Learning Outcomes
This article examines the bases upon which third parties may become liable for breaches of trust or fiduciary duty. It outlines the distinct concepts of recipient liability (knowing receipt) and accessory liability (dishonest assistance). For the SQE1 assessment, you will need to understand the criteria required to establish liability in each case, particularly the tests for knowledge in knowing receipt and dishonesty in accessory liability. Your understanding will enable you to identify and apply these principles to SQE1-style single best answer MCQs.
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.
As you work through this article, remember to pay particular attention in your revision to:
- 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.
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.
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Which of the following best describes the basis for recipient liability (knowing receipt)?
- The third party dishonestly assisted in the breach of trust.
- The third party received trust property knowing it was transferred in breach of trust, making retention unconscionable.
- The third party negligently advised the trustee, leading to a breach.
- The third party was an innocent volunteer who subsequently discovered the breach.
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What is the current test for dishonesty in accessory liability (dishonest assistance) following Ivey v Genting Casinos?
- Whether the defendant subjectively believed their actions were honest.
- Whether the defendant acted with actual knowledge of the breach.
- Whether the defendant's conduct was dishonest by the objective standards of ordinary decent people, taking into account the defendant's knowledge and beliefs.
- Whether the defendant was merely negligent in assisting the breach.
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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?
- No, because the solicitor did not have actual knowledge.
- No, because the solicitor did not directly benefit from the funds.
- Possibly yes, if their wilful blindness to the obvious facts makes retention of the benefit (eg, their fees paid from the funds) unconscionable.
- 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.
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.
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.
- 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 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.
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.
The modern approach, however, stems from Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437. This case moved away from the rigid Baden categories towards a single test:
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.
The test asks whether the recipient's knowledge made it unconscionable for them to retain the benefit of the receipt. This encompasses actual knowledge but may also include situations where the recipient wilfully ignored clear indicators of wrongdoing (wilful blindness) or deliberately refrained from making reasonable inquiries. Mere negligence or carelessness is generally insufficient.
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.
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.
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.
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).
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.
This objective test means that even if the defendant did not personally believe they were acting dishonestly, they can still be found liable if their conduct, given their knowledge, falls below the standards expected of an honest person.
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).
Assistance
The assistance provided must contribute to the breach in some meaningful way, although it does not need to be the sole or dominant cause. Actions such as preparing documents, enabling transfers, or providing advice that enables the breach can constitute assistance.
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.
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).
- 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.
Key Terms and Concepts
- Actual Knowledge
- Constructive Knowledge
- Unconscionability
- Dishonesty (in Equity)
