Liability of Strangers to the Trust

Persons who are not lawfully appointed as trustees or who do not act as a trustee may still become personally liable if they receive trust property in Breach of Trust or if they assist a trustee to commit a fraudulent Breach of Trust.

The law on “accessorial liability” derives from Barnes v Addy

The first limb of Barnes v Addy is known as “knowing receipt”.

The second limb of Barnes v Addy is known as “knowing assistance”.

The second limb of Barnes v Addy is especially relevant to those provide services to the trust such as auditors and actuaries.

The second limb of Barnes v Addy is also especially relevant to the Directors of corporate Trustees.

The first and second limbs on Barnes v Addy were considered by the New South Wales Court of Appeal in Simmons v New South Wales Trustee and Guardian [2014] NSWCA 405

The First Limb of Barnes v Addy

In Farah at [112] the High Court defined the first limb of Barnes v Addy in this way:

“Persons who receive trust property become chargeable if it is established that they have received it with notice of the trust.”

The High Court also accepted, in the absence of any argument to the contrary, that a claim under the first limb of Barnes v Addy may be made against not only a trustee who misapplies trust property, but also a fiduciary who deals with property, in respect of which he or she owes fiduciary obligations, in breach of such obligations: Farah at [113].

The elements of a claim under the first limb of Barnes v Addy may be taken to be:

  • (1) the existence of a trust, or a fiduciary duty, with respect to property (trust property);
  • (2) the misapplication of trust property by the trustee or fiduciary;
  • (3) the receipt of trust property by the third party;
  • (4) knowledge by the third party, at the time he or she received the relevant property, that it was trust property and that it was being misapplied or, in the case of breach by a fiduciary, that the trust property was transferred pursuant to a breach of fiduciary duty.

  • The authorities which may be taken to establish element (4) above, include: Hancock Family Memorial Foundation Ltd v Porteous [1999] WASC 55; 32 ACSR 124 at 142 (Anderson J); Spangaro v Corporate Investment Australia Funds Management Ltd [2003] FCA 1025; 47 ACSR 285 at [55] (Finkelstein J); Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; 200 FCR 296 at [20], [249]-[254]; Imobilari Pty Ltd v Opes Prime Stockbroking Ltd [2008] FCA 1920 at [15]; and Bell Group Ltd (In Liq) v Westpac Banking Corporation (No 9) (Bell Group (No 9)) [2008] WASC 239; 70 ACSR 1 at [4748] (Owen J).

    Although Farah did not consider the categories of knowledge sufficient to attract liability under element (4) of the first limb of Barnes v Addy, it may be accepted that the knowledge required is:

  • (1) actual knowledge of the trust, or the existence of the fiduciary duty, and of the misapplication of trust property or transfer pursuant of to a breach of fiduciary duty; or
  • (2) willfully shutting one’s eyes to those things; or
  • (3) abstaining in a calculated way from making such inquiries, as an honest and reasonable person would make, about the trust and the application of the trust property; or
  • (4) knowledge of facts which to an honest and reasonable person would indicate the existence of the trust and the fact of misapplication.

  • The authorities which have accepted that the above categories of knowledge are sufficient include: Kalls Enterprises Pty Ltd (in liq) v Balaglow [2007] NSWCA 191; 63 ACSR 557 at [176] (Giles JA; Ipp and Basten JJA agreeing); Hancock Family Memorial Foundation Ltd v Porteous at 142; Grimaldi v Chameleon Mining NL (No 2) at [268]-[270]. See also Westpac Banking Corporation v Bell Group Ltd (In Liq) (No 3) [2012] WASCA 157; 44 WAR 1 at [2130], when approving the view to which Owen J came at first instance in Bell Group Ltd (No 9) at [4748].

    On the other hand, those authorities also establish that mere knowledge of circumstances which would put an honest and reasonable person on inquiry is not sufficient to establish liability for knowing receipt.

    The Second Limb of Barnes v Addy

    In New Cap Reinsurance Corporation Ltd v General Cologne Re Australia Ltd [2004] NSWSC 781 at [15], Young CJ in Eq stated in the context of a pleading dispute: “It is essential to plead the elements of the second limb in Barnes v Addy which Jacobs, Law of Trusts (6th ed, 1997, Butterworths) at [1339] sets out as:

  • (1) The existence of a fiduciary duty;
  • (2) A dishonest and fraudulent design by the fiduciary;
  • (3) The assistance by the third party in that design;
  • (4) With knowledge.”

  • Thus, for the purposes of pleading a second limb claim, the categories of knowledge are:

  • (i) actual knowledge;
  • (ii) willfully shutting one’s eyes to the obvious;
  • (iii) willfully and recklessly failing to make such inquiries as an honest and reasonable man would make; and
  • (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man.

  • Farah also established that liability under the second limb of Barnes v Addy is confined to cases where the breach of fiduciary duty amounts to a “dishonest and fraudulent design”: see the analysis by Leeming JA (with whom I agreed) in Hasler v Singtel Optus Pty Ltd (Hasler v Singtel Optus) [2014] NSWCA 266 at [121]- [125]. Farah requires that such an allegation ought to be pleaded and sufficiently particularised: at [170]. For present purposes, what is meant by the phrase “dishonest and fraudulent design” is succinctly explained in the following paragraphs of the judgment of Leeming JA in Hasler v Singtel Optus:

    “[123] The short point is that Lord Selborne’s formulation avoids the potential for dispute as to the meaning of “fraud” in equity, by requiring that there must also be dishonesty on the part of the fiduciary.

    [124] Dishonesty amounts to a transgression of ordinary standards of honest behaviour. It is not necessary to say anything else by way of elaboration, save to confirm that it is not necessary to demonstrate that the person thought about what those standards were. (I have paraphrased Lord Hoffmann’s account in Barlow Clowes International Ltd (in liq) v Eurotrust International Ltd [2006] 1 All ER 333 at [16].)”


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    This tab updated on 18 March 2015