Learning Outcomes
This article explains when and how equity imposes liability on third parties who receive or assist with misapplied trust property, and the scope of defenses available to those third parties where they acted without fault. It builds a working understanding of:
- Recipient liability (knowing receipt): the need for a prior breach of trust or fiduciary duty, beneficial receipt by the defendant, and a state of knowledge making retention unconscionable per BCCI v Akindele.
- Accessory liability (dishonest assistance): the objective test for dishonesty (Royal Brunei v Tan; Barlow Clowes), and the breadth of “assistance”.
- The personal versus proprietary nature of claims and the different consequences of each (including tracing where property or its substitutes are still identifiable).
- Defenses for third parties, focusing on bona fide purchaser for value without notice and change of position, and how these interact with restitutionary and wrongs-based claims.
- Protection for ministerial recipients, the effect of dissipation on proprietary claims, and equitable defenses such as laches and acquiescence.
- The status and consequences of constructive trusteeship for third parties found liable, including the remedies available and limitations where they do not hold property.
SQE1 Syllabus
For SQE1, you are required to understand the circumstances in which third parties may become liable for breaches of trust committed by trustees. This involves applying the principles of recipient liability (knowing receipt) and accessory liability (dishonest assistance). A key aspect is appreciating the defences that may protect innocent third parties, with a focus on the following syllabus points:
- The distinction between recipient liability and accessory liability.
- The elements required to establish knowing receipt, focusing on the concept of knowledge and unconscionability.
- The elements required to establish dishonest assistance, focusing on the objective standard of dishonesty.
- The defences available to third parties, particularly the defence of bona fide purchaser for value without notice and change of position.
- The nature of liability imposed on third parties found liable (constructive trusteeship).
- The different remedial consequences of personal versus proprietary claims (including tracing into substitutes and mixed funds).
- Practical limits on equitable relief, including laches and the effect of dissipation of property.
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 is the established test for the state of mind required for liability in dishonest assistance?
- The defendant acted negligently.
- The defendant acted dishonestly according to the standards of reasonable and honest people.
- The defendant suspected wrongdoing but failed to make enquiries.
- The defendant had actual knowledge of the breach of trust.
-
A third party receives trust property transferred in breach of trust but is unaware of the breach at the time of receipt. They later learn of the breach but have already spent the money in good faith on living expenses. Which defence might be available?
- Bona fide purchaser for value without notice.
- Change of position.
- Ministerial receipt.
- Laches.
-
For a claim of knowing receipt to succeed against a third party, which element regarding their state of mind is essential according to BCCI v Akindele?
- The recipient acted dishonestly.
- The recipient's knowledge made it unconscionable for them to retain the benefit.
- The recipient had constructive notice of the breach.
- The recipient wilfully shut their eyes to the obvious breach.
Introduction
When a trustee commits a breach of trust, the primary route for beneficiaries is a personal claim against the trustee. But equity also targets third parties in two principal ways: recipient liability (knowing receipt) where a third party receives trust property in circumstances making it inequitable for them to retain it, and accessory liability (dishonest assistance) where a third party has helped a trustee commit a breach dishonestly. These are distinct causes of action: recipient liability focuses on the recipient’s knowledge and unconscionability of retention, while accessory liability focuses on the assistant’s dishonesty, whether or not they received any property.
The remedies against third parties reflect both personal and proprietary dimensions. A personal claim seeks compensation or account for loss against the third party; a proprietary claim seeks to recover the property itself or its traceable substitute from whoever holds it, provided it can still be identified. This practical distinction is important: a proprietary claim can give priority over unsecured creditors and survive insolvency; a personal claim depends on the defendant’s solvency.
Equity also recognises that some third parties act innocently and should be protected. Defences such as bona fide purchaser for value without notice and change of position can absolve liability and protect transactional security. A clear understanding of these principles is essential for identifying potential claims and advising on realistic outcomes.
Key Term: Knowing Receipt
Liability imposed on a third party who receives trust property transferred in breach of trust, where the recipient’s state of knowledge makes it unconscionable for them to retain the benefit of the receipt.
Recipient Liability (Knowing Receipt)
Recipient liability arises where there has been a misapplication of trust property (or property subject to a fiduciary duty) and a third party has received it for their own benefit. Liability is not strict; it depends on the interplay between the recipient’s state of mind and the circumstances of receipt and retention.
Elements of Knowing Receipt
To establish liability for knowing receipt, a claimant must demonstrate:
- A disposal of assets in breach of trust or fiduciary duty by the trustee or fiduciary.
