As a general principle, only trustees are liable for breach of trust. Trustees hold fiduciary duties and are personally accountable for any breach of those duties. A stranger to the trust — someone who is not a trustee and has not assumed fiduciary responsibilities — is not automatically liable for a trustee's breach.
However, equity recognises two situations in which a person who is not a trustee can be held liable for involvement in a breach of trust. These are: (1) knowing receipt — where a third party receives trust property with knowledge of the breach; and (2) dishonest assistance — where a third party dishonestly assists a trustee in committing a breach of trust. These are entirely separate causes of action with different elements, different knowledge requirements, and different defences.
Knowing receipt arises where a third party receives trust property (or its traceable proceeds) knowing that it is being misapplied in breach of trust. The claimant must show that the defendant has been enriched at the claimant's expense by receiving trust property, and that the defendant had the requisite knowledge of the breach of trust at the time of receipt. This is a proprietary claim: the recipient holds the property on constructive trust for the beneficiaries.
In Baden v Société Générale, Peter Gibson J established five categories of knowledge that can satisfy the knowledge requirement for knowing receipt. These categories range from actual knowledge at one end to mere notice at the other. Not all five categories necessarily give rise to liability — the courts have debated which categories are sufficient.
| Category | Description | Type of Knowledge |
|---|---|---|
| 1. Actual knowledge | The defendant actually knows the relevant facts (i.e. knows there is a breach of trust) | Actual knowledge |
| 2. Wilfully shutting one's eyes | The defendant deliberately avoids learning the truth — conscious disregard of obvious facts | Subjective constructive knowledge |
| 3. Wilfully and recklessly failing to inquire | The defendant recklessly fails to make inquiries that an honest and reasonable person would make | Subjective constructive knowledge |
| 4. Knowledge of suspicious circumstances | The defendant knows circumstances that would indicate the facts to an honest and reasonable person | Objective constructive knowledge |
| 5. Knowledge putting on inquiry | The defendant knows facts that would put an honest and reasonable person on inquiry (but need not actually know the breach) | Objective constructive knowledge |
The courts have held that only categories 1 to 4 are sufficient for knowing receipt liability. Category 5 (mere notice that would put a reasonable person on inquiry) is not enough on its own — the claimant must show that the defendant actually had knowledge of facts that would indicate the breach to an honest and reasonable person. This was confirmed in Re Montagu's Settlement Trusts [1987], where Nourse LJ stated that knowledge means notice of circumstances that would put a reasonable person on inquiry, combined with a failure to inquire.
"Knowledge for this purpose means knowledge of circumstances that would put an honest and reasonable man on inquiry." — Nourse LJ. This means that a defendant who merely has notice of something suspicious, but who has no actual knowledge of the breach, may not be liable unless they also failed to make the inquiries that an honest person would have made.
Step 1: Receipt — Did the defendant receive trust property (or its traceable proceeds)?
Step 2: Knowledge — Did the defendant have knowledge of the breach of trust at the time of receipt (at least Baden category 4)?
Step 3: Beneficial receipt — Did the defendant benefit from the receipt of the property?
If all three elements are satisfied, the defendant is liable to disgorge the property (or its value) to the beneficiaries.
The defendant must have received trust property or its traceable proceeds. "Receipt" requires that the defendant has taken the property into their own control or benefit. Merely having the property pass through an account is not enough — the defendant must have personally received and dealt with it. Where the defendant is a bank, receipt occurs when the bank receives the funds into an account it controls.
The defendant must have known (at least at Baden category 4 level) that the property was being applied in breach of trust. It is not necessary that the defendant knew all the details of the trust or the precise nature of the breach — it is sufficient that the defendant knew the property was being misapplied in a way that was inconsistent with the trustee's obligations. The knowledge must exist at the time of receipt.
The defendant must have received the property beneficially — that is, for their own benefit, not merely as an agent or intermediary. If the defendant received the property on behalf of someone else, or as a mere conduit, they may not be liable for knowing receipt (though they could still be liable for dishonest assistance).
A common exam error is confusing the timing of knowledge. The defendant must have the requisite knowledge at the time of receipt of the trust property. Knowledge acquired after receipt does not make the defendant liable for knowing receipt (though it may be relevant to a claim in dishonest assistance for subsequent conduct).
Historically, the test for accessory liability was "knowing assistance" — a third party was liable if they assisted in a breach of trust with knowledge of the breach. However, in Royal Brunei Airlines Sdn Bhd v Tan [1995], the Privy Council fundamentally changed the law by holding that the correct test is dishonesty, not knowledge. A person is only liable as an accessory to a breach of trust if they have been dishonest.
"It is not enough that the third party should have failed to take steps to ensure that the trust was not being breached. He must have acted dishonestly." — Lord Nicholls. This landmark decision replaced the Baden knowledge categories for accessory liability with a single test of dishonesty, fundamentally simplifying the law in this area.
Step 1: Assistance — Did the defendant assist the trustee in committing a breach of trust?
Step 2: Dishonesty — Did the defendant act dishonestly in providing that assistance?
