IN 2009, Saudi Arabian securities, held on trust for a Cayman Island company (“SICL”), were transferred in an alleged breach of trust to a Saudi Arabian bank (“Samba”). This transfer ignited a long running dispute between SICL's liquidators and Samba, involving previous trips to the Supreme Court (Akers v Samba [2017] UKSC 6) and Court of Appeal (Samba Financial Group v Byers [2019] EWCA Civ 416). Byers v The Saudi National Bank [2022] EWCA Civ 43 – a knowing receipt claim commenced against Samba but defended by Samba's assignee in the Court of Appeal – is the latest proceeding in this saga. Samba refused to comply with ordered disclosure so could defend the claim on only three grounds: (1) SICL's equitable interests in the disputed securities were extinguished under Saudi Arabian law; (2) no claim in knowing receipt, whether under English or Cayman Island law, could succeed if SICL's equitable interests had been extinguished upon receipt; and (3) if liable, Samba could discharge its liability by paying the securities’ market value (a sum including a “block discount” in view of the share volume) rather than their investment value (a sum reflecting their value to SICL) (at [6]).

Samba succeeded on all three grounds at first instance. The crux of the Court of Appeal's judgment dismissing the appeal, delivered by Newey L.J., was that “the Judge was right to conclude that … ‘a claim in knowing receipt, when dishonest assistance is not alleged, will fail if, at the moment of receipt, the beneficiary's equitable proprietary interest is destroyed or overridden so that the recipient holds the property as beneficial owner’” (at [78]). After decisively finding in the bank's favour on Ground 2, Newey L.J. resoundingly rejected the claimant's arguments that the court should interfere with the judge's factual finding that SICL's equitable interests had been extinguished under Saudi Arabian law (at [112]). Given these conclusions, the Court of Appeal's preference for the securities’ “investment value” to their “market value” as the measure that would have “best determined” the remedy ordered was obiter (at [135]). The remainder of this note focuses on “The Law of Knowing Receipt Issue” (at [9]), which dominated discussion.

Knowing receipt is an equitable form of third-party personal liability. Condensing dicta from previous case law, Newey L.J. said liability derives from “the combination of” two integral components: “the beneficial receipt … of assets which are traceable as representing assets of the plaintiff” and “‘[t]he recipient's state of knowledge’ having been ‘such as to make it unconscionable for him to retain the benefit of the receipt’” (at [18]). While courts have refined these constituent parts, academic commentary has focused on the justification for and operation of knowing receipt liability. Newey L.J.'s conclusion that “a continuing proprietary interest in the relevant property is required” (at [79]) to satisfy knowing receipt's first element was informed by both the available direct authorities and analysis of knowing receipt's fundamental nature. Newey L.J. endorsed Mitchell and Watterson's thesis (“Remedies for Knowing Receipt” in C. Mitchell (ed.), Constructive and Resulting Trusts (Oxford 2010)) that liability is tied to the knowing recipient's custodial duty to restore the misapplied trust property to the claimant. A continuing equitable interest was identified as a “key premise” of this theory as “[i]t is the existence of that equitable interest which gives rise to the custodial duties” incumbent upon knowing recipients (at [49]).

Passages from Court of Appeal, Privy Council and Supreme Court judgments indicating that knowing recipients are subject to custodial duties were cited in support of this analysis. However, the most that these cases show is that restorative duties are owed, they do not demonstrate Mitchell and Watterson's additional supposition that pre-existing equitable rights play a role in their creation. Equity will, after all, subject transferees to new duties owed to persons lacking an enforceable proprietary interest in certain situations: see e.g. Bannister v Bannister [1948] 2 All E.R. 133, Binions v Evans [1972] Ch 359, etc. It could be argued that the knowing recipient's restorative duty is purely a response to their own conduct. Lord Sumption hinted at this point in Williams v Central Bank of Nigeria [2014] UKSC 10 when he grouped knowing recipients alongside dishonest assistants in exposing “themselves to equitable remedies by virtue of their participation in the unlawful misapplication of trust assets” (at [9]).

