The Evolution of Knowing Receipt

Derek Whayman, [email protected]

DRAFT PAPER – Please do not cite without the author’s permission.

1 Abstract The theoretical basis of knowing receipt is still disputed. There are three competing theoretical models of liability, based on: (i) the underlying trust obligations and its property; (ii) the recipient’s fault; and (iii) unjust enrichment. All of these would draw that liability differently, particularly in respect of quantum. This paper argues the fault model is now the dominant one. This is due to two structural changes in equity: first, the classification of accessories (knowing recipients and dishonest assistants) as non-fiduciaries; and second, the application of limiting principles such as causation to breaches of non-fiduciary duty. Recent cases are analysed which turn out to be either consistent with or expressly in agreement with this thesis. Since a fault basis makes dishonest assistance and knowing receipt very similar, the remaining differences are analysed and found to be minor; further anomalies resulting from adherence to the property model of knowing receipt identified; and the authorities which hold them as separate actions are shown to be weak. Accordingly, it is submitted that given the changes, the two actions are better seen as one and the same. 2 Introduction The action in knowing receipt is an invaluable tool in the armoury of the claimant who wants to recover misapplied trust or company property from a stranger to the trust. It might be that the trustee or fiduciary is a man of straw or has disappeared or simply that the recipient is easier to sue. Then, provided the claimant can show that the recipient beneficially received property traceable to a breach of trust of fiduciary duty with cognisance of that breach, a personal claim exists to the value of that property.

This paper is concerned to trace recent developments in knowing receipt. These developments are situated in the debate over the underlying theoretical model of knowing receipt. Lewin on Trusts puts the matter succinctly: the existing debate over the basis of knowing receipt has ‘not yet been rationalised by the higher courts’. Three models (or theories) are identified: (i) the property basis: liability derives from the property received through the equitable proprietary or tracing claim; (ii) the fault or unconscionability basis: it is a free-standing equitable wrong; or (iii) it is a form of restitution for unjust enrichment.1 That the action exists and provides for personal liability is not controversial. What these theoretical models predict and what is controversial are the precise contours of the liability and particularly the remedies and quantum available. That is why they are important.

These theories are largely worked out inductively from the decisions of the courts rather than deductively from first principles or broad statements made by judges.

1 John Mowbray QC and others, Lewin on Trusts (18th edn, Sweet & Maxwell 2011) [42–25]. In Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 AC 164 [104]–[105] Lord Millett uses ‘property’ and fault’ and to define the bases of knowing receipt and dishonest assistance respectively.

1 This purpose of this paper is to demonstrate the recent court decisions adhere to the fault model and not the others.

In doing so, it first sets out the theoretical models and compares their predictions in sections 3–5. Next, in section 6, it examines the related structural change in equity which cleaved differences between fiduciary duties and non-fiduciary duties. Then, in section 7, it looks at three recent knowing receipt cases that are either consistent with or expressly adopt this change. The precise way fault is infused into the decisions is examined in section 8. Finally, since a fault model of knowing receipt renders it fundamentally similar to the related action of dishonest assistance, in section 9 the argument is made that they are essentially the same action. In doing so, further anomalies from adherence to property model reasoning, as yet untested by the courts, are identified; the differences between the ‘knowing’ part of the two actions is scrutinised and found to be small; and lastly the authority standing against this characterisation is shown to be weak.

3 Property Models 3.1 Origins The locus classicus conventionally cited in definition of the action of knowing receipt is Barnes v Addy. Lord Selborne LC’s statement of the law is terse, holding that accessories will be made ‘constructive trustees’ if they receive and become chargeable with some part of the trust property, or [if] they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.2 ‘Constructive trustee is, as Arden LJ puts it, a ‘portmanteau expression … that can be used to define the remedies for different sorts of causes of action, including breach of trust, and different types of relief.’3 It is therefore necessary to look behind the phrase to determine what the remedy is.

Charles Harpum traces the origin of knowing receipt as evolving from the tracing (or equitable proprietary) claim.4 There, unless the recipient is equity’s darling – the bona fide purchaser of the legal interest for value without notice of the breach of trust – she is bound by the equity in the property and must deliver it up in specie to the beneficiary. The very early knowing receipt case of Wilson v Moore (from 1834, some 40 years before Barnes v Addy) cited earlier tracing cases as authority and fixed the defendant with liability in rem for the property remaining and in personam for the property dissipated.5 This neatly illustrates the indemnificatory function of knowing receipt. Indeed, this is where knowing receipt comes into its own, when the recipient has passed on the property. Where the proprietary equitable claim might be useless, personal liability in knowing receipt may remain.

‘Constructive trusteeship’ here reflects the same duties as express trusteeship: in rem custodial duties including those to deliver up the trust property in specie married to an in personam liability to account for the money value of that which is passed on.

2 (1873–74) LR 9 Ch App 244 (CA) 251. 3 Charter plc v City Index Ltd [2007] EWCA Civ 1382, [2008] Ch 313 [64]. 4 Charles Harpum, ‘The stranger as constructive trustee: Part 1’ (1986) 102 LQR 114; Charles Harpum, ‘The stranger as constructive trustee: Part 2’ (1986) 102 LQR 267; Charles Harpum, ‘Liability for Intermeddling with Trusts’ (1987) 50 MLR 217, 220. 5 Wilson v Moore (1834) 1 My & K 337, 39 ER 709. Harpum also cites Keane v Robarts (1819) 4 Madd 332, 56 ER 728, noting that these cases were influenced by even earlier tracing cases.

2 This explains why liability may be founded on receipt of the traceable proceeds of trust property as well as than the property itself; it derives from the trust interest in the property.6

Harpum is also anxious to point out there was no difference in the requisite standard of cognisance of the breach of trust between the knowing receipt and the tracing claim at this point, which was notice. Indeed, until around the 1980s for the most part the courts agreed.7 This, then, is the basic property model.

3.2 Transmitted Liability Dicta The very early cases8 do not spell out this ‘transmitted liability’ from trustee to recipient, but this can be put down to the terse judicial style of the time which often lacked reasoning. Nonetheless, an explanation was given only slightly later, in the mid-nineteenth century: This wrongful receipt and conversion of trust property place the receiver in the same situation as the trustee … he becomes subject in a Court of Equity to the same rights and remedies as … the fraudulent trustee.9 The cases also speak of property being ‘held upon the same trusts’,10 ‘a transmitted fiduciary obligation’,11 and that the accessory ‘can be in no better position than an express trustee’.12 And there was something of a revival of this in the 21st century by the now-Chancellor, Sir Terence Etherton, in Arthur v Attorney General of the Turks & Caicos Islands: The recipient’s personal liability to account as a constructive trustee by virtue of knowing receipt means that the recipient is subject to custodial duties which are the same as those voluntarily assumed by express trustees … The recipient’s core duty is to restore the misapplied trust property.13 3.3 Consequences Since trust and fiduciary liability is strict with no need for fault,14 it follows the same applies for recipient liability, save for the requirement of notice of the breach of trust. Harpum’s remarks about the standard of cognisance must be correct as a matter of pure logic – because the personal claim derives from the proprietary one which is founded upon mere notice. There can only be one standard.

Moreover the limiting principles familiar from the law of damages do not apply.15 There is no place for remoteness, causation, contributory fault or mitigation of damage save that there must the slenderest connection between the loss and the

6 El Ajou v Dollar Land Holdings Plc (No 1) [1994] 2 All ER 685 (CA) 700. 7 Karak Rubber Co Ltd v Burden (No 2) [1971] 1 WLR 602 (Ch) 633–634, 636–637; Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555 (Ch) 1582–1583; Belmont Finance Corporation v Williams Furniture Ltd (No 2) [1980] 1 All ER 393 (CA) 405; Agip (Africa) Ltd v Jackson [1991] Ch 547 (CA). 8 (n 6). 9 Rolfe v Gregory (1865) 4 De GJ&S 576, 578; 46 ER 1042,1043. 10 Corser v Cartwright (1875) LR 7 HL 731 (DC) 741. 11 John v Dodwell & Co Ltd [1918] AC 563 (PC) 569. 12 Re Bell’s Indenture [1980] 1 WLR 1217 (Ch) 1236. This case has been overruled: Dubai Aluminium Co Ltd v Salaam [2002] UKHL 48, [2003] 2 AC 366 [143]. 13 [2012] UKPC 30 [37]. 14 Save for the exception in the Trustee Act 1925 s 61. 15 There is an ill-defined exception where causation applies: Target Holdings Ltd v Redferns [1996] 1 AC 421 (HL).

