Liability of Strangers to the Trust — SQE1 FLK2 Trusts Law

A trustee instructs an auctioneer to sell a collection of trust antiques and to pay the proceeds into the trustee's personal account. The auctioneer has handled the trust's sales for years. He knows the deed requires every penny of the proceeds to go into the trust account. He sells them and pays over £180,000 as instructed.

Sued by the beneficiaries, he accepts that he knew the payment was a breach of trust. But he says he simply did what his client asked, and that he never once thought of it as dishonest. Does that save him? No. And why it does not is the most important change in this topic in a decade.

This is Liability of Strangers to the Trust. Keep that auctioneer in mind. We come back to him.

Here is the route. The general rule, and the two exceptions to it. Then knowing receipt, its three elements and its defences. Then the categories of knowledge, and how much of it you need. Then dishonest assistance, and the test for dishonesty as it now stands. Then how to tell the two claims apart. And finally tracing, which is not a claim at all.

Start with the rule the exceptions bite on. Only trustees are liable for breach of trust. They hold the fiduciary duties and they answer personally for breaking them. A stranger to the trust, somebody who is not a trustee and has assumed no fiduciary responsibility, is not automatically liable just because a trustee has misbehaved.

But equity recognises two situations where a stranger is caught. Knowing receipt, where the third party receives trust property with knowledge of the breach. And dishonest assistance, where the third party dishonestly helps the trustee to commit it.

Hold on to one point before anything else, because it organises the whole topic. These are entirely separate causes of action. Different elements, different knowledge requirements, different defences, different remedies. A person can be liable for one and not the other. Neither requires the other. And a claimant with the facts for both may plead both.

Knowing receipt first. Three elements, and you prove all three. Receipt of trust property or its traceable proceeds. Knowledge of the breach, of a quality we will come to. And beneficial receipt.

Receipt means the defendant took the property into their own control or benefit. Money merely passing through an account is not enough on its own. Where the defendant is a bank, receipt happens when the funds land in an account it controls.

Then knowledge, and here the modern law has one test rather than a checklist. In BCCI v Akindele, 2001, the Court of Appeal set the question. Was the recipient's state of knowledge such as to make it unconscionable for him to retain the benefit of the receipt? That is the test. Not a category, not a label. A single question about conscience.

And the defendant need not have known the details of the trust, or the precise nature of the breach. It is enough that he knew the property was being applied in a way inconsistent with the trustee's obligations.

But the knowledge must exist at the time of receipt. That is a favourite trap. Knowledge acquired afterwards does not turn an innocent receipt into a knowing one, though what the defendant then does with the information may found a different claim altogether.

Third element, beneficial receipt. The property must be received for the defendant's own benefit, not merely as an agent or a conduit for somebody else. An agent who receives ministerially and passes the money straight on may escape knowing receipt entirely. Which does not make him safe, because assistance is still on the table.

Now, how much knowledge is enough? The vocabulary comes from the Baden categories, five gradations running from certainty down to suspicion. One: actual knowledge of the facts. Two: wilfully shutting your eyes to them. Three: wilfully and recklessly failing to make the inquiries an honest and reasonable person would make.

Four: knowledge of circumstances that would indicate the facts to an honest and reasonable person. And five: knowledge of circumstances that would put such a person on inquiry. Notice where the line falls. The first three are about this defendant's own state of mind. The last two are objective, measuring what a reasonable person would have made of what he knew.

Two things to say about that scale. It is a useful description of types of knowledge, and it is no longer the test, because Akindele swept the rigid classification away in favour of the single unconscionability question.

But the earlier line still tells you where the courts draw it. A recipient's conscience must be sufficiently affected before equity will bind him, which means actual knowledge or a want of probity, broadly the first three categories. The cold calculus of constructive and imputed notice, the last two on their own, is not the right instrument. So a defendant who merely failed to make inquiries a careful person would have made is a long way from liability.