- Beneficial receipt by the defendant (they received the assets, or their traceable substitute, for their own use and not merely as an agent).
- A state of knowledge making it unconscionable for the defendant to retain the benefit.
The requirement of beneficial receipt excludes purely ministerial or agency roles (such as a bank processing a payment) where the recipient does not take for their own benefit.
The Knowledge Requirement
The landmark case BCCI v Akindele [2001] Ch 437 established a single test: is the recipient’s state of knowledge such that it is unconscionable for them to retain the benefit? This moves away from rigid knowledge categories, instead asking whether the retention offends equity’s conscience. Knowledge is assessed practically and can include:
- Actual knowledge of the breach or trust.
- Wilfully shutting one’s eyes to the obvious.
- Wilfully and recklessly failing to make inquiries which an honest person would make.
Key Term: Unconscionability
Conduct so inequitable that the court regards retention of the benefit as contrary to conscience. In knowing receipt, unconscionability reflects the recipient’s knowledge about the breach and the circumstances that make retention unfair.
Mere negligence is generally insufficient. Suspicion alone, without wilful avoidance of the truth, is unlikely to meet the threshold. The court considers the recipient’s position (including professional experience), what they knew or should have appreciated, and the circumstances of receipt and retention. Importantly, the relevant time for assessing unconscionability can be when retention becomes unconscionable (e.g., if initial receipt was innocent but the recipient later learns of the breach and nonetheless keeps the benefit).
Beneficial Receipt versus Ministerial Receipt
Beneficial receipt is required. If the third party received the property purely as an agent or intermediary, followed instructions, and did not take any benefit, they will not be liable for knowing receipt. Agency roles include clearing banks processing payments, escrow holders, or brokers executing trades straight through within mandate.
Key Term: Ministerial Receipt
Receipt of property purely as an agent or intermediary without any beneficial claim or control, where the recipient acts on instructions and does not take advantage personally. Ministerial recipients are generally outside the scope of knowing receipt.
Traceable Substitutes and Dissipation
A proprietary claim against a knowing recipient focuses on recovering the property or its traceable product. If the property has been dissipated (e.g., spent on ordinary living expenses with nothing identifiable remaining), tracing fails. A personal claim for knowing receipt may still be available where the knowledge requirement is met, but liability will be measured by equitable compensation rather than proprietary recovery. Tracing rules apply where the recipient buys new assets with the misapplied property, or mixes funds to purchase assets; beneficiaries can then assert a proportionate share of that asset.
Worked Example 1.1
A trustee, in breach of trust, transfers £50,000 from the trust fund to their friend, Ben. Ben is told the money is a loan from the trustee personally. Ben uses £30,000 to buy shares and puts £20,000 in his savings account. Later, Ben discovers the money came from a trust fund and was transferred improperly. He decides to keep the shares and the remaining money. Are the beneficiaries likely to succeed in a claim for knowing receipt against Ben?
Answer:
Yes, potentially. Ben received trust property beneficially. Although initially unaware, he gained knowledge of the breach while still possessing the traceable proceeds (£20,000 cash and the shares bought with £30,000). His decision to retain the benefit after acquiring this knowledge likely makes it unconscionable. The beneficiaries could pursue a personal claim for knowing receipt and potentially a proprietary claim against the traceable assets (the shares and the remaining cash).
Recipient Liability: Practical Variants
Recipient liability cases often present in three practical variants:
- Type 1: Receipt with knowledge of breach. The recipient knew (or turned a blind eye to) the breach at the time of receipt. Unconscionability is usually satisfied.
- Type 2: Innocent receipt followed by knowledge. The recipient initially lacked knowledge, but at some later point learned of the breach and kept or used the benefit. Unconscionability may arise from the continued retention.
- Type 3: Receipt knowing the property is trust property (without an initial breach) but later dealing inconsistently. For example, a third party knowingly received trust funds on a valid mandate, then applied them in an unauthorised way; equity may impose liability in appropriate circumstances.
The court focuses on the fairness of retention in all three, grounded in Akindele.
Worked Example 1.2
A company director diverts trust funds to a supplier’s account to settle a personal debt. The supplier, a small business, receives the payment and applies it to clear the director’s outstanding invoices. Months later, the supplier is told the funds were misapplied trust money. The supplier has no remaining funds from that payment and no new assets purchased with it. Is knowing receipt likely and what remedies might be available?