3 default in the ‘but for’ sense.16 Those limiting principles apply to damages, whereas personal liability in equity ‘was always for an equitable debt or liability in the nature of debt.’17 Thus knowing receipt liability would similarly be immune to these considerations. However, this assertion does require explanation for it to be anything more than mere analogy. The missing step in the reasoning is that the liability is like a debt because it too is, in Austinian terms, the performance of a primary obligation rather than a secondary obligation to make good the failure to perform that primary obligation, where the law is readier to step in and modify those obligations. Thus liability is transmitted to the accessory without modification.

3.4 Varieties of Property Model It is apparent that there could be more than one property model depending on exactly how the liability is so derived. Commentators have developed different models accordingly. They are usually developed inductively from the remedies awarded. For instance, since personal liability is not limited to the value of the property received but its highest value,18 that supports the proposition that it is the same liability as the express trustees.

Mitchell and Watterson go further. As well as this, they rely on the language of ‘constructive trusteeship’ used by the courts to support their view. For them liability is ‘distinctive, primary, custodial liability which closely resembles the liability of express trustees to account for the trust property with which they are charged’.19 More particularly, the derivation process looks very closely to the property actually received rather than the broader trust obligations.

In illuminating this, it is useful to contrast it with a dishonest assistance model. Elliott and Mitchell’s theoretical model of dishonest assistance is of secondary liability derivative not of the property received (for there is not necessarily any property received) but of the liability of the express trustee, with an additional liability as an independent wrong in respect of his own profits made with are susceptible to being disgorged.20

Now suppose a trustee breaches the trust by misappropriating shares, selling them and giving the proceeds to the accessory (‘accessory’ is used hereafter to refer to both knowing recipients and dishonest assistants). The share price increases. Under

16 Brickenden v London Loan & Savings Co [1934] 3 DLR 465 (PC); Re Dawson [1966] 2 NSWR 211, approved in Bartlett v Barclays Bank Trust Co Ltd (Nos 1 and 2) [1980] Ch 515 (Ch) 543. Below, section 8.5, on page 16. 17 Ex p Adamson, Re Collie (1878) 8 Ch D 807 (CA) 819. In Bartlett v Barclays Bank Trust Co Ltd (Nos 1 and 2) (n 16) 539, leading counsel described the contention that the claim was for damages as ‘heresy’. 18 Eden v Ridsdales Railway Lamp and Lighting Company, Ltd (1889) LR 23 QBD 368 (CA) 371. 19 Charles Mitchell and Stephen Watterson, ‘Remedies for Knowing Receipt’ in Charles Mitchell (ed), Constructive and Resulting Trusts (Hart 2010) 219. See also Charles Mitchell, ‘Stewardship of property and liability to account’ [2014] Conv 215. 20 Steven B Elliott and Charles Mitchell, ‘Remedies for Dishonest Assistance’ (2004) 67 MLR 16. Note that this model was later restated by Mitchell and Watterson as secondary only insofar as it is founded upon another’s primary wrong: Mitchell and Watterson (n 19) 152. This pushes it closer to the model proposed by Ridge where liability is ‘best seen as a primary liability based upon D’s exploitation of C’s vulnerability … The nature of D’s wrongdoing is distinct from that of [the fiduciary] who breaches an obligation of loyalty’: Pauline Ridge, ‘Justifying the remedies for dishonest assistance’ (2008) 124 LQR 445, 467.

4 the primary knowing receipt model, liability is calculated by reference to the property passed on, i.e. the value of the money which does not increase. Under the secondary dishonest assistance model, liability is calculated by reference to the trust property, i.e. it is the new, higher share price. If the shares themselves had been passed on, the knowing recipient would be liable for the increased value.21

Thus in property models liability is constructed syllogistically from a small set of interlocking axioms – which may vary from model to model – to create a larger set of rules determining liability and remedy. Because the underlying trust liability is strict, fault does not appear in these models save for the need for notice upon which constructive trusteeship is founded.

4 The Fault Model The difficulty with these models is just that. Insufficient attention is paid to fault compared with more recent cases. The equity’s darling defence only applies to purchasers, and only to purchasers without notice. This means that an innocent volunteer does not qualify. Neither will a purchaser fixed with notice. The issue came to a head in Re Montagu’s Settlement Trusts,22 decided by Megarry V-C, where the doctrine of notice was insufficiently flexible to accommodate the desired decision.

Re Montagu’s ST concerned the family settlements of the Dukes of Manchester. The tenth Duke received valuable chattels from the ninth Duke’s settlement that he was not entitled to absolutely. He disposed of a number of them. They ought to have gone into a resettlement of which the eleventh Duke was a beneficiary. The eleventh Duke sued the tenth’s estate. The tenth Duke’s solicitor had had actual notice of the trusts, but had forgotten about them. The tenth Duke had relied on his solicitor and did not know of the extant trust. The problem is that a solicitor’s notice, actual or constructive, is imputed to his client. Therefore, applying a property model, the defendant would have been made personally liable for the property he had innocently dissipated.

What Megarry V-C did was to establish a difference between notice and knowledge as standards of cognisance. Vinelott J describes this difference very simply: “[N]otice” is often used in a sense or in contexts where the facts do not support the inference of knowledge. A man may have actual notice of a fact and yet not know it. He may have been supplied in the course of a conveyancing transaction with a document and so have actual notice of its content, but he may not in fact have read it; or he may have read it some time ago and have forgotten its content.23 Thus knowledge is a more subjective construct that notice.24 Moreover, Megarry V-C doubted whether knowledge, as opposed to notice, could ever be imputed.25 Even in Karak Rubber Co Ltd v Burden (No 2) – where Brightman J thought mere notice was sufficient to found liability in knowing receipt – he held that it required ‘actual or constructive notice’ conspicuously failing to mention imputed notice.26

21 Mitchell and Watterson (n 19) 154. 22 [1987] Ch 264 (Ch). 23 Eagle Trust plc v SBC Securities Ltd [1993] 1 WLR 484 (Ch) 492–494. 24 Notwithstanding that it still has constructive elements. Below, section 9.2, on page 19. 25 Re Montagu’s ST (n 22) 285. 26 (n 7) 634. The discussion of notice concerned imputing knowledge the recipient had closed his eyes to. Note that in respect of only requiring notice to found knowing receipt, Karak Rubber has not

5 The distinction was justified by reference to the two remedies. The ‘careless recipient’, like the tenth Duke, would be liable so long as he kept the property and thus did not have to reach into his own pocket, but would be permitted to innocently dissipate it unless and until he knew a great deal more about the wrongdoing.27

While it is readily accepted in the textbooks that Re Montagu’s ST created a distinction between the personal and proprietary claim,28 it is less well documented that it seriously undermined the property basis of knowing receipt. As noted, property models, reliant on the transmission of the trust or fiduciary obligations through the receipt of property, require only notice on the part of the recipient. Requiring a higher standard of cognisance to found the action is incompatible with this basis.

5 Unjust Enrichment There is another way of solving the Duke of Manchester’s problem. Restitution scholars have been busy over the last 50 years or so rationalising disparate parts of English law into an intellectually coherent whole. Since, at least as a matter of common sense, the recipient of trust property belonging in equity to another has unjustly enriched the defendant, it seems inevitable that many have tried to bring in the action of knowing receipt into the law of unjust enrichment.

5.1.1 Reconceptualization The theoretical basis of liability in unjust enrichment (or restitution) is beautifully simple. No fault is required on the part of the recipient. Instead what must be found is: (i) that the defendant has been enriched; (ii) that this enrichment was gained at the claimant’s expense; and (iii) that the defendant’s enrichment at the claimant’s expense was unjust.29 If all three are satisfied, a further question arises as to whether there are any defences, for otherwise liability is strict. It is clear that the receipt of property originating in a breach of trust would bring the recipient into that umbrella category, ‘unjust enrichment’,30 so liability would turn on the availability of a defence, most notably bona fide change of position in addition to bona fide purchase.31

The similarities are obvious. Under the present law (and supported by both the property and fault models), mala fides will defeat both defences.32 Moreover, the careless recipient will only be liable for what property remains in his hands when he been followed by recent authority from at least Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 (CA) onwards. 27 Re Montagu’s ST (n 22) 272. 28 E.g. Jill Martin, Hanbury and Martin, Modern Equity (19th edn, Sweet & Maxwell 2012) [12–016]; Lewin on Trusts (n 1) [42–50]; John McGhee, Snell’s Equity (32nd edn, Sweet & Maxwell 2010) [30– 071]. 29 C C J Mitchell, P Mitchell and S Watterson, Goff & Jones: The Law of Unjust Enrichment (8th edn, Sweet & Maxwell 2011) [1–09]. 30 Though an enrichment without justification does not always lead to the remedy of restitution: Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] AC 70 (HL) 196. 31 Goff & Jones (n 29) [1–09]. 32 It would be difficult to compare how the bona fides requirement works across both types of liability because of the evidence overlap between good faith (or the lack of it) and notice or knowledge of the breach of trust, notwithstanding that good faith is indeed a separate requirement of the bona fide purchase defence to the absence of notice: Lewin on Trusts (n 1) [41–119].