Two defences. First, the bona fide purchaser for value without notice, who buys in good faith, gives value, and knows nothing of the trust. He takes free of it, and that is the end of the claim.

Second, change of position. An innocent recipient who in good faith changes her position in reliance on the receipt may reduce or defeat the claim. In Lipkin Gorman v Karpnale, 1991, the defence entered English law. Picture a woman given £30,000 by a friend she has no reason to suspect, who spends it on a once-in-a-lifetime holiday she would never otherwise have taken. To that extent the money has gone, and so has the claim.

Now the other claim, and it starts with a change of direction. The old test was knowing assistance: help a breach with knowledge of it and you were liable. In Royal Brunei Airlines v Tan, 1995, the Privy Council changed that. Lord Nicholls held that the test for an accessory is dishonesty, not knowledge. Fail to take steps to check, and that is not enough. You must have acted dishonestly.

Two elements, then. Assistance in a breach of trust, and dishonesty in giving it. Assistance means a positive act. Mere inaction, or a failure to prevent the breach, will not do, and the help must be causally connected to it.

The examples are the professionals around a transaction. A solicitor who prepares the documentation for an improper transfer. A bank that processes a payment it knows to be a breach. An accountant who advises on how to structure the deal. And notice what none of them needs to have done. Received anything. An accessory can be liable without a penny of trust property ever passing through his hands.

Which brings us to dishonesty itself, and you need to know both where the law was and where it is. In Twinsectra v Yardley, 2002, the House of Lords laid down a combined test. Dishonesty is judged by the standards of ordinary decent people, but the defendant must also have realised that ordinary decent people would regard his conduct as dishonest.

That second half is the bit that has gone. In Ivey v Genting Casinos, 2017, the Supreme Court set out a single test for dishonesty across civil and criminal law, and it has two stages.

Stage one is subjective. Ascertain what this defendant actually knew or believed about the facts. Stage two is objective. Decide whether, on that footing, his conduct was dishonest by the standards of ordinary decent people. And there it stops. There is no further requirement that he appreciated his conduct would be regarded as dishonest.

So back to our auctioneer. He knew the deed required the proceeds to go into the trust account. He paid £180,000 into the trustee's personal account anyway. On what he knew, ordinary decent people would call that dishonest, and his own view of himself is simply not the question the court asks.

Which is also why good faith is not a defence to assistance. A defendant may genuinely believe he is doing the right thing and still be dishonest by ordinary standards. His sincerity is not on trial. What he knew, and what decent people make of acting that way knowing that, is.

One refinement worth carrying into the exam. A defendant cannot escape by not asking. Take a wealth manager who has read the trust deed and strongly suspects that a £400,000 payment to the trustee's new partner is not permitted. He asks nothing, because the trustee is his largest client. A strong suspicion he deliberately declines to confirm supplies the knowledge the claim requires.

But do not stretch it the other way. Carelessness is not dishonesty. A professional who was negligent, who should have checked and did not, is not an accessory. Negligence without dishonesty gets the beneficiaries nowhere on this claim.

So how do you choose between the two? Ask one question first. Did this defendant receive trust property, or did he only help? If he received it, knowing receipt is the primary claim, with assistance as the alternative. If he received nothing and only advised or processed, dishonest assistance is the only claim there is.

Then notice that the thresholds differ, and not in the direction people expect. Unconscionable knowledge is a lower bar than dishonesty. So a defendant may be caught by knowing receipt while being nowhere near dishonest, which is exactly why the two claims are not interchangeable.

And the remedies differ. Knowing receipt is about property that came to you: give it up, or its value. Dishonest assistance is about a breach you helped bring about: compensate for the loss it caused. Several accessories to the same breach can be jointly and severally liable for it.

Try one. A solicitor advises a trustee on how to structure an improper transfer, receives nothing but his usual fee, and knows perfectly well what the deed says. Knowing receipt, dishonest assistance, or both? Assistance only. He received no trust property, so the first element of the receipt claim fails at the door.