Answer:
Liability for knowing receipt is unlikely on these facts if the supplier had no knowledge of the breach when receiving and applying the funds. Even if the supplier later learns of the breach, by then the money has been dissipated in the ordinary course of business, leaving no traceable asset. A proprietary claim will fail. A personal restitutionary claim may be considered but would face challenges where the supplier acted in good faith and irrevocably changed position; change of position may partially or fully defeat a restitutionary claim.
Accessory Liability (Dishonest Assistance)
Accessory liability (dishonest assistance) targets third parties who help a trustee or fiduciary commit a breach of duty dishonestly. Unlike knowing receipt, the assistant need not receive any trust property. The focus is on the breach and the quality of the assistance.
Key Term: Dishonest Assistance
Liability imposed on a third party who dishonestly assists a trustee or fiduciary to commit a breach of trust or fiduciary duty, judged by the standards of ordinary decent people.
Elements of Dishonest Assistance
Establishing liability requires proof of:
- A trust or fiduciary relationship and a breach of trust or fiduciary duty.
- Assistance by the third party (any conduct that makes the breach easier or more likely, including planning, execution, or concealment).
- Dishonesty, judged objectively given the defendant’s actual knowledge and circumstances.
The trustee need not be dishonest for the third party to be liable; a negligent or even innocent breach by a trustee can be “assisted” dishonestly by another party.
The Dishonesty Standard
The test for dishonesty is objective: did the defendant act as an honest person would have acted in all the circumstances? Royal Brunei Airlines v Tan and Barlow Clowes v Eurotrust confirm that the court considers what the defendant knew and then judges that conduct by the standards of ordinary decent people. It is not necessary for the defendant to realise that their conduct was dishonest.
Factors include the defendant’s experience and role (e.g., solicitor, accountant, banker), whether they turned a blind eye to obvious risks, and whether they deliberately avoided inquiries. Professional assistants are expected to meet the standards of their profession.
Assistance covers a wide range of conduct, from drafting documents and effecting transfers, through arranging offshore structures to conceal breaches, to providing misleading assurances. Passive acquiescence alone is usually not enough; there must be some conduct that helped the breach.
Remedies for Accessory Liability
Accessory liability generally gives rise to a personal remedy (equitable compensation or account for profits) against the assistant; proprietary remedies like tracing are not available unless the assistant also received property. In appropriate cases the court may order an account of profits where the assistant profited from their dishonest conduct.
Worked Example 1.3
Chloe, a solicitor, is instructed by trustees to draft documents enabling an investment. Chloe realises the investment is highly speculative and likely outside the trustees' powers according to the trust deed she has seen. She advises the trustees against it but, upon their insistence, proceeds to draft the necessary documents, suspecting a breach is occurring but choosing not to investigate further or refuse instructions. The investment fails, causing loss to the trust. Could Chloe be liable for dishonest assistance?
Answer:
Possibly. A breach of trust occurred (unauthorised investment). Chloe assisted by drafting documents. The key issue is dishonesty. An ordinary, honest solicitor, aware of the trust deed's limitations and the speculative nature of the investment, might have refused to proceed or sought further clarification/advice. If Chloe's conduct, given her knowledge and professional position, fell below the objective standard of honesty expected in those circumstances, she could be liable for dishonest assistance, even if she did not personally benefit.
Worked Example 1.4
A trustee instructs an accountant to route trust funds through an offshore account to “avoid regulatory scrutiny.” The accountant knows the funds originate from a trust and suspects no legitimate reason for concealment. They implement the structure and charge fees. The funds are lost. Is accessory liability likely?
Answer:
Yes. The trustee’s breach is plain. The accountant’s assistance (creating a concealment structure and moving funds) and knowledge of the trust context, combined with suspicious circumstances, indicates dishonesty judged by objective standards. A personal claim for dishonest assistance and potentially an account of profits (to disgorge their fees from the wrongful assistance) would be realistic.
Defences for Innocent Volunteers
Where a third party receives trust property without knowledge of the breach and without providing value (an “innocent volunteer”), equity moderates liability to protect transactional justice. The main protections are bona fide purchaser for value without notice and change of position. Additionally, ministerial receipt and dissipation may limit claims, and equitable defences like laches can bar relief in some circumstances.
Key Term: Innocent Volunteer
A person who receives trust property transferred in breach of trust without giving valuable consideration and without knowledge of the breach.
Bona Fide Purchaser for Value Without Notice (BFPFVWN)
This is a complete defence to both personal and proprietary claims in equity. A third party who acquires legal title to property:
- For valuable consideration (more than nominal; fair consideration suffices even if not full market value).