6 acquires knowledge of the trust interest when personal liability arises – change of position is only a partial defence, operating to the extent of the change of position. Once the recipient acquires knowledge of the breach of trust, he can no longer change his position further bona fide.33 The temporal limit of liability-free dissipation in the fault model matches precisely the temporal limit of the change of position defence in the restitution model. Moreover, the defence of bona fide purchase, a full defence in property law, is also probably a full defence in unjust enrichment.34 All this means that the tenth Duke would have been able to say that, notwithstanding his enrichment at the expense of his son, he had honestly and genuinely believed he was entitled to dispose of the property. That he did so in reliance of the receipt is trite. Accordingly, he would have availed himself of the defence.

5.2 Irreconcilable Differences However, below the surface there are theoretical and practical differences. The most significant is that the change of position requires a causal, not transactional, link to the property.35 If a volunteer carelessly receives £1,000 of trust money and spends it on the rent, there is no liability in knowing receipt even after she is made aware of the breach of trust. The residual liability depends on a transactional link. However, she has not changed her position – the rent would have been paid in any event, not but for the receipt. Therefore liability for restitution remains. It is an oft-made criticism that the rules in knowing receipt are too generous to the recipient: ‘There is no argument for keeping what one was never intended to have.’36 Conversely, if our careless recipient made a whim purchase from and on account of her new-found wealth, that would constitute a change of position (due to causation being made out), but under the tracing claim she would have to yield up the proceeds irrespective of fault or causation.

Moreover, if there is a disgorgement remedy available in knowing receipt – and following Novoship (UK) Ltd v Nikitin37 it seems that there is – then the unjust enrichment framework cannot apply at all. This is because in restitution disgorgement is not available in restitution for unjust enrichment. It is only available in restitution for wrongs. This follows because disgorgement can only be a response to a wrong. Hence there would be a need for two models to describe knowing receipt.

It is therefore more accurate to say that there are principles reminiscent of unjust enrichment in knowing receipt rather than that unjust enrichment is a contending

33 Re Diplock, Diplock v Wintle [1946] 1 Ch 465 (CA) 477. Contrast this with the first limb of the Equity’s Darling defence – purchase. The purchase money must be paid. So, if the consideration is £500 and the recipient pays only £400 and then acquires notice, he is bound: Story v Windsor (1743) 2 Atk 630, 26 ER 776. 34 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 (HL); Peter Birks, ‘The English recognition of unjust enrichment’ [1991] LMCLQ 473, 486; Goff & Jones (n 29) [29–09]. Cf Armstrong DLW GmbH v Winnington Networks Ltd [2012] EWHC 10 (Ch), [2013] Ch 156 [105]; William Swadling, ‘Restitution and Bona Fide Purchase’ in William Swadling (ed), The Limits of Restitutionary Claims: A Comparative Analysis (UKNCCL 1997). The debate centres around whether bona fide purchase is merely to rectify defects in title or has a wider application. 35 Goff & Jones (n 29) [27–25]. 36 Peter Birks, An Introduction to the Law of Restitution (Clarendon 1989) 239. See also Peter Birks, ‘Receipt’ in Peter Birks and Arianna Pretto (eds), Breach of Trust (Hart 2002); Jill Martin, ‘Recipient liability after Westdeutsche’ [1998] Conv 13. 37 [2014] EWCA Civ 908, [2014] WLR (D) 297 [82], [93].

7 model of it. In any event, either interpretation of Re Montagu’s ST goes against property model principles.

6 Limiting Transmitted Liability: Non-Fiduciaries and Non-Fiduciary Duties 6.1 Dicta The 20th century cases shied away from equating the liabilities of the recipient with the express trustee. The trend was in the other direction. Indeed, a famous dictum of Ungoed-Thomas J reads that constructive trusteeship is ‘nothing more than a formula for equitable relief.’38

6.2 Decisions A further limitation to ‘transmitted liability’ constructive trusteeship was confirmed in the new millennium. It was held at the highest level that accessories to a breach of trust are not fiduciaries, most recently in Williams v Central Bank of Nigeria. Accessories do not take on fiduciary responsibilities voluntarily; instead they act adversely to the trust or prior fiduciary relationship from the outset.39 Now, the transmitted liability dicta can mean no more than liability is ‘as if’ the accessory was a trustee. The door is thereby opened to finding principled distinctions to modify the liability of accessories vis-à-vis fiduciaries.

A clear difference has been created for the purpose of limitation. For express trustees, there is no limitation period, but for accessories a six-year time limit is applied.40 Another break with transmitted liability was seen in the related action of dishonest assistance. Rightly or wrongly, Barnes v Addy was interpreted as requiring dishonesty on the part of the express trustee to found liability for the accessory. This requirement was overruled in the case of Royal Brunei Airlines Sdn Bhd v Tan which held that what founds liability is dishonesty on the part of the accessory. No dishonesty on the part of the trustee is necessary.41

Moreover, the incidents of the fiduciary relationship give a principled justification for imposing stricter liability upon a fiduciary than a non-fiduciary. That is not to say that non-fiduciary accessories should go unpunished, quite the contrary: if the trust or fiduciary relationship is to be protected, then accessories should be held liable too. But the trustee is held strictly liable for the trust fund. She must account for it or replace it from her own pocket if she cannot. Unauthorised profits are appropriated to the beneficiaries no matter whether the fiduciary was innocent or not, or whether the trust had the capacity to take the unauthorised opportunity or not.42 For consequential losses, equitable compensation against fiduciaries is tempered by causation, but there is in effect a presumption of causation against the fiduciary.43

38 Selangor v Cradock (No 3) (n 7) 1582. See also above, on page 3, text to n 2. 39 [2014] UKSC 10, [2014] 2 WLR 355. See also Dubai Aluminium Co Ltd v Salaam (n 12) [141]. 40 Williams v Central Bank of Nigeria (n 39). The express trustee category would also include trustees de son tort and de facto trustees because they held the trust property consistently with the original trust instead of adversely to it. See also Paragon Finance plc v D B Thakerar & Co [1999] 1 All ER 400 (CA). 41 [1995] 2 AC 378 (PC) 385, 392. 42 Boardman v Phipps [1967] AC 46 (HL). 43 Swindle v Harrison [1997] 4 All ER 705 (CA). See Joshua Getzler, ‘Equitable Compensation and the Regulation of Fiduciary Relationships’ in Peter Birks and Francis Rose (eds), Restitution and Equity: Resulting trusts and equitable compensation (Mansfield Press 2000); Brickenden v London

8 For the accessory, such presumptions of fault are inapt because the accessory never undertook the duty of loyalty and does not have the powers of investment for which the presumptions are justified.

A related development is the distinction between fiduciary and non-fiduciary duties. Traditionally, it was considered that someone is subject to fiduciary duties because he is a fiduciary. Indeed, in Nocton v Lord Ashburton, the defendant was in breach of his ‘fiduciary duty of care’.44 However, in Bristol and West Building Society v Mothew, Millett LJ cleaved an important distinction. Not all the duties of a fiduciary are fiduciary duties. Nowadays, the equitable duty of care is one such non-fiduciary duty. Moreover, the common law limiting principles of ‘causation, remoteness of damage and measure of damages’ can be applied ‘by analogy’ to breach of non-fiduciary duty.45 Presumably this would be without the reverse onus just noted. Logically, therefore, limiting principles should be applied to knowing receipt (and dishonest assistance) claims because they must, a fortiori, concern breach of non-fiduciary duties.46

It must be noted that these principles have not been applied in proprietary tracing claims and indeed were rejected in Foskett v McKeown. In Foskett the substitute property was a life insurance policy. The first two instalments had been paid with non-trust money; misappropriated funds had been used to pay the latter instalments. Given the peculiar structure of this complex financial instrument, even if the latter instalments had not been paid at all, upon the policyholder’s death the same sum would have been paid out because the policy was up to date. Hence there was a transactional, but not causal, link. Nonetheless, the House of Lords allowed the claim.47

6.3 Summary After Re Montagu’s ST and applying these principles, knowing receipt appears to be free from any tight association with the property or its underlying fiduciary obligations. Accordingly, the ‘transmitted liability’ dicta in the old cases must be read with this in mind.