If both elements are satisfied, the defendant is personally liable to compensate the beneficiaries for losses caused by the breach.
The defendant must have assisted the trustee in committing the breach of trust. This requires some positive act of assistance — mere inaction or failure to prevent the breach is not enough. The assistance must be causally connected to the breach. Examples include: a solicitor who prepares documentation for an improper transfer of trust property; a bank that processes a payment knowing it is in breach of trust; an accountant who advises on how to structure a transaction that breaches the trust.
The defendant must have acted dishonestly. The standard of dishonesty has been the subject of significant judicial development. In Twinsectra v Yardley [2002], the House of Lords held that dishonesty is judged by an objective standard — what a reasonable person would consider dishonest, subjectively applied (the defendant must have known that reasonable people would regard their conduct as dishonest). This was refined in Barlow Clowes v Eurotrust International Ltd [2005], which confirmed that the defendant must both know about the breach and act dishonestly.
"Dishonesty is judged by the standard of ordinary decent people. However, the defendant must have realised that ordinary decent people would regard their conduct as dishonest." — Lord Hutton. This established a combined subjective-objective test: objective in that the standard is set by ordinary decent people, but subjective in that the defendant must have been aware that their conduct would be regarded as dishonest.
"For liability for dishonest assistance, it is necessary that the defendant was dishonest and that he knew the transaction was a breach of trust or was intended to be a breach of trust." — Nourse LJ. This case confirmed that both knowledge of the breach and dishonesty are required. The two elements are separate: knowledge alone is not enough, and dishonesty without knowledge of the breach is also not enough.
The Supreme Court in Ivey v Genting Casinos established a single, unified test for dishonesty that applies in both civil and criminal contexts. Under the Ivey test: (1) the court must first ascertain (subjectively) the actual state of the defendant's knowledge or belief as to the facts; and (2) the court must then determine (objectively) whether that conduct was dishonest by the standards of ordinary decent people. A person is dishonest if they knew that what they were doing was dishonest by ordinary standards, even if they believed it was justified. The Ivey test has been applied in the trust context and effectively replaces the Twinsectra two-stage test, simplifying the analysis.
A defendant who assisted in a breach of trust cannot escape liability by arguing that they acted in good faith. The question is whether the conduct was dishonest by the standards of ordinary decent people, not whether the defendant subjectively believed they were doing the right thing. A person may act in what they consider to be good faith, but still be dishonest by objective standards.
When analysing dishonesty in an exam answer, apply the Ivey test step by step: (1) What did the defendant actually know? (2) Would ordinary decent people regard the defendant's conduct, given that knowledge, as dishonest? Remember to consider the defendant's own knowledge — a person who genuinely does not know about the breach cannot be dishonest. But if they knew the facts and proceeded anyway, their subjective belief that they were justified will not save them.
| Feature | Knowing Receipt | Dishonest Assistance |
|---|---|---|
| Nature of liability | Proprietary — the recipient holds the property on constructive trust | Personal — the accessory is liable in damages/compensation |
| What the defendant did | Received trust property (or traceable proceeds) | Assisted the trustee in committing a breach of trust |
| Knowledge requirement | Constructive knowledge (Baden categories 1-4) | Dishonesty (Ivey test) — must know of the breach and act dishonestly |
| Did the defendant receive property? | Yes — receipt is an essential element | No — the assistant need not have received any property at all |
| Defences | Bona fide purchaser for value without notice; change of position | No specific defence — good faith is not a defence |
| Remedy | Restitution / disgorgement of the property (or its value) | Personal compensation for losses caused by the breach |
| Leading authority | Baden v Société Générale [1993] | Royal Brunei Airlines v Tan [1995]; Ivey v Genting Casinos [2017] |
| Standard of fault | Lower threshold — constructive knowledge is sufficient | Higher threshold — actual dishonesty is required |
In an exam scenario, consider whether the defendant received property or merely assisted. If they received trust property, knowing receipt is likely the primary claim, with dishonest assistance as an alternative. If they only assisted (e.g. gave advice, processed a transaction) without receiving anything, dishonest assistance is the only available claim. Always consider pleading both where the facts support it.
Tracing is the process by which a claimant follows trust property into the hands of third parties who have received it. It is not a cause of action in itself — it is a process or remedy that allows the claimant to identify and recover their property (or its substitute) even where it has been transferred, mixed with other funds, or used to purchase other assets. Tracing is closely linked to knowing receipt because the claimant must trace the property into the hands of the recipient to establish the receipt element.
Do not confuse tracing with a cause of action. Tracing is merely the process of following property. The actual claim against the third party will be knowing receipt (if they received the property) or dishonest assistance (if they helped the trustee). Students sometimes write "the claimant can trace the property" as if that were the complete answer — always go on to identify the substantive cause of action.
Topic 7 is closely linked to Topics on breach of trust, tracing, and remedies. When answering a question on stranger liability, consider: Who is the trustee? What was the breach? Who received the property? Who assisted? What did each person know? Apply the Baden categories for knowing receipt and the Ivey test for dishonest assistance. Consider defences and remedies. Structure your answer around these questions for maximum marks.