A person who acquires legal title to property for value, without notice of any prior equitable interest or breach. Equity will not compel such a purchaser to restore the property; they take free of prior equitable claims.

“Bona fide purchaser” is a complete defence to proprietary claims. If trust assets are transferred to such a purchaser, proprietary remedies are barred. Personal claims (eg, for dishonest assistance) may still be considered against other actors involved, but knowing receipt cannot be made out against a purchaser for value without notice because the Akindele standard cannot be satisfied by someone without notice.

Tracing and Receipt

An essential prerequisite for recipient liability is that the defendant must have beneficially received trust property or its traceable equivalent. Tracing is the process by which the claimant identifies the trust property's path into the defendant's hands. If the property cannot be traced to the recipient, or if the recipient only handled it ministerially (eg, as an agent bank), liability for knowing receipt cannot arise, although accessory liability might still be relevant.

Tracing operates by well-established rules. Where the defendant mixed trust money with their own, equity can:

claim a proportionate share of mixed assets; or
assert a charge to secure repayment of the traceable amount.

Where the recipient’s bank account contained both personal money and trust money, equity generally assumes the recipient spends their own money first when drawing down the mixed fund, enabling the claimant to recover the entire traceable balance if sufficient funds remain. The precise election between a proprietary share and a charge depends on which produces the best recovery in the circumstances.

Key Term: Tracing
The process of following value into its product or substitute and asserting proprietary rights over that product or substitute.

Limitation and Defences

Limitation periods and equitable defences can affect claims against recipients:

claims “to recover trust property or its proceeds” from a trustee are not time-barred under the Limitation Act 1980. Where the defendant still holds identifiable trust property or its proceeds, a proprietary claim based on tracing is generally not subject to limitation
for personal claims where the recipient no longer holds property, limitation may apply. Where the third party is sued as a constructive trustee for knowing receipt, courts consider the nature of the claim. In contrast, dishonest assistance claims (which do not involve receipt) are ordinarily subject to a six-year period
equitable defences such as laches and acquiescence may operate where there has been undue delay, causing prejudice
an innocent volunteer recipient (no knowledge at the time of receipt) is usually exposed only to proprietary claims via tracing, not personal liability. A special personal claim against such recipients exists in the administration of estates (Re Diplock), but only once other remedies are exhausted.

Key Term: Innocent Volunteer
A person who receives trust property without consideration and in good faith, without any knowledge of a breach. Generally, they cannot be sued personally in equity, although proprietary remedies may compel restoration of the property.

Accessory Liability (Dishonest Assistance)

Accessory liability arises where a third party dishonestly assists a trustee or fiduciary in committing a breach of trust or fiduciary duty. Unlike recipient liability, the defendant does not need to have received any trust property themselves.

Establishing Dishonest Assistance

Four elements are required:

existence of a trust or fiduciary duty
breach of that trust or duty by the trustee/fiduciary (though the trustee need not themselves be dishonest)
assistance in the breach by the third party
dishonesty on the part of the third party.

Assistance is interpreted broadly. The third party’s conduct must contribute to the breach in a meaningful way. Preparing documents, implementing transactions, and even “turning a blind eye” while enabling steps in a breach can qualify, provided the conduct amounts to assistance. The assistance need not be the sole cause of the breach; causation is not approached in a strictly “but for” manner in equity.

The Dishonesty Requirement

The key element is the dishonesty of the accessory. The test for dishonesty was clarified by the Supreme Court in Ivey v Genting Casinos (UK) Ltd [2017] UKSC 67 (overruling the previous test from Twinsectra Ltd v Yardley [2002] UKHL 12).

The court first determines the defendant’s actual state of knowledge and belief about the facts (not the law). In light of that knowledge and belief, the question is whether the conduct was dishonest by the objective standards of ordinary decent people. The defendant’s own standards of honesty are irrelevant. This aligns with the approach previously taken in equity (Royal Brunei Airlines v Tan; Barlow Clowes International v Eurotrust), and Ivey removes any lingering subjectivity from the test.

Worked Example 1.2

An accountant, David, prepares documents for a trustee, Laura, which facilitate the transfer of trust funds to an offshore account for Laura's personal use, contrary to the trust terms. David knows the purpose of the transfer is improper and breaches the trust, but carries out the instructions because Laura is a major client. David does not receive any trust funds himself. Is David likely liable for dishonest assistance?

Answer:
Yes. There is a breach of trust by Laura. David has assisted in that breach by preparing the necessary documents. Given David's actual knowledge of the improper purpose, his conduct in enabling the breach would likely be considered dishonest by the objective standards of ordinary decent people, regardless of his motives (eg, retaining a client).

Nature of Assistance and Omission

While courts generally look for a positive act, passive assistance or omission may suffice if the accessory is in a position where failing to act amounts to participation in the breach (for example, deliberately choosing not to stop or report a transfer where the accessory is actively participating in implementing it and knows it to be a breach).

Remedies and Limitation

Accessory liability gives rise to a personal obligation to make good the loss caused by the breach. As the accessory never received the property, proprietary remedies (including tracing claims) will not usually be available. Limitation periods generally apply to personal claims for dishonest assistance (six years is commonly relevant, subject to exceptions for fraud, concealment, or disability).