Sir Terence Etherton’s obiter dictum goes somewhat against the grain in this respect. Indeed, for the strongest dicta in the English authorities supporting transmitted liability, Mitchell and Watterson rely on cases reported between 1844 and 1918, well before the change in judicial attitude and the changes just discussed.48

Loan & Savings Co (n 16) 469. See also Charles Mitchell, ‘Equitable Compensation for Breach of Fiduciary Duty’ (2013) 66 CLP 307, 329; J D Heydon, ‘Causal relationships between a fiduciary’s default and the principal’s loss’ (1994) 110 LQR 328; Sirko Harder, ‘Equitable compensation for a fiduciary’s non-disclosure’ (2011) 5 J Eq 34. 44 [1914] AC 932 (HL) 946. 45 [1998] Ch 1 (CA) 18, 17. 46 As causation was in Novoship (UK) Ltd v Nikitin (n 37) [106]. 47 [2001] 1 AC 102 (HL). 48 Mitchell and Watterson (n 19) 130–131: from Sheridan v Joyce (1844) 1 Jo & Lat 401, 7 Ir Eq R 115 to John v Dodwell & Co Ltd (n 11).

9 7 Three Troublesome Cases Now three troublesome knowing receipt cases can be analysed. They adhere to the fault model and are incompatible with property models.

7.1 Bank of Credit and Commerce International (Overseas) Ltd v Akindele: Quantum BCCI v Akindele is perhaps most well-known for Nourse LJ’s summary rejection of recasting knowing receipt into the law of unjust enrichment, as well as being yet another milestone in the debate over the standard of cognisance required of the breach of trust in knowing receipt. However, there is another facet of it, unargued before the courts, that makes it, although not obviously, a difficult case.

The facts of Akindele, stated briefly, follow. Chief Akindele invested $10m in the BCCI group in 1985 by agreement with a BCCI group company, International Credit and Investment Co (Overseas) Ltd (‘ICIC’) to purchase shares in BCCI Holdings. At the time, BCCI was considered to be a reputable international bank. With hindsight, we can say this was far from the truth. By 1988 Akindele had heard rumours about the integrity of the BCCI group. Accordingly, he exercised his right to exit the agreement early and was paid $16.7m by BCCI (Overseas) (‘BCCI’), representing a $6.7m return on his investment. The money was paid out by BCCI and was a breach of fiduciary duty because it was not for BCCI to pay – it was for ICIC to pay. ICIC could not afford to pay, hence the scheme.

However, none of it could have traceably come from Akindele’s money. ICIC could not afford to pay him, so presumably any monies traceable to his would have been swallowed by its overdraft rendering tracing impossible, even supposing Akindele’s money was held on trust and was not merely a debt. So Akindele received the entire $16.7m traceable to a breach of fiduciary duty. On property model reasoning, the entire receipt is recoverable.

No moral opprobrium was heaped upon Akindele. On the contrary, at first instance, Carnwath J held that Akindele was entitled to ‘take steps to protect his own interest,’ i.e. he could get out before the rumours of impropriety crystallised into knowledge of a specific breach of fiduciary duty.49 There is a normative imperative here – that persons in Akindele’s position ought to have an incentive to exit and be allowed to retain what they have earned so far. The alternative would encourage them to take a punt on leaving their funds in such a scheme in the hope of higher returns, given that they stand to lose everything if caught either way.

But the fact remains that if Akindele was liable, the entire sum should have been recoverable. Yet the claim was for only $6.7m. Perhaps the liquidators made a terrible mistake. On the other hand, there are perfectly good principles which explain that figure and these are considered when analysing the Akai case.

49 Bank of Credit and Commerce International (Overseas) Ltd v Akindele [1999] BCC 669 (Ch) 682. The only criticism of Carnwath J’s judgment made by the Court of Appeal is that dishonesty was too high a standard. ‘Unconscionability’, as the Court of Appeal define the standard, does not require that the recipient act dishonestly, as confirmed in Starglade Properties Ltd v Nash [2010] EWHC 148 (Ch) [57], this matter not challenged on appeal: Starglade Properties Ltd v Nash [2010] EWCA Civ 1314.

10 7.2 Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd: Causation This problem was revisited in the case of Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd where the quantum in knowing receipt was very much in issue.50 It was a case of the Hong Kong Court of Final Appeal, but the leading judgment was given by a familiar name, one Lord Neuberger of Abbotsbury, now president of the UK Supreme Court. It is therefore suggested that his opinion carries approximately the weight of a Privy Council judgment. Lord Neuberger actually decided the case on the common law basis of lack of authority and the tort of conversion. However, since the case was argued in the alternative in knowing receipt, he embarked on a series of obiter dicta concerning how the case would have been decided in equity.

The facts, stated simply, are these. The defaulting fiduciary, one Mr Ting, was director of two companies, Singer NV and what was to become Akai Holdings (‘Akai’). ‘The bank’ (Kasikorn or Thai Farmers Bank) had loaned money to Singer NV and in an error of judgment had advanced some US$30m upon seriously deficient security. To protect Singer NV, Ting secured a loan for Akai to discharge that loan held by Singer NV which was by then on the verge of default. Clearly this was to the manifest disadvantage of Akai because it received nothing in return. Nonetheless, the bank proceeded; if it had not, it would have had to report the first loan’s default to the Banks of Thailand and England and this would have caused it what were coyly described as ‘problems’. One may speculate that that led it to ignore the patent defects in the evidence of Ting’s authority.51

The bank received US$50.1m of shares in Akai Electric (a subsidiary mostly owned by Akai) on pledge as security for a loan representing some 143% of the loan’s value. It later returned some 5.5m shares because their value had increased and fewer of them amounted to sufficient collateral. When Akai defaulted on the loan, the shares were worth US$32.9m compared to the accrued debt of US$31.3m. The bank delayed, obtaining various clearances, and then sold the remaining shares for their then market value of US$20.5m. The bank later made good its loss by proving in the insolvency and recovering the balance of the loan.

Lord Neuberger held that given what the bank knew (which included rather more than the basic facts recited above), it had acted irrationally and therefore Ting, lacking actual authority, also lacked the requisite apparent authority to bind Akai to the transaction. Therefore the loan and pledge agreements were void and the bank had converted Akai’s property to its own use. In conversion, the quantum is measured at the date of the conversion and was therefore US$20.5m.52

In the alternative in knowing receipt, the latent Akindele problem remains. Applying property model thinking, the knowing recipient is fixed with the duty to return the property immediately, not to restore it on demand. At that point the property was the shares, and they were valued at US$50.1m. The claimant is entitled to the full sum

50 [2010] HKCFA 63, (2010) 13 HKCFAR 479 (Hong Kong Court of Final Appeal). 51 Ibid [27], [119]. 52 Mercer v Jones (1813) 3 Camp 477, 170 ER 1452; Henderson & Co v Williams [1895] 1 QB 521 (CA).

11 and a lien over the property.53 Much like in the cases of Target Holdings v Redferns, and Bristol & West Building Society v Mothew,54 the claimants had pursued the case in equity on account of its seemingly more generous rules of compensation. But it would have been an undeserved windfall – had they kept the shares, Akai would have held on to them until they were worthless and, ironically, were profiting from the wrong done against them.55

Lord Neuberger hit upon another method to come to the sum of US$20.5m. He applied Target Holdings v Redferns. In other words, the rules of causation applied.56 The ‘losses’ were caused by market movements and not the bank’s actions; it was perfectly reasonable to wait for clearance to sell.

Likewise, the application of causation would yield the quantum claimed (but ultimately denied) in Akindele, because Akindele’s alleged behaviour was not the source of the principal sum, but only of his gain. Given his decision to exit early, had Akindele known of the truth behind BCCI, he would not have invested in the first place.

