“give me back my property”
“you must return it to me, account to me or pay me equitable compensation for its loss”
“Conceptually these two proposed bases of recovery are very different. A common law liability in restitution depends on the defendant having been unjustly enriched by the receipt. The liability of a constructive trustee is essentially a custodial liability comparable to that of an express trustee, which is imposed on him because he has sufficient knowledge to affect his conscience”
“Now in this case we have to deal with certain persons who are trustees, and with certain other persons who are not trustees. That is a distinction to be borne in mind throughout the case. Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.”
“So, in my view, in general as in this case, a credit in a company’s bank account which the directors are authorised to operate are moneys of the company under the control of those directors and are held by them on trust for the company in accordance with its purposes.”
“A limited company is of course not a trustee of its own funds: it is their beneficial owner; but in consequence of the fiduciary character of their duties the directors of a limited company are treated as if they were trustees of those funds of the company which are in their hands or under their control, and if they misapply them they commit a breach of trust (Re Lands Allotment Co, per Lindley and Kay LJJ). So, if the directors of a company in breach of their fiduciary duties misapply the funds of their company so that they come into the hands of some stranger to the trust who receives them with knowledge (actual or constructive) of the breach, he cannot conscientiously retain those funds against the company unless he has some better equity. He becomes a constructive trustee for the company of the misapplied funds.”
“I conceive that the directors of every company being the managing agents of a trading concern have considerable authority and power in dealing with outstanding debts due to the concern [. . .] but if they deal with the funds of a company, although those funds are not absolutely vested in them, but funds which are under their control, and deal with those funds in a manner which is beyond their powers, then as to that dealing they are treated as having committed a breach of trust […] directors are not always trustees. As directors they are not trustees at all. They are only trustees qua the particular property which is put into their hands or under their control, and which they have applied in a manner which is beyond the powers of the company, I conceive that qua such fund they are constructive trustees, or trustees by implication of law.”
“The question is not merely whether a person is to take a property subject to an equity but whether the full burden of trusteeship is to be imposed on him by construction of equity.”
“It seems to me that one must be very careful about applying to constructive trusts either the accepted concepts of notice or any analogy to them. In determining whether a constructive trust has been created, the fundamental question is whether the conscience of the recipient is bound in such a way as to justify equity in imposing a trust on him.”
“Third, there seems to me to be a fundamental difference between the questions that arise in respect of the doctrine of purchaser without notice and constructive trusts. As I said in my previous judgment, ante, pp 272H—273B: ‘The former is concerned with the question whether a person takes property subject to or free from some equity. The latter is concerned with whether or not a person is to have imposed upon him the personal burdens and obligations of trusteeship. I do not see why one of the touchstones for determining the burdens on property should be the same as that for deciding whether to impose a personal obligation on a man. The cold calculus of constructive and imputed notice does not seem to me to be an appropriate instrument for deciding whether a man's conscience is sufficiently affected for it to be right to bind him by the obligations of a constructive trustee.’ I can see no reason to resile from that statement, save that to meet possible susceptibilities I would alter ‘man’ to ‘person’. I would only add that there is more to being made a trustee than merely taking property subject to an equity.”
“This is a claim to enforce a constructive trust on the basis of knowing receipt. For this purpose the plaintiff must show, first, a disposal of his assets in breach of fiduciary duty; secondly, the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff; and thirdly, knowledge on the part of the defendant that the assets he received are traceable to a breach of fiduciary duty.”
“In order to ascertain the applicable law under English conflict of laws, it is not sufficient to characterise the nature of the claim: it is necessary to identify the question at issue. The English law of restitution makes a fundamental distinction between the unjust enrichment of the defendant which is occasioned by depriving the plaintiff of his property and enrichment which results from a wrong done to the plaintiff by the defendant. In the first category of case the plaintiff’s restitutionary claim is said to have a proprietary base. The enrichment of the defendant is at the direct expense of the plaintiff and is matched by a corresponding diminution of his assets. The plaintiff brings the claim in order to recover his own property and must succeed, if at all, by virtue of his own title. In the latter class of case his claim arises from a breach of fiduciary or other obligation on the part of the defendant. The distinction is that drawn by equity between the claim of an equitable owner to recover his property, or compensation for the failure to restore it, from a person into whose hands it has come and a claim by a plaintiff in respect of a breach of fiduciary obligation owed to him. In the former case he relies upon his continuing equitable interest in the property under an express or resulting trust; in the latter upon an equity between the parties which may in appropriate circumstances give rise to a constructive trust. The distinction, which is crucial, may have been lost sight of in the language of some of the more recent decisions on knowing receipt. Macmillan’s claim is of the former kind. In respect of the Berlitz shares there was no relationship of any kind between Macmillan and any of the defendants. There is no equity between them. In the absence of such an equity, any liability of the defendants to restore the shares or their proceeds to Macmillan or to pay compensation for their failure to do so must be based upon Macmillan's continuing equitable ownership of the shares. In the language of restitution, Macmillan's claim must rest upon ‘an undestroyed proprietary base’. Such a claim cannot succeed against a party who has under the applicable law acquired a title to the shares which is superior to that of Macmillan.”
