Knowledge and the First and Second Limbs of Barnes v Addy

Mossop M summarised the position in Australian Law as to the requisite degree of knowledge in Lallemand & Anor v Brown & Anor [2014] ACTSC 235 at [170]:
The requirements for the first and second limbs of what is referred to as the rule in Barnes v Addy are summarised by Croft J in Taverners J Pty Ltd v Saxo Bank A/S [2011] VSC 27 at [11]-[13] as follows: 11 In order to establish a claim based on “knowing receipt” within the first limb of Barnes v Addy, (1874) 9 Ch App 244. Taverners must prove that:(a) the defendant was in receipt of “trust property”; and(b) the defendant had “knowledge” that:(i) the property received was “trust property”; and (ii) circumstances attendant on the transfer of that property made the transfer a breach of trust or fiduciary duty. (See Spangaro v Corporate Investment Australia Funds Management Ltd (2003) 47 ACSR 285, [55]; Imobilari Pty Ltd v Opes Prime Stockbroking Ltd (2008) 252 ALR 41, [15]; cf [28]–[31] and Bell Group Ltd (in liq) v Westpac Banking Corporation(2008) 225 FLR 1, [4748],[8733].) 12 In Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89, [177]. the High Court said that the species of knowledge required for a claim of “knowing assistance” (the second limb of Barnes v Addy (1874) 9 Ch App 244 at 251–2.) was any of the first four categories propounded in Baden v Société Générale pour Favoriser le Dévélopment du Commerce et de l’industrie en France SA [1993] 1 WLR 509 at 575–6, namely:

(i) actual knowledge;

(ii) wilfully shutting one’s eyes to the obvious;

(iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make;

(iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man.

13 The fifth category propounded in Baden was “knowledge of circumstances which would put an honest an reasonable man on inquiry”. It has, however, been reaffirmed that “knowledge” within the fifth category will not suffice: see Consul Developments Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 at412 (Stephen J). This means that, as reaffirmed by the High Court in Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at 163–164 [176]–[178]all that is necessary is that the known facts would have communicated to a reasonable person a general understanding that fraud, breach of trust or fiduciary duty had occurred”: see Young, Croft and Smith, On Equity(Law Book Co, 2009) [6.910], at p 459. The prevailing view in Australia (both before and after Farah v Say-Dee) is that the same Baden four categories are required for a claim in “knowing receipt”: Koorootang Nominees Pty Ltd v Australia and New Zealand Banking Group Ltd [1998] 3 VR 16 at 85 and 105Hancock Family Memorial Foundation Ltd v Porteous (1999) 151 FLR 191 at 209; Spangaro, [60]; Bell Group, [4748], [8733];Imobilari v Opes, [27]; Chameleon Mining NL v Murchison Metals Ltd [2010] FCA 1129, [132]. (footnotes incorporated as text)