Note that it is not necessary to rely on Target Holdings. It is now clear that accessories are not fiduciaries and thus the limiting principles such as causation apply. Hence if Target Holdings – applying causation to a fiduciary – is overruled it makes no difference to accessorial liability.57

7.3 Novoship (UK) Ltd v Nikitin: Causation and Account of Profits Novoship (UK) Ltd v Nikitin was a dishonest assistance case. However, much of the judgment deals with both knowing receipt and dishonest assistance on the same footing because they both concern accessorial liability of a non-fiduciary character.58

The case concerned a complex set of relationships dominated by bribery. The defendant Mikhaylyuk, a director of Novoship (UK) Ltd (‘Novoship’), breached his fiduciary duty to Novoship by demanding bribes as the price of letting Novoship’s vessels to various charterers. The defendants Nikitin and Ruperti dishonestly

53 Re Oatway [1903] 2 Ch 356 (Ch). 54 (n 15); (n 45). 55 Thai Chamkat v Akai (n 50) [154]. 56 (n 15). Note that Lord Neuberger had to steer around the case of Criterion Properties plc v Stratford UK Properties LLC [2004] UKHL 28, [2004] 1 WLR 1846, where Lord Nicholls held that cases such as Akindele should be dealt with using the common law principles of want of authority and thus in conversion, much as Akai was. Lord Neuberger distinguished Criterion v Stratford by noting that it concerned an executory, not executed, contract. One might also point to the fact, as Lord Nicholls did not, that in Akindele there seems to have been apparent authority and thus the contract would not have been void, and hence an action in conversion would not have succeeded: Matthew Conaglen and Richard Nolan, ‘Contracts and knowing receipt: principles and application’ (2013) 129 LQR 359. The application of causation had previously been suggested, obiter, in Brown v Bennett [1999] 1 BCLC 649 (CA) 657. Further analysis of the court’s application of causation is discussed below in section 8, on page 14. 57 Novoship (UK) Ltd v Nikitin (n 37); Williams v Central Bank of Nigeria (n 39). AIB Group (UK) Plc v Mark Redler & Co Solicitors [2013] EWCA Civ 45, [2013] PNLR 19 – a simple application of Target Holdings on the facts – went to the Supreme Court in June 2014, where one suspects a challenge to the principles of that case took place: Supreme Court, ‘Case Details: AIB Group (UK) PLC (Appellant) v Mark Redler & Co. Solicitors (Respondent)’ accessed 28 July 2014. 58 (n 37) [68] et seq and [82]; especially [86].

12 assisted Mikhaylyuk through a scheme where Mikhaylyuk required Ruperti to pay bribes to himself as well as a company owned and controlled by Nikitin, Henriot Finance Ltd (‘Henriot’).

The obligation to return the bribe monies is uncontroversial. The issue of concern is the availability of an account of profits. The profit in issue – some $109m – was due to charters made between Novoship and Henriot which were then sub-chartered to Nikitin’s clients. What was sought was therefore a private profit of the accessory, not that of the principal. However, there was a clear causal link – without the dishonest assistance, Nikitin could not have made the profits because Mikhaylyuk would not have contracted with him; by the time of the Henriot charters the relationship had not yet been ‘cleansed’.

The head charters between Novoship and Henriot had been made at commercial rates, albeit at the low end of the market. However, the profit was due to the market movements which had allowed Nikitin to sub-charter at a large profit. Nikitin had read the market well, and since Mikhaylyuk had obtained commercial rates, the profit was not – or not largely – at the expense of Novoship.

The court held that account of profits is available in principle, but not on these facts. This is because the approach to causation adopted was the contractual one. Rather than simple ‘but for’ causation, effective causation was required. The effective cause in Novoship was the market and Nikitin’s skill, where the dishonest assistance gave no more than occasion for the profits. The difference was largely ‘an application of common sense’.59

In respect of the different action of knowing receipt, much of Novoship is obiter dictum. However, what is remarkable are the five propositions of law the case lays down.

First, account of profits is available as against a dishonest assistant and a knowing recipient alike.60 Second, it is a personal remedy.61 Third, the remedy is discretionary, applying A-G v Blake;62 one of the factors to be thereby tested is proportionality.63 Fourth, the profits in question are those of the accessory, not of the fiduciary or express trustee.64 Fifth, since accessories (both knowing recipients and

59 Ibid [114], [108], applying Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360 (CA) 1374. The court expressly made the connection to ‘common sense’ causation as described in Target Holdings v Redferns (n 15) 439. 60 Novoship (UK) Ltd v Nikitin (n 37) [66]–[85], [86]–[93]; especially [86]. 61 Ibid [66]. N.B. In Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, [2012] Ch 453 [46]–[47], [53], [90], Lord Neuberger claimed equitable compensation was flexible enough to be a personal disgorgement remedy going beyond the principal sum to reach the profits made from it. Sinclair was overruled by FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45, [2014] 3 WLR 535 [50] but only insofar as it relied on the cases of Lister & Co v Stubbs (1890) 45 Ch D 1 (CA) and Metropolitan Bank v Heiron (1880) 5 Ex D 319 (CA). Therefore this part should still stand. However, despite extensive discussion of a personal disgorgement remedy during the hearing of FHR, the matter was not brought up in the judgment, presumably because it was not necessary to decide, a proprietary remedy having been granted. 62 [2001] 1 AC 268 (HL). 63 Novoship (UK) Ltd v Nikitin (n 37) [119]. 64 Ibid [7], [114].

13 dishonest assistants) are not fiduciaries, the usual common law limiting principles of causation, remoteness and measure of damages should be applied.65

Moreover, the convergence between knowing receipt and dishonest assistance is palpable: it does not make ‘any difference whether a defendant is the payee or the payer of the bribe’.66 The ‘relief is founded on fraud’ in both instances.67 Perhaps most significantly of all: It would be … inappropriate to differentiate between the availability in principle of remedies relating to profits made by a knowing recipient on the one hand and profits made by a dishonest assistant on the other.68 While the court restricted its remarks to the remedy of account of profits – excluding the purely compensatory remedy to restore what was lost – this is hardly surprising given that it was not in issue. Conversely, the court did not remark on any differences between dishonest assistance and knowing receipt.

Novoship thus further supports the rationalisation of the quanta sought in Akindele and in Akai. The focus is shifted from the simple restitution of property to the disgorgement of profits. It would not be unjust or disproportionate to have taken Akindele’s profit had he been more cognisant of the frauds and breach of fiduciary duty going on at BCCI. Even if there was the possibility of BCCI’s liquidators electing to seek compensation instead of account – because, as noted, it would yield the entire $16.7m69 – the application of causation is surely guided by this broad principle of disgorgement and should lead to the gain of $6.7m.

8 Quantum, Causation and Fault What links Re Montagu’s ST, Akindele (as rationalised), Akai and Novoship is that there was a huge emphasis placed on fault outside of the doctrine of notice. This is fault in the form of the standard of cognisance, causation, and in the discretionary part of the test for awarding an account of profits. The receipt of property was a significant ingredient of liability in these cases, but ultimately subservient to other factors. The starting point is ‘knowledge’ of the breach of trust or fiduciary duty; the subsequent factors can now be examined further in support of this claim.

8.1 Initial Sum Despite being characterised as ‘equitable compensation’ in Akai, the remedy there was gain-based; a disgorgement measure. This is to be distinguished with compensation, a measure concerned with actual losses, or simple restitution, a measure concerned simply to return what was received. Calling it ‘compensation’ is therefore a little confusing.70 This is part of the wider problem with the ambiguous terms of art in this part of the law. Nonetheless, the rules can be distilled and set out plainly.

65 Ibid [107], applying Bristol & West BS v Mothew (n 45). 66 Novoship (UK) Ltd v Nikitin (n 37) [58]. 67 Ibid [86], citing Williams v Central Bank of Nigeria (n 39) [30]. 68 Novoship (UK) Ltd v Nikitin (n 37) [93]. 69 Above, on page 10. 70 If not without precedent: In Re Leeds and Hanley Theatres of Varieties, Ltd [1902] 2 Ch 809 (CA) 825, 830, 831, 833 the Court of Appeal awarded a personal remedy ‘in the nature of damages’ amounting to the secret profit.

14 First, one takes the account of profits or the loss to the trust caused by the receipt. In simple cases this is the property received. Alternatively, it could be the private profits of the accessory.71 The disgorgement remedy is subject to a structured discretion including whether it is proportionate to do so. However, even if the trust makes no actual loss (as in Akai), the receipt can be considered to be a Novoship-style private profit and subject to disgorgement.

Next, the rules of causation are applied to determine if subsequent losses were caused by the recipient. This doctrine is value-laden and focused on relative fault.

8.2 Effective Cause The simplest question is whether the cause was effective or not. Aside from situations where there are no competing causes, this gives the trial judge a substantial discretion to apportion blame.

8.3 Hypothetical Supervening Cause Then, there is a hypothetical supervening cause. It had always been open for Akai to recall the shares from the bank, but Lord Neuberger considered that had this happened, Akai would have kept them until they had become worthless. As noted, Akai was substantially better off because of the bank’s wrong.72 However, the argument that no value was lost and therefore compensation should have been nil was rejected. But this would have left the bank unpunished. This is analogous to the common law causation case of McWilliams v Sir William Arrol.73 The claim failed because it was found that the deceased would not have used safety equipment even if it had been provided. The difference is merely that hypothetical outcome were different across the two cases, hence the different results.