- In good faith (without fraud or inequitable conduct).
- Without notice (actual, constructive, or imputed) of the beneficiaries’ equitable interest or the breach of trust,
takes the property free of the trust. Equity will not defeat the rights of a genuine purchaser who acquired the property fairly and without awareness of any pre-existing equitable interests.
Key Term: Bona Fide Purchaser for Value Without Notice
A person who acquires legal title to property for value, in good faith, and without notice of any prior equitable interests. This status is a complete defence to equitable claims and defeats tracing.Key Term: Constructive Knowledge
Knowledge imputed by law where the circumstances would have prompted an honest and reasonable person to inquire, and proper inquiry would have revealed the truth. Wilfully shutting one’s eyes or making no inquiries in the face of obvious signs may amount to constructive knowledge.
A few practical points:
- Value includes money or money’s worth; marriage consideration can count in some contexts, but voluntary recipients (gifts) are not purchasers.
- Notice includes actual knowledge, constructive notice (facts that should have led to inquiry), and imputed notice (e.g., notice to a professional agent within their authority is imputed to the principal).
- The defence requires acquisition of legal title. Taking only an equitable interest, or receiving as a volunteer, does not confer this protection.
- For registered land, statutory priority rules (Land Registration Act 2002) govern priority against the register, but the equitable principle remains conceptually relevant where equitable interests are not protected on the register.
Change of Position
This defence is available to an innocent recipient (typically a volunteer) who has detrimentally changed their position in good faith in reliance on the receipt. If it would be inequitable to require full restitution because of this change, the court may reduce or extinguish the recipient's liability.
The leading authority is Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, recognizing the defence in restitutionary claims such as payments made by mistake. The core requirements are:
- Good faith: the recipient acted honestly and without notice of the breach or mistake.
- Causal link: the change of position must be a consequence of the receipt (the recipient must have changed their circumstances in reliance on receiving the money).
- Inequity of full restitution: requiring full repayment would be unfair given the irreversible change.
Key Term: Change of Position
A defence to restitution where an innocent recipient, relying on a payment, has changed their circumstances irreversibly such that compelling full repayment would be inequitable. The defence can operate to reduce or extinguish liability.
Importantly, change of position is a defence to restitutionary claims (e.g., money paid by mistake or unjust enrichment) rather than to wrongs-based claims. It does not apply where the recipient acted dishonestly, in bad faith, or retains identifiable property or its substitute. In practice:
- If the recipient is genuinely innocent and has spent the money on non-refundable expenses they otherwise would not have incurred, a partial defence often reduces liability to the unspent or substitutable portion.
- If identifiable assets remain (e.g., goods or investments purchased), a proprietary claim may succeed and change of position will not defeat proprietary recovery of those assets.
- For knowing receipt (a wrongs-based claim), an “innocent volunteer” will not be liable at all; the defence is unnecessary. Where liability is framed as restitution rather than wrongs-based, change of position becomes central.
Worked Example 1.5
Trustees mistakenly overpay a beneficiary, David, by £10,000. David, believing the payment to be correct and having no reason to suspect an error, uses £8,000 of the money to pay for essential and non-refundable surgery for his child, which he otherwise could not have afforded. The trustees later discover the error and seek repayment. Can David rely on the change of position defence?
Answer:
Likely yes, in part. David received the money innocently. He changed his position significantly (£8,000 spent on non-refundable surgery) in reliance on the payment. It would likely be inequitable to demand repayment of the full £10,000. He may have a defence regarding the £8,000 spent, but would likely remain liable for the £2,000 not spent or spent on ordinary expenses he would have incurred anyway.
Worked Example 1.6
Nancy receives £25,000 transferred in breach of trust, unaware of the breach. She spends £15,000 refurbishing her home and invests £10,000 in listed shares. Two months later she learns the funds were misapplied. The trustees sue for restitution and, alternatively, knowing receipt. What outcomes are likely?
Answer:
A personal wrongs-based claim for knowing receipt is unlikely because Nancy lacked knowledge at receipt and did not retain the benefit after learning of the breach; her retention after knowledge only extends to the shares (£10,000). The trustees may bring a proprietary claim to trace into the purchased shares and assert a proportionate claim to their value; change of position does not defeat proprietary recovery of those shares. As to the £15,000, if the refurbishment is non-refundable and Nancy acted in good faith, change of position can provide a defence to a restitutionary claim for that portion. A balanced outcome is a proprietary claim over the shares, plus a reduced or extinguished personal claim for the remainder.
