TRUSTS LAW: KNOWING RECEIPT (EQUITABLE LIABILITY OF STRANGERS (II)) – TERM 2 WEEK 5

Knowing Receipt

1. Introduction 

Where a person knowingly receives trust property which has been transferred away from trust OR otherwise misapplied AND where that person has acted unconscionably,
then that person will incur personal liability to account as CONSTRUCTIVE TRUSTEE to beneficiary of that trust for amount of loss.

 Knowing Receipt  Unconscionable Receipt + Knowledge (AGIP V JACKSON)

 Knowing Receipt  person who is not trust, not beneficiary will be personally liable to account to trust for any loss suffered in a situation where she receives trust
property UNCOSNCIONABLY with knowledge that property had been passed to her in breach of trust (Re Montagu, AGIP v Jackson, Lipman Gorman v Karpnale, El
Ajou v Dollar Land Holdings appealed, BCCI v Akindele)
 Another expression of defining KR  Personal liability to account concerning strangers who received some trust property that has been transferred away in
breach of trust
Receipt-Based claim analogous to equitable compensation (El Ajou vv Dollar Land)
 Must prove breach of trust FIRST before making a KR claim/ for a KR claim to exist.
 Once breach of trust shown, C must show that D acted unconscionably & whether there has been receipt or to will be decided according to tracing claim rules (El Ajou
vv Dollar Land) OR it will eb based on D having possession of the property!
 Knowledge means actual knowledge, willfully closing one’s eyes to breach of trust, failing to make inquiries which reasonable person would have made (Re Montagu)
 This test of knowledge also based on whether D had acted unconscionably in receiving trust property (BCCI v Akindele)

KNOWING RECEIPT
RECEIPT (UNCONSCIONABLE RECEIPT) KNOWLEDGE
2. The nature of the “receipt” – Receipt Based 3. The nature of “unconscionability” in unconscionable 4. The nature of “knowledge”
receipt

****Preferred approach  1. Court should consider whether D had requisite knowledge of breach of trust (as  X necessary degree of knowledge , X may himself become C. Trustee
set out in Re Montagu) , and then 2. Ask whether in general terms D had acted unconscionably. for B on basis of knowing receipt (Westdesutche)
 Unless X has requisite degree of knowledge X is not personally liable to
account as trustee (Re Diplock, Re Montagu. Westdeutsche)

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What do we really mean when we say “D had
received the property”??? Knowing the nature of
receipt is VERY VERY IMPORTANT.
 Whether D had received property?
Defining this is super impt:
 Whether or not the person holding
account was acting merely as agent for
others (so D won’t be liable for knowing
receipt because there will be no
appropriate receipt of property since D
was just acting as an agent) OR whether he
received property in beneficial capacity =>
So what capacity he receives property in
MATTERS!
 But if test is simply whether or not receipt
passed into D’s possession or control then
whether D acquires beneficial rights in
property really doesn't matter because our
focus is on whether that receipt was
coupled with appropriate breach of trust
a. Taking property in  Cases not precise in
your possession defining how property
must be received
 No need stranger to
have any common law
OR equitable rights in
the property. 
Property pass through
 Innocent receipt of property X subject to existing equitable interest
doesn't by itself make X a trustee despite severance of LT and ET
Defining unconscionability is VITAL. THE SIGNIFICANCE OF BCCI v Akindele  IT LAYS DOWN TEST OF
UNCONSCIONABILITY, linked to the requirement of knowledge.
Now apparent uncertainty of what unsconscionability is
removed by Re Montagu’s Settlement. Not about D acted unconscionably in general terms, which imposes liability,
but rather it is a Q as to whether or not D has such knowledge of
It’s just what remains unclear is how those categories of circumstances so as to make his retention OR dealing with property
unsconsionability in Re Montagu  considered unconscionable.
unconscionable but beyond test of knowledge?!!! (next
element we need to deal with) => Having knowledge : Satisfy test for constructive knowledge that property
was passed to him in breach of trust, (Re Montagu) would constitue an
unconscionable circumstance for D to have received property.
a. The concept of  This test of knowledge is a. The PAST PRESENT LAW (RE MONTAGU)
unconscionability based on whether D had categories of
acted unconscionably in knowledge Actual knowledge of circs Actual knowledge of circs
receiving trust property means D knew material facts means D knew material facts
 enough to show D regardless of whether or nit regardless of whether or nit
knew or ought to have she tried to ignore them. she tried to ignore them.
known breach of trust or
fiduciary duty for D to be
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 stranger’s hands liable in UR. (BCCI v 1. Actual Knowledge => 1. Actual Knowledge =>
enough. Akindele) Indicate form of actual Indicate form of actual
 Lack proof of receipt  How to determine knowledge of circs knowledge of circs
 prevent claim for unconsionability? Look 2. Wilfully shutting one’s 2. Wilfully shutting one’s
KR being commenced. at D’s state of eyes to obvious => eyes to obvious =>
 “There is receipt of knowledge... Indicate form of actual Indicate form of actual
trust property when a UNSCONSIONABILITY OF knowledge of circs knowledge of circs
company’s funds are D  IF IT IS 3. Wilfully and recklessly 3. Wilfully and recklessly
misapplied by any UNCONSCIONABLE FOR failing to make inquiries failing to make inquiries
person whose D TO RETAIN ANY which an honest person which an honest person
fiduciary position gave BENEFIT TAKEN FROM would have made. => would have made. =>
him control of them RECEIPT OF PROPERTY, Indicate form of actual Indicate form of actual
OR enabled him to OR IT WOULD CAUSE knowledge of circs knowledge of circs
misapply them.” BEENFICIARIES
(Millet J)  AGIP v UNCOMPENSATED LOSS Indicator of constructive Indicator of constructive
Jackson => WITHOUT D HAVING knowledge knowledge
 Person receives trust GOOD DEFENCE OR AN
property if she takes ABSENCE OF 4. Knowledge of Circs that 4. Knowledge of Circs that
control OR takes it KNOWLEDGE (BCCI v would indicate facts to an would indicate facts to an
into her possession Akindele) honest and reasonable honest and reasonable
=> Meaning Stranger man => indicator of man => indicator of
can go and misapply  NOTE, now there is only constructive knowledge constructive knowledge
it. (Good e.g. Bank) a SINGLE TEST of 5. Knowledge of Circs which 5. Knowledge of Circs which
dishonesty for DA => would put an honest and would put an honest and
there ought to be a reasonable man on reasonable man on
SINGLE TEST FOR inquiry => Indicator of inquiry => Indicator of
KNOWLEDGE for KR. constructive knowledge constructive knowledge