Nevertheless, the position taken in Byers is persuasive. MacMillan Inc v Bishopsgate Investment Trust plc (No.3) [1995] 1 W.L.R. 978 and Akers v Samba (S.C.) produced direct evidence of the necessity of a “continuing proprietary interest” following forensic examination. Moreover, Newey L.J. hit the nail on the head when said: “[i]f the law treats the receipt of the property as conferring unencumbered title on the recipient, it is difficult to see why retention should be regarded as unconscionable” (at [76]). The problem with the alternative explanation for knowing recipients’ duties is that the relevant conduct element (mere possession of an asset that used to be trust property) and mental element (knowledge of the breach of duty, not dishonesty) are separately and collectively weak. Together they appear inadequate to justify equity raising wholly new custodial duties, particularly when contrasted with other circumstances in which direct rights against property transferees arise.

Two further questions about knowing recipients’ custodial duties remain. First, how might we categorise or classify their trigger? Unjust enrichment was expressly ruled out (see [38]), while Newey L.J. also explained that custodial duties anticipate rather than respond to any wrongful behaviour: “the constructive duty may arise where the recipient has done nothing which could be described as unconscionable” (at [76]). This focus on conscience is significant as Byers adds further weight to calls, spurred on by other knowing receipt cases such as BCCI (Overseas) Ltd. v Akindele [2001] Ch 347 (“Akindele”) and Relfo v Varsani [2014] EWCA Civ 360, to recognise the potential for unconscionable behaviour as a relevant causative event (see e.g. S. Agnew, “The Meaning and Significance of Conscience in Private Law” [2018] C.L.J. 479).

Second, what role do custodial duties play within knowing receipt claims? Does a claim in knowing receipt, as Mitchell and Watterson suggest, involve asking the court to directly enforce the custodial duty? Or, as others contend, are claimants seeking compensation following breach of the custodial duty? Byers adds credence to the former view. The claimants sought “substitutive performance”, Mitchell and Watterson's work was generally endorsed (at [48], [49], [54]) and the importance of restoring the trust fund emphasised in the court's obiter reasoning on the valuation ground (at [135]). This perspective's strength is that it explains why claimants can pursue knowing receipt and available proprietary claims simultaneously (as in Arthur v Attorney General of the Turks & Caicos Islands [2012] UKPC 30). However, the substitutive performance framing was agreed by both parties (at [116]) and fits poorly with the principles governing personal recovery against express trustees discussed in AIB v Mark Redler [2014] UKSC 58.

Finally, Byers raises incidental questions about banks’ liability to knowing receipt claims. The foremost matter is whether the stipulation that receipt be beneficial (Akindele, 455) needs revisiting. This requirement ensures that banks that receive misapplied trust funds in a ministerial capacity are immunised against knowing receipt liability. Banks clearly and unproblematically receive funds ministerially where the bank is subject to an immediate fiduciary duty to credit the sums to an account with a positive balance. As Harpum puts it, “[n]o question as to the title of the trust property is in issue” (“The Stranger as Constructive Trustee” [1986] 102 L.Q.R. 114, 126) as the account holder may be subject to a proprietary or knowing receipt claim. Back-up personal claims against the bank, in either dishonest assistance or inconsistent dealing, are also a possibility should recourse against the account holder prove unviable. The position is more complex where the account is overdrawn. Despite Millett J. suggesting that a bank “receives the money for its own benefit” whenever “the collecting bank uses the money to reduce or discharge the customer's overdraft” (Agip (Africa) Ltd. v Jackson [1990] Ch 265, 292), commentators now argue that banks receive beneficially where money is deposited or transferred by the account holder but ministerially if payment is made by a third party (P. Matthews et al (eds.), Underhill and Hayton: Law of Trusts and Trustees (London 2022), [102.26] ff.).

If the second account is correct, Byers raises the following question in third-party transfer cases: is it justifiable for banks to be immune to knowing receipt liability in cases where crediting the account holder's account will destroy the claimant's continuing equitable interest (e.g. payments which reduce the account holder's overdraft)? The beneficial receipt inhibits banks’ liability, even though the claimant must logically have a continuing equitable interest in their hands when cash is deposited or payment into the receiving bank's clearing account is made (tracing into a bank account with a positive balance would not otherwise be possible). One could say that the possibility of knowing receipt liability is unnecessary in this situation as banks can be liable for inconsistent dealing instead. However, challenging questions then arise about what the appropriate degree of fault for inconsistent dealing is (see Harpum, above) and where it should be set in this situation. Both matters require further thought.