Other Potential Defences
- Ministerial Receipt: A person who receives property purely as an agent for another (e.g., a bank processing a transaction) and passes it on according to instructions without benefiting personally is typically outside knowing receipt. Absent dishonest assistance, a personal claim will not be available. If they charge their usual processing fee, that alone does not negate the ministerial nature of the receipt.
- Dissipation: If the trust property has been dissipated (spent on day-to-day living or services without any identifiable substitute), tracing fails and no proprietary remedy lies. A personal claim may still exist if the recipient meets the knowledge threshold for knowing receipt; if not, a restitutionary claim may be considered but can be met by change of position.
- Laches and Acquiescence: Unreasonable delay by the claimant that prejudices the defendant can bar equitable relief. Where the claim seeks equitable remedies (like an injunction or proprietary orders), a court may refuse relief if the claimant delayed and the defendant’s position has materially changed. Acquiescence can similarly release a defendant from equitable liability.
Key Term: Ministerial Receipt
Receipt as a mere agent or intermediary, with no beneficial entitlement and no personal advantage from the property. A ministerial recipient is usually not liable for knowing receipt.
Worked Example 1.4 (Ministerial Receipt)
A clearing bank credits funds to a customer’s account under payment instructions from a trustee. The bank does not know the funds are trust funds, applies standard automated processing, and charges its usual fee. Later, the payment is discovered to be a breach of trust. Can the beneficiaries sue the bank for knowing receipt?
Answer:
Unlikely. The bank’s receipt is ministerial. It did not take the funds for its own benefit; standard processing and charging a routine fee do not amount to beneficial receipt. Absent evidence of dishonest assistance, the bank is not liable. The beneficiaries’ claims lie against the trustee and, where the funds remain, against the current holder of any traceable substitute.
Proprietary Recovery and Tracing Against Innocent Volunteers
Where an innocent volunteer still holds the original property or a clean substitute, beneficiaries can trace and assert a proprietary claim to recover it. If the volunteer mixed trust funds with their own funds to acquire an asset (e.g., buying a car with mixed funds), beneficiaries may claim a proportionate share reflecting the trust’s contribution. If money has been mixed in a bank account and then used to buy assets, tracing rules (including presumptions about withdrawals and allocations) determine the extent of the proprietary claim.
Where identifiable property no longer exists, proprietary claims fail. A personal restitutionary claim may still be brought, subject to change of position and the recipient’s good faith.
Revision Tip
Remember that the BFPFVWN defence defeats both personal and proprietary claims. The change of position defence applies primarily to personal claims for restitution (though its interaction with proprietary claims is limited) and usually applies to innocent volunteers. Distinguishing between these defences and when they apply is key. Always ask: is the claim framed as a wrong (knowing receipt or dishonest assistance) or as restitution/unjust enrichment? Then identify whether any identifiable property or substitute remains to support a proprietary claim.
Key Point Checklist
This article has covered the following key knowledge points:
- Third parties can be liable for breaches of trust through knowing receipt or dishonest assistance.
- Knowing receipt requires beneficial receipt of trust property with knowledge making retention unconscionable.
- Dishonest assistance requires dishonest participation in a breach, judged objectively by the standards of ordinary decent people considering what the defendant knew.
- Beneficial receipt is distinct from ministerial receipt; agency processing of funds without personal benefit falls outside knowing receipt.
- Innocent volunteers are recipients who give no value and have no knowledge of the breach; they may face restitutionary claims but can rely on change of position where appropriate.
- The defence of bona fide purchaser for value without notice protects purchasers who acquire legal title for value, in good faith, and without notice; it defeats both personal and proprietary claims.
- The change of position defence protects innocent recipients who have irreversibly altered their position in reliance on the receipt, typically in restitutionary claims.
- Dissipation prevents proprietary recovery where no identifiable property or substitute remains; a personal claim may still be considered subject to defences.
- Remedies differ: proprietary claims seek recovery of property or substitutes (including proportionate claims in mixed assets), while personal claims seek equitable compensation or an account; accessory liability is generally personal.
- Equitable defences like laches and acquiescence can bar relief where delay has prejudiced the defendant.
Key Terms and Concepts
- Knowing Receipt
- Unconscionability
- Dishonest Assistance
- Innocent Volunteer
- Bona Fide Purchaser for Value Without Notice
- Constructive Knowledge
- Change of Position
- Ministerial Receipt