b. Taking beneficial  Cited test for
ownership of “receipt”  (El Ajou
property vv Dollar Land,
Hoffman J) : It says
MUST have beneficial
b. Preferred approach on Analysing  Reason behind change  3 to 5 had element of willful
cases Montagu behaviour on part of D who cant be proved to have
categories of actually known of facts alleged.
knowledge in  Megarry VC excluded 4 and 5 because they did not
light of require willfulness of D’s part and if D claimed to have

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 receipt of property. “actual forgotten knowledge which previously she had had,
I.e., MUST (1) SHOW knowledge”, then she would be held liable for knowing receipt.
disposal of assets in “nelsonian
breach of fiduciary knowledge”,  (A) Actual Knowledge (Baden v Societe Generale) =>
duty, (2) Beneficial “naughty proof D consciously knew breach of trust and source
Receipt by D of assets knowledge” of property she received. If cannot show this then C
which are traceable as must rely on cat (2) and (3) which are constructive
representing assets of forms of knowledge in which D is DEEMED to have
C (so identifiable knowledge of breach even if actual knowledge cannot
property ) & (3) be definitely proved!
Knowledge on D’s
part that assets he  (B) Nelsonian Knowledge => Requires there was
received are traceable something obvious about circs which should have
to a breach of indicated there had been breach of trust which D
fiduciary duty! ignored. => Was D being WILFULLY BLIND over
things?!!!

 (C) Naughty Knowledge => What inquires are which

honest and reasonable person would have made in
cirs? Did D make those inquires? If not then D would
be taken to have knowledge of theft. Was he willful in
making those inquires?!

 (4) & (5) are very broad….Do not need that D acted
“willfully” or “intentionally”, just that circumstances
which might have put them on inquiry!!! Re Montagu
says D must have shown some willfulness OR
unconscionability…..  Cannot hold D liable for
knowledge so easily!!!
What Requirements (1) Circ of receipt don't Likelihood  D will escape liability b. Acid Test for Knowledge: “Should you have been suspicious?”
mean? Why do (1), (2), require a “disposal of his
(3) pose problems? assets in breach of Baden v Societe Generale  Enough to show D had Background to this (3) Wilfully and recklessly failing to make inquiries which
fiduciary duty” but rather knowledge of factors that would have put an honest and matter an honest person would have made. => Indicate form of