Exam Warning

Do not confuse the test for dishonesty in accessory liability (objective test based on Ivey) with the test for knowledge in recipient liability (unconscionability based on Akindele). While knowledge is relevant to assessing dishonesty, the ultimate tests are distinct. Accessory liability requires proving dishonesty, not just knowledge that makes retention unconscionable.

Additional Worked Examples

To consolidate the distinctions and criteria, consider the following scenarios.

Worked Example 1.3

A bank receives £250,000 from a trustee client and, on the trustee’s instructions, transfers the funds to a third-party account the same day. The bank charges standard transfer fees credited to its business income. The trustees later prove insolvent and the beneficiaries sue the bank for knowing receipt.

Answer:
Unlikely liable for knowing receipt. The bank acted as agent and had ministerial receipt only. It did not beneficially receive the trust property; standard transfer fees are a payment for services, not beneficial receipt of the misapplied fund itself. Without beneficial receipt, the Akindele test is not engaged. Consider dishonest assistance instead only if the bank’s conduct was dishonest, which is rare on the facts described.

Worked Example 1.4

A law firm pays an invoice from funds received from a trustee client, knowing the payment comes from trust funds but believing (without inquiry) that the trustee is authorised. Red flags are present: urgency, inconsistent explanations, and prior instances of personal withdrawals by the trustee. The beneficiaries sue for knowing receipt to recover the fees.

Answer:
Potentially liable for knowing receipt to the extent of the fees if the firm’s knowledge and wilful blindness make retention of the fees unconscionable under Akindele. The firm obtained a beneficial benefit (its fees) derived from traceable proceeds. Whether liability attaches turns on the degree of suspicion and failure to make obvious inquiries. If the circumstances compelled an honest practitioner to pause and verify authority but the firm closed its eyes, retention may be unconscionable.

Worked Example 1.5

A purchaser acquires trust land for full market value, unaware it is trust property and without any notice of a breach. The price is paid to the trustee, who misapplies the proceeds. The beneficiaries seek to set aside the sale and recover the land from the purchaser.

Answer:
The purchaser is a bona fide purchaser for value without notice and takes free of equitable claims; the proprietary remedy against them fails. The beneficiaries’ recourse is against the trustee and any accessory or recipient of the misapplied proceeds whose knowledge meets the relevant tests. If the sale proceeds can be traced into the hands of a recipient whose retention is unconscionable, a claim for knowing receipt may be viable against that recipient.

Practical Points When Analysing Third-Party Liability

Identify the correct head of liability. If the third party received property, assess knowing receipt first; if they did not receive property but were involved in the mechanics of the breach, consider dishonest assistance.
Pin down whether receipt was beneficial. Agency or ministerial handling does not suffice; retention of fees or reduction of a personal indebtedness may.
Separate knowledge and dishonesty. Akindele asks whether retention is unconscionable; Ivey asks whether conduct was dishonest by objective standards.
Consider tracing. Recipient claims depend on identifying the asset or its proceeds. If value has been dissipated, proprietary recovery may be limited and a personal claim (if available) becomes more significant.
Think about limitation and equitable defences. Proprietary claims to recover trust property are often not time-barred, but personal claims can be.
Keep in mind special contexts. In the administration of estates, a narrow personal claim may exist against innocent volunteers (Re Diplock), but only after other remedies are exhausted.

Key Term: Trustee de son tort
A person who, without appointment, intermeddles with trust property or administration in a way that causes loss, and is treated as a trustee for liability purposes.

Although not strictly part of knowing receipt or dishonest assistance, intermeddling can result in constructive trustee liability where the stranger effectively assumes the functions of a trustee and causes loss.

Key Point Checklist

This article has covered the following key knowledge points:

Third parties can be liable in equity for involvement in breaches of trust, primarily through knowing receipt or dishonest assistance.
Knowing receipt requires beneficial receipt of trust property (or its traceable product) transferred in breach of trust.
Liability for knowing receipt depends on the recipient's knowledge making retention of the property unconscionable (Akindele test).
Beneficial receipt is essential; mere ministerial/agency handling of funds is insufficient.
Dishonest assistance requires the third party to have assisted the breach of trust.
Liability for dishonest assistance depends on the accessory's dishonesty, judged objectively by the standards of ordinary decent people, considering the accessory's actual knowledge/belief (Ivey test).
Tracing is necessary to identify property for recipient liability but not for accessory liability.
A bona fide purchaser for value without notice takes free of equitable claims to the property.
Limitation rules differ: proprietary claims to recover trust property or its proceeds are often not time-barred, while personal claims (especially for dishonest assistance) are generally subject to limitation, subject to exceptions.
Innocent volunteers are generally exposed to proprietary remedies only, with a limited personal claim in estate administration where other remedies are exhausted (Re Diplock).

Key Terms and Concepts

Actual Knowledge
Constructive Knowledge
Unconscionability
Dishonesty (in Equity)
Beneficial Receipt
Agent (Ministerial Receipt)
Bona Fide Purchaser for Value Without Notice
Tracing
Innocent Volunteer
Trustee de son tort

Remedies against third parties: recipient and accessory liab...