8.4 External Causes Next there are the external causes. There is an argument that the quantum in Akai should have been US$32.9m as the value of the shares when the loan went into default and the bank decided to sell. However, as in South Australia Asset Management Corpn v York Montague Ltd (‘SAAMCO’)74 market falls were not recoverable. Here, waiting for clearance is an entirely proper and foreseeable act; hence there is no responsibility market falls during this time. While the measure for common law deceit includes market falls,75 the bank here could not be said to have

71 It might well be both. The requirement of election between remedies is justified by reference to either adopting the impugned transaction, or rejecting it because doing both is inconsistent: Tang Man Sit v Capacious Investments Ltd [1996] AC 514 (PC); United Australia Ltd v Barclays Bank Ltd [1941] AC 1 (HL). This seems to be an expression of the rule against double recovery. However, in these circumstances, this is inapt because the accessory is not purportedly acting for the trust. If the law then falls back on the rule against double recovery, it might well be that both sums can be recovered without offending the rule if the assistance was sufficiently remote from the private profits. On the other hand, this remoteness might be enough to preclude a finding of effective causation. Unsurprisingly, there appears to be no authority on this situation yet. 72 Thai Chamkat v Akai (n 50) [154]. 73 [1962] 1 WLR 295 (HL Sc). The notion of causation based on the hypothetical acts of the claimant also applies in the law of contract: Carslogie Steamship Co Ld v Royal Norwegian Government (The Carslogie) [1952] AC 292 (HL). Ultimately these cases are an extension of the ‘but for’ principle demonstrated in Barnett v Chelsea and Kensington Hospital Management Committee [1969] 1 QB 428 (QB). 74 [1997] AC 191 (HL). 75 Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254 (HL).

15 been that culpable. No doubt if the bank had made a further and unwarranted delay whereupon the shares fell further in value, this would not have allowed it to escape from paying US$20m.

8.5 Value Judgements Unsurprisingly, the accumulated learning of the study of causation in the common law has much to say on this matter. Hart and Honoré note that there are presumptions that the courts apply in the McWilliams v Arrol situation, namely that the reasonable man would take precautions to avoid risk so it would take stronger evidence to displace this presumption. They further note that: Such presumptions introduce an element of legal policy even into decisions on that element of legal policy even into decisions on that element in causal issues (‘cause- in-fact’) which modern writers like to distinguish, as purely factual, from policy-laden decisions on ‘proximate cause’.76 Getzler further notes the normative content of the rules of causation. He highlights Lord Hoffmann’s reflective point in SAAMCO that causation ‘is deeply affected by the court’s normative judgment of the purpose and the context of the duty whose breach is said to have caused the harm’; the courts have preferred to draw the lines of the scope of the duty in terms of remoteness and causation.77

Finally, if the value-laden nature of causation was not already clear from the need to distinguish causation from occasion, the use of the phrases ‘common sense’ and ‘effective or dominant cause’, consider these dicta of Laws LJ: Often the issue tested by causation is, where should responsibility lie? And in that case, of course, the assessment of causation is by no means a value-free exercise.78 8.6 Summary There are two things seen that agree with a simple fault model rather than transmitted liability. First, the remedy disgorges the profits of the accessory, not those of the fiduciary. Second, the remedy is susceptible to causation. The net effect is a remedy more focused on the disgorgement of the recipient’s profits rather than restitution of the property received simpliciter.

Account of profits presents another challenge for the Mitchell and Watterson model. Going back to their example,79 suppose the recipient wrongly receives the shares. Upon the increase in price, the recipient sells thereby banking a profit. Applying Novoship, the recipient is liable for the profit; it is unthinkable that it would be appropriate for the court to use its discretion not to order disgorgement. In fact, account of profits is accommodated by Mitchell and Watterson, but under a separate, parallel liability.80 Given the comments in Novoship such as that liability is simply ‘founded on fraud’, it is suggested that the simpler and better model is the one which says the accessorial liability extends to higher of the value lost or the value gained.

76 H L A Hart and Tony Honoré, Causation in the Law (OUP 1985) 413. Further there is an argument for reducing damages by the percentage chance of a favourable outcome by analogy with ‘loss of a chance’ damages: ibid 418. 77 Getzler (n 43) 245. 78 Gibb v Maidstone and Tunbridge Wells NHS Trust [2010] EWCA Civ 678, [2010] IRLR 786 [32]’. For further analysis of Gibb in this respect, see Goff & Jones (n 29) [6–10] et seq. See also Richard Nolan, ‘A targeted degree of liability’ [1996] LMCLQ 161, 163. 79 Above, on page 4. 80 Mitchell and Watterson (n 19) 142–143.

16 One might argue that Target Holdings v Redferns, excusing a fiduciary wrongdoer for want of causation, means that these cases are still compatible with a property model. This is true only if Target Holdings causation is as flexible and nuanced as in these cases, which is doubtful. The main reason why it was said in Target Holdings that causation applied was that the trusts were no longer on foot, the transaction having been completed.81 This is not the case in property models of knowing receipt which emphasise its custodial nature.82 Even if this obstacle were overcome, the ‘no longer on foot’ test would give inconsistent results. While it would apply to engage causation in Akai, it probably would not in Akindele.

9 Cleaning Up – A Single Equitable Accessorial Wrong Novoship contains a number of propositions of law that move knowing receipt and dishonest assistance closer together.83 The argument is now made that the two actions should be seen as a single equitable accessorial wrong. So far it has been seen that both have a common root as accessorial liability in Barnes v Addy (notwithstanding the earlier cases Harpum identified);84 both have a disgorgement function; and both are examples of non-fiduciary liability. It is also clear that they overlap – consider the dishonest recipient. Moreover, the rules of limitation are the same for knowing recipients and dishonest assistants.85 What remains to be shown are the other anomalies – untested by the courts – that remain from property model reasoning, and how the authority that holds knowing receipt and dishonest assistance as separate actions with separate ingredients is not strong.

9.1 Anomalies As noted, knowing receipt also serves an indemnificatory function for where the actual property cannot be recovered in full or in part. Adherence to property model principles is deleterious to this function, as these two examples show.

First, consider Burn v Morris. In this case, the claimant’s clerk lost a £20 banknote. It fell into the hands of the finder, who paid the defendant £2 to change it into £1 coins. She then dissipated all but £7 of the coins. The claimant recovered the coins, and £13 from the defendant (the banknote was passed to the Bank of England as bona fide purchaser so no further tracing or following was possible).86

In fact the case was brought in conversion, not knowing receipt. How the £7 was recovered is not reported, although one might suppose it was via the restitutionary action of money had and received. The reduction of liability in conversion from £20 to £13 was due to the rule against double recovery. Still, why could it not also be

81 (n 15) 435–436. 82 Above, section 3.4, on page 4. Indeed, Professor Mitchell, who supports property model reasoning, has called for Target Holdings to be overruled: Mitchell, ‘Stewardship of property and liability to account’ (n 19). 83 Above, on page 13. 84 In Williams v Central Bank of Nigeria (n 39) [131], Lord Mance remarked that ‘in the state of the law as it was understood and developed at the relevant times, section 21(1)(a) [Limitation Act 1980] and its predecessor were probably addressing the only type of dishonest assistance then clearly established, namely dishonest assistance of a fraudulent trustee.’ Presumably Lord Mance means accessorial liability generally in his first instance of ‘dishonest assistance’. 85 Ibid. 86 (1834) 2 Cr&M 579, 149 ER 891.

17 possible in knowing receipt?87 Given knowing receipt’s indemnificatory function it seems entirely natural. The answer is that it would allow a double election.

The problem is that remedies involving tracing give rise to what Birks described as the ‘geometric multiplication of the plaintiff’s property’.88 If property held on trust is taken and sold, the claimant must elect to either follow the trust property into the hands of the recipient or trace its value into the proceeds. She cannot do both.

If one were to allow recovery in the knowing receipt version of Burn v Morris then this would be a double election. On the one hand, the claimant would elect to trace into the substitute, the coins, and recover those in the equitable proprietary claim; on the other, she would follow the original property into the hands of the defendant and after its dissipation seek the recovery of its money equivalent. This is all well and good if the party the claimant elects to pursue is solvent, but manifestly unfair if this is not the case, for as both potential defendants are culpable this would amount to excusing one on the basis of a technicality.

If knowing receipt is underpinned by a property model, then this double election is utterly impossible. This is because of the justification for access to substitutes is the tracing fiction that they are the claimant’s property.89 Therefore if the substitute belongs to the claimant, then the original property does not and the justification falls away. However, if knowing receipt is based on fault, this is no obstacle. Then the traceable property can be recovered with the usual justification that it represents the original property. Further, the knowing recipient is – or perhaps the knowing recipients are – held liable for any value not recovered. The election rule is not applied because what is sought does not derive from a right of property.

Then quantum as against each defendant would be limited by the rule against double recovery. This is a finer-grained and fairer rule than election. Indeed, election in the tracing claim can be seen as a blunt version of the rule against double recovery, a reasonable compromise where there are discrete items of property, but ill-suited to a money claim.