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What’s the effect? THERE MUST HAVE BEEN
PROPERTY (NOT
NECESSARY AN ASSET)
PASSED AWAY IN BREACH
OF FIDUCIARY DUTY  Q:
So does it mean there’s
some kind of lack of
consistency here?!!
(2)  Take painting
example
(3)  Suggests that
recipient MUST become
owner of property in
equity. BUT Millet J’s AGIP
v Jackson formation is on
basis D need only take
property under he control
OR into her possession.
Acquiring control or
possession of property
doesn't make the person
the owner of property in
equity
*** MILLET J CORRECTLY
EXTENDED AMBIT OF
LIABILITY OF ANY PERSON
WHO COMMITS THE
EQUITABLE WRONG OF
TAKING PROPERTY INTO
HER POSSESSION …. 
reasonable man on inuirty as propriety of actions of bank
officers.
NOW,
***(BCCI v Akindele) 
Facts: D promised high return on his investments by bank
offers and bank officers sought in breach of fiduciary
duties to bank to procedure D that return on his
investments even though his investments didn't perform
so well.
Q at issue: Whether in relation to a series of payments
made to D he has at any time had knowledge of breach of
fiduciary duties by bank involved..
HELD: D heard rumours about what was happening in bank
inside BUT there was nothing on facts to show D acted
unconscionably in general terms and therefore D NOT
LIABLE FOR KNOWING RECEIPT.
So even though D would have been treated as a having
constructive knowledge of fraud, because he was not
found to have acted unconscionably, he was not liable for
Knowing Receipt under Receipt Claim.
OVERALL EFFECT OF NOTION OF UNCONSCIONABILITY IS
TO LET COURT REACH CONCLUSION IT WANTED BASED
ON FACTS => WHICH IS TO ABSOLVE D OF LIABILITY EVEN
WHEN A STRICTER TEST MAY HAVE MADE HIM LIABLE TO
ACCOUNT TO BANK AS HE HAD KNOWLEDGE OF FACTORS
THAT MIGHT HAVE PUT A REASONABLE PERSON ON
actual knowledge of circs
Now this is very hard to define because it deals with
situations in which D could have been expected to have
asked more Qs or investigated further into the source of
property.
The Acid Test Polly Peck: The Acid test is whether or not recipient of
property ought to have been suspicious that the
property had been acquired in breach of trust !!!
KR liability to be attached “in situation in which any
honest and reasonable man would have made inquiry”
-El Ajou v Dollar Land Holdings (Millet J):
El Ajou v Dollar Land Holdings (Millet J): The issue is
whether or not circumstances are such that they require
a person to be suspicious, so that their conscience
would encourage them to make inquiries. So if nothing
in circs make recipient suspicious, they will not be held
to have had knowledge under 3rd category of
knowledge!
Where there’s something about CONTEXT which
should make recipient suspicious, then recipient
should make reasonable inquires. If inquiries produce
NO INFO or if recipient is deceived when making those
inquiries, then she’ll be absolved from having
knowledge of those circumstances.
Knowledge may Polly Peck: Money laundering case. Nadir being sued by
depend on context Central Bank of Cyprus. Argument was that N was
responsible for misapplication of substantial funds in
sterling which were assets of Plaintiff company
beneficiary…) and Central Bank exchanged GBP for
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E.g. $$ laundering scheme INQUIRY! Turkish Lire with actual knowledge of fraud on P or circs
where property put where Central Bank should have inquired where $$
beyond reach of beneficial THE SIGNIFICANCE OF BCCI v Akindele  IT LAYS DOWN came from.
owner. MILLET J’S TEST OF UNCONSCIONABILITY, WHICH IS NOW PART OF
FORMULATION IS THAT THE APPROPRIATE TEST IN CASES OF RECEIPT OF HELD(Scott LJ): POV of honest and reasonable banker
ALL PERSONS PROPERTY IN BREACH OF TRUST. adopted, but he did express reservations this was not
KNOWINGLY AND the only test.
UNCONSCIONABLY
INVOLVED IN BREACH OF Reasonableness of Recipient’s belief falls to be JUDGED
TRUST CAN BE LIABLE FOR from PERSPECTIVE of Recipient itself…. HELD  No
KNOWING RECEPT. SO IF reason for suspicion as large amounts of $ passed
PROPERTY WAS STOLEN through Central Bank’s accounts regularly & nothing at
FROM TRUST AND the time of transaction to cause bank to be suspicious of
PASSED TO D, D COULD particular transaction..
NOT BE BENEFICIALLY
ENTITLED TO STOLEN NOWADAYS, Banks have imposed duty to go and ask
TRUST PROPERTY => were huge amounts of $$ come from to identify
HOFFMAN’S J suspicious transactions to prevent $$$ laundering!
FORMULATION COULD Knowledge is Knowledge is subjective and therefore knowledge can
NEVER STRICTLY FOUND subjective and be forgotten – Re Montagu’s Settlement
LIABILITY IN KNOWING therefore
RECEIPT, WHICH CANNOT knowledge can be Facts: 10th Duke beneficiary life tenant under settlement
BE CORRECT, forgotten created by 9th duke. Trustees considered to have POWER
(explaining using to appoint chattels to 10th Duke meaning trustees
case law considered they could transfer ABSOLUTE TITLE in those
development) items of property to 10th Duke rather than hold them on
trust during his life then for his successor in title after his
death! =>

Now, obviously this is a breach of trust that 10 th duke

and trustees lapse into habit of treating all valuable
chattel as belonging absolutely beneficially to 10 th DUKE
(RECAP  Life tenant, remainder beneficiary

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arrangement, trustee cannot compromise)

Issue in Question:

Whether 10th Duke’s Estate (10th duke died) should be

held liable for knowing receipt of chattels in breach of
trust.

