At the end of 2023, the UK Supreme Court handed down judgment in Byers and others v. Saudi National Bank[1]. Unanimously dismissing the appeal, the Supreme Court definitively determined that a claim in knowing receipt cannot be brought if the claimant’s equitable interest in the relevant property has been extinguished – regardless of the fact that the recipient of the property was aware that it was being transferred to it in breach of trust.
Background
The appellants were Saad Investments Co Ltd and its joint liquidators. The claim concerned shares in five Saudi Arabian companies that Maan Al-Sanea had held on trust for Saad Investments but had transferred, in breach of trust, to Samba Financial Group to discharge his own debts. Samba knew that Al-Sanea held the shares on trust for Saad Investments at the time of the transfer, and either knew or should have ascertained that the transfer was a breach of that trust. However, Saudi Arabian law, which applied to the transfer of the shares, does not recognise a distinction between legal and beneficial ownership and, accordingly, the effect of the transfer was that Saad Investments had no continuing proprietary interest in the shares.
Saad Investments and its joint liquidators brought a claim against Samba for knowing receipt.
Knowing receipt
Claims for knowing receipt usually arise where the trustee transfers trust property beneficially owned by the claimant to the defendant in breach of trust, and the defendant learns about that breach before disposing of the property. The moment the defendant learns of the breach of trust, the defendant is obliged to restore the trust property to its equitable owner. While it is in the defendant’s hands, the claimant can make a proprietary claim against the defendant for the return of the property. If the defendant disposes of the property, the claimant can no longer pursue a proprietary claim, but instead can bring a claim of knowing receipt, whereby the defendant has a personal liability to account to the claimant as if the defendant were a trustee of the property.
A claim for knowing receipt cannot be brought against a bona fide purchaser for value without notice (i.e., knowledge) of the breach of trust. In such a case, the claimant’s proprietary equitable interest has been extinguished. If such a purchaser later becomes aware of the breach of trust, that would not resuscitate the claimant’s proprietary equitable interest. And if such a purchaser transferred the property to a transferee who knew that the original transfer to the purchaser was a breach of trust, the claimant would have no claim against that transferee.
The facts of this case were somewhat unusual for a knowing receipt claim in that the trustee (Al-Sanea) had transferred the trust property (the shares) owned by the claimant (Saad Investments) to the defendant (Samba), who knew (or should have known) of the breach of trust, but the defendant had not disposed of the trust property. Usually, the fact that the defendant still held the trust property would mean that the claimant could bring a proprietary claim against the defendant for the return of the property. In this case, due to the fact that Saudi Arabian law extinguished the proprietary equitable interest in the trust property at the time of the transfer, Saad Investments could not bring a proprietary claim.
The question before the courts was whether a claimant could bring a claim for knowing receipt against a defendant when its equitable proprietary interest in the relevant property had been extinguished when the property was transferred to the defendant.
The High Court and the Court of Appeal held that the extinction of the proprietary equitable interest defeats a claim for knowing receipt.
The claimants appealed, arguing that liability in knowing receipt is not about – or based on – matters of equitable title at all, but rather, it is about equity’s historic role as the enforcer of the obligations of conscience. Given the defendant’s knowledge of the breach of trust, it would be unconscionable for it to treat it as its own, and equity will not allow it.
The Supreme Court’s decision
The Supreme Court unanimously dismissed the appeal.
Lord Briggs and Lord Burrows reviewed case law on knowing receipt and concluded that it tended to favour the respondents’ position; but, as there was no authority squarely on point, it was necessary to consider the most basic equitable principles that underlie a claim in knowing receipt.
Lord Briggs found the answer to the question could be determined by looking at the position of a transferee who receives the trust property from a bona fide purchaser but knows that the original transfer from the trustee to the bona fide purchaser was a breach of trust. It is well established that such a transferee receives the property free of any liability to the claimant. The reason for this can only be that the transfer to the bona fide purchaser extinguishes the claimant’s equitable interest for all time, and accordingly, the bona fide purchaser gets the property with clear title – and so too do all their successors. If the appellants’ argument was correct, Saad Investments’ equitable interest in the property would not have been overridden but merely suspended while in the hands of the bona fide purchaser. This is contrary to basic equitable principles.
In response to the appellants’ contention regarding equity’s role as the enforcer of obligations of conscience, Lord Briggs emphasised that while one of the fundamental purposes of equity is to impose constraints upon unconscionable conduct otherwise permitted by the law, it achieves that purpose by laying down well-understood principles. Importantly, equity recognises the need to balance the restraint of unconscionable behaviour with the need to respect the public interest in the certainty and, therefore, marketability of title.
Lord Briggs then set out five ‘powerful reasons of principle’ why a claim in knowing receipt should not survive the extinction of a claimant’s equitable interest:
- There is a deep-rooted contradiction between having clean title and being under an obligation to restore the property to someone else.
- There is a serious lack of logic in the view that a proprietary claim may be killed off due to the extinguishing of the beneficial proprietary interest but a claim in knowing receipt nevertheless remains, with the same liability to return the property to the claimant as if there was a proprietary claim.
- The proposition that a claim in knowing receipt survives despite the extinguishing of the equitable interest by Saudi Arabian law fails to give appropriate respect to the primacy of that law in regulating title to the property.
- The attempted alignment of a claim in knowing receipt with dishonest assistance as a form of liability based upon fault arising from a connection with the breach of trust, but a lesser fault of dishonesty, would create a two-tier structure of fault-based ancillary liability with no justification for doing so.
- In the absence of any original fiduciary relationship between Saad Investments and Samba, or other relationship giving rise to equitable obligations between them, or fraud, there is simply no equity between them capable of giving rise to an equitable claim.
Takeaway
It is, of course, right that equity be applied following well-established principles. Were it to be called upon to combat any perceived unconscionable act – divorced from basic principle – intolerable uncertainty would surely follow. In this case, the application of principle resulted in Saad Investments being apparently left without remedy against Samba due to the quirks of Saudi Arabian law. This may seem to be an unsatisfactory result, but it is one that might have been avoided. As Saad Investment’s counsel conceded, a claim for unjust enrichment may well have succeeded. Unfortunately, the limitation period for such a claim is now long past.
[1] [2023] UKSC 51
Contributors
Alex Radcliffe