Second, consider one aspect of El Ajou v Dollar Land Holdings Plc (No 1) which was that the funds had been passed through many hands in the process of being laundered.90 If one of the intermediaries is a bona fide purchaser, the equitable interest is lost.91 Even if a subsequent recipient has notice, the equitable interest is not revived.92 Under a property model, knowing receipt liability could not be founded. However, under a fault model a claim in knowing receipt could and should be available. This avoids the capricious consequence of giving the wrongdoers the

87 Given the appropriate tweaks to the facts so that legal title does not pass; legal title passes with money and other negotiable instruments: Miller v Race (1758) 1 Burr 452, 97 ER 398. 88 Birks, An Introduction to the Law of Restitution (n 36) 70. 89 Taylor v Plumer (1815) 3 M&S 562, 575; 105 ER 721, 726: ‘It makes no difference in reason or law into what other form, different from the original, the change may have been made … for the product of or substitute for the original thing still follows the nature of the thing itself’. See Craig Rotherham, ‘The Metaphysics of Tracing: Substituted Title and Property Rhetoric’ (1996) 34 Osgoode Hall LJ 321, 332 et seq for detailed analysis of this fiction. 90 El Ajou v Dollar Land Holdings Plc (No 1) (n 6). 91 Unless the transferring transaction is rescinded: Independent Trustee Services Ltd v GP Noble Trustees Ltd [2012] EWCA Civ 195, [2013] Ch 91. 92 Wilkes v Spooner [1911] 2 KB 473 (CA).

18 benefit of defending this claim simply because they had incorporated an innocent third party purchaser for value into the laundering process.

9.2 The Standards of Cognisance The similarity of dishonest assistance and knowing receipt in the indemnity situation is striking. Indeed, a prudent claimant would also plead dishonest assistance in order to avoid these issues. The main advantage of claiming in receipt instead of assistance is that a lower level of cognisance on the part of the defendant is required, namely ‘unconscionability’ rather than dishonesty.93 This difference is justified because the beneficial receipt of property (rather than dealing with it in a ministerial capacity) brings with it the quid pro quo of a greater risk of being fixed with liability. Accordingly, the rationales of the two standards are said to be different.94

However, the two different rationales are sometimes misapplied due to their associated rules. A bank who receives money into an account in credit receives it ministerially, but a bank who receives money into an overdrawn account receives it beneficially.95 In both cases there is acquisitive behaviour, which justifies the lower unconscionability standard. However, the bank receiving money into the overdrawn account benefits from the higher standard. This rule is a technical one predicated on the difference in the ‘direction’ of the obligation of debt; in other words who owes whom. It is criticised because in simple terms of ‘benefit’ because the bank simply does benefit. It is also criticised because the culpability of the bank is the same in both situations, hence the standard of fault ought to be the same in both situations.

This is yet another reason why too rigid a connection to the property results in deleterious effects. Discarding the property basis of knowing receipt would eliminate this problem. But, as the two rationales demonstrate, there is something special about the receipt of property. How can this be accommodated if it is not an ingredient of the action? It is suggested that the acquisitive nature of beneficial receipt (in the non-technical sense) will readily allow the inference that the behaviour of the defendant was dishonest given the state of his knowledge. It boils down to construction.

In considering this process, the starting point is Lord Nicholls’ observation that knowledge is a ‘gradually darkening spectrum where the differences are of degree and not kind.’96 In deciding whether someone has knowledge of something, there are almost always constructive elements, perhaps the most famous of these being ‘blind- eye’ knowledge – looking the other way to ensure one does not acquire truly actual knowledge. This is considered tantamount to actual knowledge.97 Further constructive elements are added such as failing to make enquiries, and secondary knowledge that would either indicate the facts or put one on inquiry.98 The difficulty,

93 BCCI v Akindele (n 26) 455, 456. 94 Snell’s Equity (n 28) [30–068]. 95 Agip (Africa) Ltd v Jackson [1990] Ch 265 (Ch) 292. 96 Royal Brunei v Tan (n 41) 391. 97 E.g. Armstrong v Winnington (n 34). 98 Baden, Delvaux and Lecuit v Société General pour Favoriser le Développement du Commerce et de l’Industrie en France SA (1983), [1992] 4 All ER 161 (Ch) [235] is inevitably cited, plotting points on the scale of knowledge of: (i) actual knowledge;

19 as Lord Nicholls points out, is how to draw the line between culpability and non- culpability on that spectrum of subjective to objective knowledge.

Consider next what dishonesty amounts to. In dishonest assistance, ‘objective dishonesty’ does not require the accessory to advert that he is acting dishonestly; it simply requires that he is dishonest by the standards of ordinary and honest people.99 ‘Subjective’ dishonesty – criminal standard dishonesty, where the defendant is aware that he has acted dishonestly100 – is at the most subjective end of the scale of knowledge, followed by objective dishonesty.

While knowing receipt knowledge is said to be a more subjective standard the notice, that is simply because notice has still more constructive elements, as Re Montagu’s ST demonstrates.101 In fact, knowledge comes next to objective dishonesty on that scale and certainly includes ‘blind-eye’ knowledge. It is objective in the sense that it falls short of criminal dishonesty’s requirement of advertence of the wrongdoing. It is also objective because knowledge is inferred from at least the act of turning a blind eye. Indeed, the when the Court of Appeal asked whether it was unconscionable for Akindele to retain the benefit of the receipt, the judgment referred back to Megarry V- C’s consideration of ‘want of probity’.102 For Knox J, the issue was ‘commercially unacceptable conduct in the particular context involved.’103 These tests are objective insofar as they look to the behaviour of the accessory rather than her advertence of the consequences but subjective because they do not impose a readily infer knowledge beyond highly culpable failure to inquire. Contrast this with notice, which is much more readily inferred through the imputation of one’s solicitor’s notice and the failure to conduct inquiries.

(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; (v) knowledge of circumstances which would put an honest and reasonable man on inquiry. 99 Royal Brunei v Tan (n 41) 289; Barlow Clowes International Ltd v Eurotrust International Ltd [2005] UKPC 37, [2006] 1 WLR 1476 [15]–[16]. As for the debate over Twinsectra v Yardley (n 1), Lord Neuberger regarded that as over in Sinclair v Versailles (n 61) [4]. 100 R v Ghosh [1982] QB 1053 (CA). 101 Above, section 4, on page 5. 102 BCCI v Akindele (n 26) 455; Re Montagu’s ST (n 22). 103 Cowan de Groot Properties Ltd v Eagle Trust plc [1992] 4 All ER 700 (Ch) 761.

20 Therefore both objective dishonesty and unconscionable knowledge are close together at the objective end of the scale. It must be the case that ‘[d]ishonesty and knowledge (of some sort) are rather like the chicken and the egg’.104 When Lord Nicholls’ protested that ‘dishonesty’ was a better label than ‘knowledge’,105 it was because ‘dishonesty’ better drew the line between culpability and non-culpability than the label ‘knowledge’. On the other hand, Lord Millett preferred ‘knowledge’; dishonesty was ‘a distraction’ and ultimately the issue was ‘a semantic one.’106 Moreover, unconscionability is a: flexible test, which requires the court to consider what is right, taking into account the nature and extent of the defendant’s knowledge and all the circumstances relating to the receipt[.]107 It is therefore submitted that the ingredients and the method of determining culpability are the same, and acquisitive receipt of trust property is just one of these factors, although an important one. As Iacobucci J put it, ‘[i]f the stranger received a benefit as a result of the breach of trust, this may ground an inference that the stranger knew of the breach.’108 Tracing is useful for the determination of this inference because it helps decide if the recipient knew of the property’s origins. All in all, knowledge amounting to unconscionability can simply be recast as objective dishonesty. It is a narrow distinction, and it would be better to eliminate it.

The fact of receipt would still have some significance outside the determination of knowledge: quantum. Subject to the doctrine of causation as developed in Akai and Novoship, in a unified equitable accessorial wrong the amount received would normally be the loss caused to the trust and therefore the quantum available.109 Again, this reduces receipt from a defining ingredient to an assisting one.

9.3 Authority Having dealt with the ‘transmitted liability’ dicta, what remains to be overcome are the rationes decidendi of cases since Barnes v Addy that stand in the way of this reconceptualization.