HELD: D does not have requisite knowledge on which

to base a KR claim if D has genuinely forgotten the
relevant factors.

One should be liable for receipt ONLY if one had

knowledge of THE RELEVANT FACTOR – knowledge of
trustee solicitor or other agent should not imposed on
D.

Because (1),(2),(3) all predicated on willful behaviour

OR actual knowledge, having forgotten information
would absolve person from having knowledge of that
info at material time!!!

D forgotten terms of trust => D would not be imputed

with his lawyers’ knowledge that for him to treat
property as his own personal property would have
been in breach of trust!

Cat 5 (Knowledge of Circs which would put an honest

and reasonable man on inquiry => Indicator of
constructive knowledge) STRUCK OUT!
IF D NOT REQUIRED TO HAVE ACTED WILFULLY OR
INTENTIONALLY THEN IT WOULD BE EASIER TO FIX D
WITH KNOWLEDGE THAN IN CIRCS IN WHICH C WAS

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 REQUIRED TO PROVE D HAD ACTED INTENTIONALLY IN
FAILING TO MAKE REASONABLE INQUIRES AS TO
SOURCE OF PROPERTY WHICH HE HAD RECEIVED!

MEGARRY VC NARROWED SCOPE FO KNWOLEDGE

TEST TO (1) , (2) AND (3) => NOW ONLY
INCORPORATING ACTS THAT D CONDUCTED WILFULLY
OR DELIBERATELY, OR FACTS OF WHICH D HAD ACTUAL
KNWOELDGE. => NO LIABILITY FOR KNOWING RECEIPT
ATTACHED TO 10TH DUKE AND HIS ESTATE.

**Note  Duke’s Position  Public Policy at that

tiem?!!

Misuse of
confidential info &
trust property
Knowing Receipt in
complex
commercial fund
Current State of Law for Receipt: Current State of Law for Knowledge:

(1) Ask first if D meets category (1), (2) OR (3) above (Re Montagu’s
Settlement). If yes can prove meet 2 of categories =>
unconscionability 
(2) If cannot prove fit category , the court to think whether or not there
was something unconscionable about circs of case more generally!

Current State of the law – Analysis of change effected to law by introducing “unconscionability” & line of cases applying dishonesty to receipt-based claim & explanation of how those cases correlate
with concept OF KR.

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 Side point  Unjust enrichment r/s with test for knowledge

KNOWING RECEIPT IS NOT BASED ON UNJUST ENRICHMENT. D WILL BE LIABLE TO ACCOUNT FOR KNOWING RECEIPT IF SHE RECEIVED TRUST PROPERTY ON BREACH OF TRUST AND SINCE
DISPOSED PROPERTY (EVEN WITHOUT EARNING ANY PROFIT FROM TRANSACTION). THE LAW DOES NOT CARE IF D EARNED ANY PROFITS FROM THE PASSING ON OF TRUST PROPERTY OR NOT.
REPEAT EMPHASIS  D WILL OWE BENEFICIARY PERSONAL LIABILITY TO ACCOUNT ON BASIS OF CONSTRUCTIVE TRUSTEESHIP, AS IF WERE TRUSTEE.

4. Comparing the “Knowledge” Requirement in KR with DA.

Potter LJ made clear applicable test for both KR & DA should be one of “dishonesty” as set out in RBA v Tan as set out in RBA v Tan.
Twinsectra v Yardley (HOL)
Position of English Law MOVEMENT AWAY from knowledge as basis for receipt based claim.
Academic Critique Marginal SHIFT between (1) Test of knowledge & (2) Test for dishonesty => suggested this could make significant difference in borderline
cases.

What is test based on
knowledge really about?
What is test based on
dishonesty really about?
Twinsectra v Yardley’s decision in CA presents a PARTIAL SHIFT: TRIGGER FOR LIABILITY IS “WHAT AN OBJECTIVE HONEST PERSON
WOULD HAVE DONE RATHER THAN WHAT DID D KNOW?
Test based on knowledge concerned with state of mind of D & seeks to establish precisely what that particular D knew… RMB D liable IN
PERSONAM, not in rem)
Not just about D’s particular mental state, it’s about what an honest person would have doen in D’s place => Court will attempt to
establish what an objective, reasonable person, would have done in those circumstances.