Topic 8 - Liability of Strangers

Question 1

What is the primary claim against a wrongdoer in a breach of trust?

Answer 1

The primary claim is against the trustee or other fiduciary.

Question 2

What are the two key claims that can be made against a stranger to the trust?

Answer 2

• A claim for accessory liability (dishonest assistance)
• A claim against the recipient of the traceable proceeds of a breach of trust (knowing receipt)

Question 3

What is accessory liability?

Answer 3

Accessory liability (dishonest assistance) is a form of secondary liability allowing a claimant to sue a third party for loss caused by the trustee or fiduciary.

Question 4

What must be shown to establish dishonest assistance?

Answer 4

• There was a trust in existence
• The trustee committed a breach of that trust
• The defendant assisted the trustee in committing the breach
• The defendant’s assistance was dishonest

Question 5

What is required for a knowing receipt claim?

Answer 5

• A misapplication of trust property
• Beneficial receipt of the misapplied property or its proceeds by the defendant
• Persistence of the claimant’s equitable proprietary interest
• Knowledge making it unconscionable for the defendant to retain the benefit

Question 6

What is the definition of dishonest assistance?

Answer 6

Dishonest assistance is a fault-based claim where the defendant is liable only if their assistance to the breach of trust was dishonest.

Question 7

In which case did the Court of Appeal outline the requirements for establishing liability for dishonest assistance?

Answer 7

Group Seven Ltd v Nasir [2019] EWCA Civ 614.

Question 8

What does the term ‘beneficial receipt’ refer to in the context of knowing receipt?

Answer 8

Beneficial receipt means the defendant receives the property for their own benefit or in their own right.

Question 9

True or False: Knowing receipt claims are limited to cases involving trusts.

Answer 9

False.

Question 10

What happens if the recipient of misapplied trust property dissipates it before acquiring requisite knowledge?

Answer 10

They do not incur any personal liability.

Question 11

What did Lord Nicholls state about acting dishonestly?

Answer 11

Acting dishonestly means simply not acting as an honest person would in the circumstances.

Question 12

What is the significance of the case Royal Brunei Airlines Sdn Bhd v Tan?

Answer 12

It established principles regarding liability for dishonest assistance where a managing director misapplied trust property.

Question 13

What is the difference between accessory liability and knowing receipt?

Answer 13

Accessory liability involves assisting the breach of trust, while knowing receipt involves the recipient’s knowledge of the misapplication of trust property.

Question 14

Fill in the blank: Knowing receipt claims are also referred to as _______ receipt.

Answer 14

unconscionable

Question 15

What must a claimant show to recover profits from a dishonest assistant?

Answer 15

The claimant must demonstrate that their participation was the ‘real’ or ‘effective’ cause of the profits.

Question 16

What is the role of the judge in determining dishonesty in civil proceedings?

Answer 16

The judge is the ‘fact-finder’ who applies the standard of ordinary decent people.

Question 17

What does the term ‘proprietary claim’ refer to in the context of trust property?

Answer 17

A proprietary claim allows the claimant to claim the property itself rather than just a personal claim for damages.

Question 18

In which case was it held that a bank does not receive money beneficially when credited to an account in credit?

Answer 18

Agip (Africa) Ltd v Jackson [1990] Ch 265.

Question 19

What is the legal consequence if a defendant has knowledge of the misapplication after receipt but before disposing of the property?

Answer 19

They must restore the property to the trust or face personal liability.

Question 20

What did the case Novoship (UK) Ltd v Mikhaylyuk establish regarding dishonest assistants?

Answer 20

It established that a dishonest assistant is liable for profits acquired through their participation in a breach.

Question 21

What is the significance of the case Bank of Credit and Commerce International (Overseas) Ltd v Akindele?

Answer 21

It is the leading authority on the knowledge required for a knowing receipt claim.

Question 22

What was the key case discussed?

Answer 22

Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437

Question 23

What agreement was made between the claimant and the defendant?

Answer 23

The defendant agreed to invest US$10m for at least two years for a guaranteed return of more than 50%

Question 24

How was the transaction structured in the Akindele case?

Answer 24

As a sale of shares to the defendant with an agreement for the company to re-purchase the shares after two years

Question 25

What was the amount paid back to the defendant after two years?

Answer 25

US$16.179m

Question 26

What was the conduct of the company’s directors described as?

Answer 26

Dishonest breach of their fiduciary duties and misapplication of the company’s funds

Question 27

Did the defendant have knowledge of the directors' misconduct?

Answer 27

No, the defendant did not have knowledge of these matters

Question 28

What was the principal issue in the claim against the defendant?

Answer 28

The type of knowledge required for a knowing receipt claim

Question 29

What was the conclusion of the court regarding the defendant's knowledge?

Answer 29

The defendant did not have knowledge that made his receipt unconscionable

Question 30

What did Nourse LJ conclude about dishonesty in a knowing receipt claim?

Answer 30

Dishonesty is not a requirement for a knowing receipt claim

Question 31

What does the recipient’s state of knowledge need to be for it to be unconscionable?

Answer 31

It must be such as to make it unconscionable for him to retain the benefit of the receipt

Question 32

What was the reason for the defendant not questioning the transaction?

Answer 32

The company was part of a reputable banking group with no doubts about its integrity at the time

Question 33

What did the defendant learn by the time of the payment?

Answer 33

Rumors of financial irregularities and arrests of some directors for money laundering

Question 34

What is the Baden scale?

Answer 34

A scale comprising five types of knowledge relevant to knowing receipt claims

Question 35

List the five types of knowledge in the Baden scale.

Answer 35

* Actual knowledge * Willfully shutting one's eyes to the obvious * Willfully and recklessly failing to make inquiries * Knowledge of circumstances indicating facts to an honest person * Knowledge of circumstances putting an honest person on inquiry

Question 36

What did Stephen Morris QC summarize about Baden types (1) to (3) in a commercial context?

Answer 36

They render receipt of trust property 'unconscionable' without needing to show realization of breach of trust

Question 37

What must Baden types (4) and (5) knowledge demonstrate to render receipt 'unconscionable'?

Answer 37

A reasonable person must appreciate the probability of breach of trust or would have made inquiries

Question 38

What was the defendant's approach in Armstrong DLW GmbH v Winnington Networks Ltd?

Answer 38

Implemented a 'know your client' (KYC) procedure before purchasing property

Question 39

What was the outcome of the Armstrong case regarding the seller's property?

Answer 39

The seller had stolen the property from the claimant

Question 40

How did Morris QC view the defendant's knowledge in the Armstrong case?

Answer 40

It rendered the receipt unconscionable due to failure to follow through on inquiries

Question 41

Fill in the blank: The defendant in Armstrong made a conscious decision not to follow its _______.

Answer 41

KYC procedure

Question 42

True or False: The Akindele case established that dishonesty is always needed for a knowing receipt claim.

Answer 42

False

Question 43

What did Nourse LJ state about the nature of the transaction in Akindele?

Answer 43

It was structured in an entirely artificial way

Question 44

What did the defendant's knowledge fall within in the Armstrong case?

Answer 44

At least Baden type (3)