One ingredient of knowing receipt that suggests very strongly that it adheres to a property model is the requirement that not just the receipt of trust property but also its traceable proceeds may found the action. The authority cited for this is usually the judgment of Hoffmann LJ in El Ajou v Dollar Land Holdings Plc (No 1). Unfortunately Hoffmann LJ did not cite any authority for this proposition of law.110

While the other cases usually cited in support were decided after El Ajou111 and thus are not helpful in tracing the authorities back in time, a few are older and did allude to this matter. Belmont Finance v Williams (No 2) does not mention tracing expressly

104 Three Rivers DC v Bank of England (No 3) [2000] 2 WLR 15 (CA) 62 (Hirst LJ). 105 Royal Brunei v Tan (n 41) 392. 106 Twinsectra v Yardley (n 1) [133]–[134]. 107 Starglade v Nash (n 49) [57]. 108 Air Canada v M & L Travel Ltd [1993] 3 SCR 787 (Supreme Court of Canada) 812. 109 The remedy for dishonest assistance already extends to the value of the trust estate: Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch) [1589]–[1601]. 110 (n 6) 700. 111 Satnam Investments Ltd v Dunlop Heywood & Co Ltd [1999] 3 All ER 652 (CA) 671; Goose v Wilson Sandford [2001] Lloyd’s Rep PN 189 (CA) [88]; Trustor AB v Smallbone (No 2) [2001] 1 WLR 1177 (Ch) [18]–[19].

21 but held the second defendant ‘City’ liable for receiving ‘some part of the trust fund’. The part in question was the traceable proceeds of the property so this issue was implicit. Likewise tracing was utilised in Agip (Africa) Ltd v Jackson.112

Ultimately, the reasoning in Belmont Finance – as repeated by Lord Nicholls in Tan113 – simply quotes Barnes v Addy where tracing is not mentioned expressly but instead the requirement is that the accessory should ‘receive and become chargeable with … trust property’.114 The missing step in the reasoning that traceable proceeds are sufficient is the tracing fiction that he who owns the original property owns the substitute.115 Therefore, the argument that says El Ajou and the related cases support a property model assumes what it purports to show. It is a circularity.

The other way of analysing the requirement is to look at its normative justifications. In El Ajou, the Court of Appeal reversed Millett J but only on the issue of knowledge attributed from officer to company. One might therefore look to the justifications Millett J gave there and in his other cases.

The first knowing receipt case Millett J dealt with was Agip (Africa) v Jackson in 1989 at first instance. The claim in knowing receipt failed because there was no beneficial receipt, although the alternative claim in dishonest assistance was upheld on appeal.116 Millett J was concerned to hold dishonest assistance and knowing receipt as separate actions. While knowing receipt did require beneficial receipt, Millett J did not elucidate on the relationship between knowing receipt and the tracing claim other than to acknowledge that personal liability could not arise without knowledge, which might be a different standard of cognisance to notice.

The next Millett J case was El Ajou in 1992. Millett J weighed up the requirements of both knowledge and notice, and considered that both had constructive elements, albeit that notice was not as severe as notice in the conveyancing sense. This allowed him to reach the conclusion that this similarity: is in accordance with the preponderance of judicial authority in this country and New Zealand, and is consistent with an analysis of the underlying trust as a subsisting trust … In the present case, for example, it would be illogical and undesirable to require the plaintiff to assert a proprietary claim he does not need in order to avoid the burden of having to prove dishonesty or ask the court to infer it.117 Indeed, this is a property model of knowing receipt; liability is derivative of the equitable interest in the property. However, the case contains the logical inconsistency of describing a property model and simultaneously holding the standards of cognisance for knowing receipt and the proprietary claim to be different.

Millett J’s argument that the claimant should not have to prove more than he needs is relevant but misses the point. He later noted this as the tendency to ‘fail[] to

112 Belmont Finance v Williams (No 2) (n 7) 405; Agip (Africa) Ltd v Jackson (n 95) 289–292. See also Boscawan v Bajwa [1996] WLR 328 (CA) 334. 113 Royal Brunei v Tan (n 41) 382. 114 Barnes v Addy (n 2) 251. 115 n 89. 116 Agip (Africa) Ltd v Jackson (n 7). 117 El Ajou v Dollar Land Holdings (No 1) [1993] 3 All ER 717 (Ch) 717, 718.

22 distinguish between rights and remedies’.118 Just because there is proprietary liability does not mean a claimant is bound to take a proprietary remedy; she may select a personal one after proving the ingredients of the proprietary one.119 Therefore this point falls away.

Boscawen v Bajwa did not concern knowing receipt but was a proprietary tracing and subrogation case.120 Then there was the House of Lords dishonest assistance case of Twinsectra v Yardley (2001).121 By then, Lord Millett had changed his mind. He held (albeit obiter) that ‘[l]iability for “knowing receipt” is receipt-based. It does not depend on fault. The cause of action is restitutionary’. This accorded with his extra- judicial opinion in 1991.122 However, this must allude to unjust enrichment, not a property model.

Lord Millett’s views were therefore fluid. Moreover, he was clearly disenchanted with property models of knowing receipt and, constrained by authority, only applying such thinking at first instance. Furthermore, Hoffmann LJ was no fan of equitable liability as his extra-judicial writing shows: he would have preferred to replace knowing receipt and dishonest assistance with a simple fraud claim and an unjust enrichment claim respectively.123 In El Ajou, what Hoffmann LJ did was take a reluctant application of property model reasoning by Millett J – later to be eroded by subsequent decisions – and lay down a dictum without any consideration of its history or its consequences. The danger is then to read it like a statute.

Therefore the authorities, particularly El Ajou, for the proposition of law that beneficial receipt of property traceable to the breach of fiduciary duty is a necessary ingredient of knowing receipt, are not strong. That is even before one considers that in Dubai Aluminium Co Ltd v Salaam (in 2002), none other than Lord Millett held that dishonest assistants were not fiduciaries,124 shortly before the same was confirmed of knowing recipients.125

118 Lord Peter Millett, ‘Bribes and Secret Commissions Again’ (2012) 71 CLJ 583, 585. 119 FHR European Ventures LLP v Cedar Capital Partners LLC (n 61) [7]. 120 (n 112). 121 (n 1) [105]. 122 P J Millett, ‘Tracing the proceeds of fraud’ (1991) 107 LQR 71. See also P J Millett, ‘Restitution and constructive trusts’ (1998) 114 LQR 399. 123 Sir Leonard Hoffmann, ‘The Redundancy of Knowing Assistance’ in P B H Birks (ed), The Frontiers of Liability (OUP 1994). 124 (n 12) [141]. 125 Above, section 6, on page 8.

23 9.4 Summary Coalescence neatly brings us full circle to the case of Barnes v Addy, where Lord Selborne LC did not trouble to distinguish between recipients and assistants to any great extent. The dishonest accessory will be held ‘responsible as a constructive trustee’.126 While before the phrase ‘constructive trustee’ has been used to describe knowing recipients and proprietary claim recipients together as subject to connected liabilities, it is now more apt to describe knowing recipients’ and dishonest assistants’ connected personal liabilities. Indeed, writing extra-judicially, Lord Millett opined that: It is often said that wrongfully substituted assets are held on a constructive trust. I do not think they are. I think that they continue to be held on the same trusts throughout.127 It seems the phrase’s obfuscatory power has clouded this shift. While Lord Millett’s claim they are the same trusts presumes tracing is not a substantive remedy – which is by no means uncontroversial – at least use of distinct language illuminates the shift, and the difference between the proprietary tracing claim and knowing receipt.128

10 Conclusion One theme that has run through this paper is the increasing complexity in the factual scenarios presented to the courts. For simple custodial trusts a property model of liability is perfectly adequate to determine the liability of the express trustee and the knowing recipient alike. However, these times are gone.

Given the complexity of the cases, the courts have admitted fault to the action in knowing receipt, undermining its adherence to property models. Fault is admitted through the standard of knowledge and through the doctrine of causation. Crucially, what has made this all possible is the recasting of accessories as non-fiduciaries. Consequently, knowing receipt is no longer well described by property models. Instead, it is a freestanding equitable wrong more focused disgorging actual illicit gains rather than the plain restitution of property.

Given its (new) basis in fault it is not surprising that knowing receipt is now very close to dishonest assistance. Indeed, it has been shown that accepting that both dishonest assistance and knowing receipt are the same equitable accessorial wrong would remove the remaining anomalies in property model knowing receipt. In a way, the evolution of knowing receipt is a return to its roots – a simple fault-based wrong as set out in Barnes v Addy.

126 Above, on page 2, text to n 2. 127 Peter Millett, ‘Proprietary Restitution’ in Simone Degeling and James Edelman (eds), Equity in Commercial Law (Lawbook Co 2005) 315. See also Millett, ‘Tracing the proceeds of fraud’ (n 122) 81: ‘it is surely more appropriate to refer the source of [the volunteer recipient’s] continuing liability, if any, to the substantive trust in respect of which he was formerly a trustee than to some remedial constructive trust imposed de novo by the Court’. 128 This presumption is in agreement with Lord Millett’s characterisation of tracing as an evidential process rather than a remedy in Foskett v McKeown (n 47) 128. Cf Rotherham (n 89) 328.

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