Unlawful “Successor Fund Transfer” – Knowing Receipt

Where a person receives trust property in the knowledge that that property has been passed to him or her in breach of trust, the recipient will be personally liable to account to the trust for the value of the property passed away. A person is taken to have received property when it comes under his or her possession or control. Once a breach of trust has been proved, it is incumbent in the claimant that the defendant had the requisite knowledge.1 The Three elements of the offence of “knowing receipt” are:
  1. A breach of trust
  2. the receipt of trust property subsequent to the breach of trust,
  3. knowledge of the breach of trust by the defendant
 

Breach of Trust

Most Trust Deeds will include protective clauses to ensure that the “Trust Fund” is only applied for authorised purposes and if the trustee or trustees apply trust property in a manner not authorised by the Trust Deed then the trustee or trustee will have committed a breach of trust.

The nature of “receipt”

Millet J in Agip v Jackson2 held that:

“..there is receipt of trust property when a company’s funds are misapplied by any person whose fiduciary position gave him controlof them and enable him to misapply them.”

A trustee who transfers trust property to another party, including another external trustee of another fund, in breach of trust will initiate a claim for knowing receipt if the external trustee had knowledge of the breach of trust.

The nature of “knowledge”.

Lord Browne- Wilkinson held in Westdeutsche Landesbank Girozentrale v Islington LBC:

“If X has the necessary degree of Knowledge, X may himself become a constructive trustee for B on the basis of knowing receipt.3 But unless he has the requuisite degree of knowledge he is not personally liable to account as trustee4. Therefore innocent receipt of property by X subject to an existing equitable interest does not by itself make X a trustee despite the severance of legal and equitable titles.5

A further question is what a person can be taken to “know“. The most significant judicial explanation of the various categories of knowledge was set out by Peter Gibson J in Baden v Société Générale 6 as follows:
  1. actual knowledge;7
  2. wilfully shutting one’s eyes to the obvious;8
  3. wilfully and recklessly failing to make inquiries which an honest person would have made;
  4. knowledge of circumstances which would indicate the facts to an honest and reasonable man;
  5. knowledge of circumstances which would put an honest and reasonable man on inquiry.
The first three categories encompass situations in which the defendant knew the material facts, regardless of whether or not he or she tried to ignore them. “Knowing receipt” is also referred to as the “first limb of Barnes v Addy9” and the “second limb of Barnes v Addy” is referred to a “knowing assistance“. Both limbs of Barnes v Addy were considered by the High Court of Australia in Farah Constructions v Say-Dee.10 The High Court of Australia has ruled in that “knowledge” that falls with any of the first four categories will suffice for a defendant to be liable for “knowing receipt“. The High Court stated at [147]:

“It is not necessary to go beyond the considered dicta of the three members of the majority in Consul Development Pty Ltd v DPC Estates Pty Ltd11.  Those dicta are based on the numerous cases in the past, and conform with the numerous later authorities, in which the traditional understanding of the first limb of Barnes v Addy has been affirmed.”

In Consul Development v DPC Estates Gibbj at [15] states:

“It is clear that the principle extends to the case “where a person received trust property and dealt with it in a manner inconsistent with trusts of which he was cognizant“: Soar v. Ashwell (1893) 2 QB 390, at pp 396-397; Lee v. Sankey (1872) LR 15 Eq 204, at p211<; and in In re Blundell; Blundell v. Blundell (1888) 40 Ch D 370, at p 381 .”

   

(1) Polly Peck International v Nadir (No.2) [1992] 4 All ER 769, 777 per Scott LJ

(2) Agip v Jackson [1990] Ch 265,286, per Millett J; [1991] Ch 547, CA

(3) Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669

(4) Re Diplock [1948] Ch 465 and Re Montagu’s Settlement Trusts [1987] Ch 264

(5) Westdeutsche Landesbank Girozentrale v Islington LBC [1996] [1996] 2 All ER 961,990

(6)Baden v Société Générale pour Favoriser le Dévélopment du Commerce et de l’industrie en France SA [1993] 1 WLR 509

(7) Bank of Tokyo-Mitsubishi Ltd v Baskan Gida [2004] EWCH 945 (Ch); [2004] 2 Lloyd’s REp 395

(8) Manifest Shipping Co Ltd v Uni-Polaris Shipping Co ltd [2003] 1 AC 469

(9) Barnes v Addy (1874) 9 Ch App 244

(10) Farah Constructions v Say-Deed [2007] HCA 22;230 CLR 89; 236 ALR 209 {Link}

(11) Consul Developments Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 {Link}