Supreme Court offers clarity on claims for "knowing receipt"
The Supreme Court has dismissed a claim of knowing receipt brought by Saad Investments Co Ltd (Saad) against a Saudi-Arabian bank (the Bank), and in doing so, provided welcome elucidation of certain elements of the cause of action: Byers v Saudi National Bank  UKSC 51.
Saad is a Cayman Islands company, and the beneficiary of certain Cayman Islands trusts; the trust property of which included shares in five Saudi Arabian companies (the Shares). The trustee, in breach of trust, transferred the Shares to the Bank to discharge a debt he owed to the Bank in his personal capacity. Notably, the Bank knew the transfer was made in breach of trust. However, under Saudi Arabian law, which governed the transfer, there is no distinction made between the legal title of, and an equitable interest in, property. The effect of the transfer was therefore that the Bank became legal owner of the Shares, and Saad’s equitable interest in the property was extinguished.
The critical question on appeal was whether a claim for knowing receipt requires a continuing proprietary interest in the subject property. The Supreme Court unanimously held in the affirmative, finding that a claim cannot succeed where the proprietary interest has been extinguished or overridden.
The Supreme Court’s key observations were as follows:
- The transfer of trust property, by a trustee, to a bona fide purchaser for value without notice, extinguishes or overrides the proprietary equitable interest of a beneficiary, even where a trustee acts in breach of trust.
- If a purchaser later becomes aware that a transfer was made in breach of trust, this does not resuscitate the proprietary equitable interest. That interest is also not revived if the purchaser transfers the property to a second person, who, at the time of the transfer, is aware of the breach. However, if the second recipient were the defaulting trustee, they would not be released from their obligations and would hold the property on trust for the beneficiary.
- If the extinction of a proprietary equitable interest has occurred by the time the property is received, any proprietary claim in the property will be defeated.
Applying this reasoning, by operation of Saudi Arabian law, the effect of the transfer was to extinguish Saad’s proprietary equitable interest in the Shares – notwithstanding the breach of trust, and/or the Bank’s knowledge of that breach.
This decision will be of particular interest to asset tracing professionals and legal professionals advising on breaches of trust arising from the transfer of property.