Last piece, and it is the one students get wrong in writing. Tracing. Tracing is the process of following trust property into other hands, through mixtures and substitutions, so that you can identify it. It is available at common law and, more broadly, in equity.

But tracing is not a cause of action. It identifies property. It does not assert any right over it. It also stops dead when the property reaches a bona fide purchaser for value without notice.

So it matters to knowing receipt, because you must trace the property into the recipient's hands to prove receipt at all. It is irrelevant to dishonest assistance, where nothing needs to have been received. And never let an answer end at the claimant can trace the money. Trace it, then name the claim.

A word on how SQE1 tests this. You are not asked to recall case names. You get a scenario, five answers, and one instruction: pick the best. So learn the elements and how they sort a set of facts. The names in this episode are memory pegs, nothing more.

If you keep only three. BCCI v Akindele, for the single question of whether the recipient's knowledge makes retention unconscionable. Royal Brunei Airlines v Tan, because accessory liability turns on dishonesty and not on knowledge. And Ivey v Genting Casinos, because it fixed what dishonesty means and removed the limb that Twinsectra had added.

Four traps. One: do not run the two claims together. Receipt asks what the defendant got and what he knew when he got it. Assistance asks what he did and whether he was dishonest. An answer requiring an assistant to have received something, or a recipient to have been dishonest, has merged them.

Two: watch the clock on knowledge. In knowing receipt it must exist at the moment of receipt. A recipient who learns the truth a month later did not knowingly receive anything, however uncomfortable his position then becomes.

Three: the defendant's own opinion of his honesty is irrelevant, and so is his good faith. Since Ivey the court asks what he knew and then what decent people make of it. An option that turns on the defendant not having realised others would think him dishonest is stating the law as it was before 2017.

Four: tracing is not an answer. It is the process that gets you to the defendant's door. What you sue on when you arrive is knowing receipt if he received the property, or dishonest assistance if he only helped.

Quick check. A trustee pays £70,000 of trust money into the personal account of a man who has no connection with the trust. The man keeps the money and spends part of it on himself. He does not assist the trustee in any way. The payment simply arrives. The beneficiaries have found it in the trust's bank statements and want to sue him.

Which of the following must they prove to succeed against him? Three candidate answers. One: that he assisted the trustee, knew of the breach of trust, and acted dishonestly throughout.

Two: that he received trust property, gave value for it, and had notice of the trust. Three: that he received trust property, knew it was being misapplied, and received it for his own benefit. Pause here if you want a moment.

The answer is three. This is a receipt case, not an assistance case: he did nothing to bring the breach about, so the claim is knowing receipt. Its three elements are receipt of trust property or its traceable proceeds, and knowledge that the property was being applied in breach such that retention is unconscionable. Then beneficial receipt: he took it for himself, not as an agent.

Why the others fail. One recites the elements of dishonest assistance, and this man assisted in nothing. Two mixes the claim up with a defence: giving value is no part of what the beneficiaries prove. Value and absence of notice belong to the bona fide purchaser, and it is for the defendant to raise them.

Five things to take away. One: only trustees are liable for breach of trust, and the two exceptions are knowing receipt and dishonest assistance, which are separate claims throughout. Two: knowing receipt needs receipt of trust property, knowledge at that moment making retention unconscionable, and beneficial receipt.

Three: the categories of knowledge describe rather than decide, and the conscience must be sufficiently affected, so constructive notice on its own will not do. Four: assistance needs a positive act and dishonesty, and no receipt of anything at all.

Five: dishonesty is what this defendant knew, judged by the standards of ordinary decent people, with no extra requirement that he saw himself that way. And our auctioneer? Liable, however sincerely he says otherwise. Next time, Fiduciary Relationships and Obligations.

Practise this topic with exam-style questions at sqe1prep.co.uk. This episode is for education and exam revision only, not legal advice, and we are not affiliated with or endorsed by the SRA or Kaplan.