Despite the media portrayal of offshore jurisdictions, not all offshore companies are vehicles of fraud. However, there are undoubtedly cases where offshore companies are used to receive the proceeds of fraud. For liquidators assisting the victims of such frauds in recovering assets from offshore companies, the legal doctrines of Dishonest Assistance and Knowing Receipt provide an effective way of seeking redress.
On 27 January 2022 Lord Justice Newey handed down the Court of Appeal’s decision in Byers v Saudi National Bank (previously Samba Financial Group)  EWCA Civ 43 dismissing the Claimants’ appeal and upholding Mr Justice Fancourt’s decision in the High Court at first instance. Specifically, the Court of Appeal was asked to consider whether: (i) a claim for knowing receipt depends on a claimant maintaining a proprietary interest in the property in the hands of the defendant; and (ii) whether that interest existed on the facts of the case before it.
By way of brief background, dishonest assistance refers to a cause of action under which a third party becomes personally liable for procuring or assisting a breach of trust of one or more trustees. Liability arises where the third party defendant has acted dishonestly and provided assistance to a trustee to enable a breach of trust, although the breach of trust itself does not have to be fiduciary in nature. The assistance provided by the third party defendant must be more than minimal although the third party does not have to know that a fiduciary duty by the trustee existed. Furthermore, for accountability to be attributed to the third party defendant, the trustee does not have to have acted dishonestly for the cause of action to be made out. In this context the test of honesty is an objective test.
Conversely, knowing receipt is a separate equitable remedy which prevents a party from receiving and retaining property, for his or her benefit, to which he is not entitled, knowing that the transfer to him was of property which beneficially belonged to a third party/claimant. In order for this equitable cause of action to succeed, it is necessary for the defendant to have some degree of culpability. Therefore, for such a claim to succeed there must be a transfer of property amounting to a breach of fiduciary duty owed to the claimant where the defendant’s state of knowledge makes it unconscionable for them to retain the property. However, and unlike a claim of dishonest assistance, the claimant does not have to show that the defendant acted dishonestly when they received the property.
In Byers v Samba Financial Group the Court of Appeal and Mr Justice Fancourt in the High Court had been asked to consider the law of knowing receipt in the context of a claim brought by the Joint Official Liquidators of Saad Investments Company Limited (“SICL”), a Cayman Islands Registered Company, against a Saudi Arabian Bank for the value of shares in five Saudi Arabian companies which were transferred to the Bank, in it was alleged breach of trust. The High Court considered the distinction between dishonest assistance and knowing receipt in light of a long line of case law which at best had blurred the distinctions between the two legal principles, and in turn the Court of Appeal was asked to determine whether the claimants’ interest in the disputed property had been extinguished so as to forfeit its rights to bring a claim against the defendant for knowing receipt.
Lord Justice Newey confirmed that the authorities and academic commentary both supported a finding that for a claim of knowing receipt to succeed a claimant must be able to show that: (i) the defendant is guilty of an element of wrongdoing; and (ii) the claimant was a beneficiary of the property in question and maintained an equitable interest in the property at the time the defendant had knowledge of the breach of trust. The Court of Appeal confirmed that it is the existence of the claimant’s equitable interest in the property which gives rise to the custodial duties of a defendant upon receipt of the property. In turn it is the existence of the claimant’s interest in the disputed property coupled with the defendant’s knowledge of a breach of trust at the point of receipt which makes it unconscionable for the defendant to retain the property which in turn gives rise to the equitable remedies available in a claim of knowing receipt.
Lord Justice Newey confirmed that Mr Justice Fancourt had correctly concluded that a claimant’s continuing proprietary interest in the property is therefore a necessary component in a claim for knowing receipt and as a matter of fact in the case before the Court the claimants’ absence of a continuing proprietary interest in the disputed securities at the time of registration mean that the Liquidators’ claim against the defendant for knowing receipt must fail.
The parties did not appeal Fancourt LJ’s decision with respect of the distinct legal difference between liability for dishonest assistance and for knowing receipt and therefore the decision at first instance remains good in law and helpful authority on the point. Fancourt LJ confirmed that while the distinction between the two legal principles may become blurred, if as the facts present themselves, a defendant is liable for both dishonest assistance and knowing receipt, this does not close the gap on the difference between the two legal principles, namely that:
- Dishonest assistance is a truly fault based offence requiring the defendant to be dishonest in assisting a trustee to commit a breach of trust.
- Knowing receipt is unconnected with dishonesty, at least at the moment of receipt.
- The recipient, in a case of knowing receipt is not liable in such a claim for wrongly agreeing to receive the property; once received the recipient must deal with the property as if he were a trustee of it and restore it to the trust. It would be unconscionable to do otherwise. The recipient does not have to have acted dishonestly and his duties arise as of the moment he is in receipt of the property because of his knowledge.
In the context of asset recovery in offshore jurisdictions, the Court of Appeal’s decision, upholding Mr Justice Fancourt’s decision at first instance, is a helpful and important judgment which brings the law of dishonest assistance and knowing receipt up to date. This decision also provides guidance on how a court will approach cases concerning these legal principles in both the Cayman Islands, which adopts the common law from the UK in the absence of any specific jurisprudence from its own court, and also the UK.
While the Court of Appeal’s decision in Byers v Samba Financial Group is a helpful judgment which clarifies the legal position, as a matter of common law, the practical issues that Liquidators must consider in their efforts to recover assets and return value to fraud victims are no less complicated.