“In my judgment, Macmillan's claim is properly to be characterised as a restitutionary claim which depends upon establishing a continuing proprietary interest in the subject matter of the claim; each of the defendants claims to have acquired a security interest in that subject matter which is superior to Macmillan's interest; and the question at issue is whether any of the defendants can identify a particular act or event which had the result of extinguishing Macmillan's interest or postponing it to that of the defendant. In my judgment the defendants have correctly characterised the issue as one of priority.”
“For these reasons I have come to the view that, just as there is now a single test of dishonesty for knowing assistance, so ought there to be a single test of knowledge for knowing receipt. The recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt.”
“A purchaser for valuable consideration without notice can give a good title to a purchaser from him with notice. The only exception is that a trustee who has sold property in breach of trust, or a person who has acquired property by fraud, cannot protect himself by purchasing it from a bona fide purchaser for value without notice.”
“Both sides appear to have proceeded on the assumption that knowing receipt claims, even though for personal relief, are properly viewed as a vindication of pre-existing property rights and are parasitic on those property rights and so are inappropriate against a purchaser who takes free from the prior trust interests by virtue of the Torrens system in question.”
“If the requisite degree of knowledge on the part of Mr Khan is established, his liability as a constructive trustee arises as a matter of law and attaches to the Property while it remains in his ownership. It is a liability which affects his conscience directly, and is not dependent upon the survival of the claimant’s original beneficial interest as one which binds the Property in his hands. This way of putting the claim is therefore unaffected by the technicalities of overreaching and land registration, as Ms Williamson rightly accepted. It follows that the critical issue on this part of the case is whether, on the facts, there is a serious question to be tried.”
“first, a disposal of his assets in breach of fiduciary duty; secondly, the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff; and thirdly, knowledge on the part of the defendant that the assets he received are traceable to a breach of fiduciary duty.” (iii). Millett J’s decision in Macmillan directly supported Fancourt J’s reasoning. In that case, a bona fide purchase of the legal title for value without notice gave the defendants a good defence to any claim by Macmillan, including one for knowing receipt, not because it would mean that their retention of shares was not unconscionable but because the defendants would have taken free of Macmillan’s interest. According to Millett J, a continuing proprietary interest was crucial. (iv). That a continuing proprietary interest is a prerequisite of a knowing receipt claim was also indicated by obiter dicta of Peter Gibson LJ in Lightning and of Nugee J in Courtwood Holdings. The Court of Appeal thought this was also supported by Lord Mance’s leading judgment in Akers v Samba, at para 20 (this is set out at para 122 below). (v). The description of the remedies for knowing receipt in the influential chapter by Charles Mitchell and Stephen Watterson, “Remedies for Knowing Receipt” (see para 104 above), which included reference to the knowing recipient having a custodial duty and a duty to restore the property, was viewed by the Court of Appeal as resting on a key premise that the beneficiaries still had an equitable interest in the relevant property at a time when the defendant had knowledge of the breach of trust. In Newey LJ’s words: “it is inapt to talk of a custodial duty, or a duty to restore, if the recipient acquires full and unencumbered title as a result of the transaction by which he receives the property.” (para 49) (vi). It made sense for a knowing recipient to have a custodial duty, including a duty to restore the property, where the property was subject to an interest having priority to the recipient’s. “It is much more difficult to see why a recipient should be bound to restore property or otherwise to have ‘custodial’ responsibilities in respect of it if he has an unimpeachable title to it.” (para 75) (vii). No help could be gleaned fromsection 29 of the Land Registration Act 2002 because its effect turned on the particular terms of the statutory regime. The Court of Appeal noted the different views of Matthew Conaglen and Amy Goymour, on the one hand, and of the Law Commission, on the other hand, as to the impact of those provisions on a claim for knowing receipt but thought it unnecessary to make any comment on them. (viii). Overall, Fancourt J’s reasoning and conclusion had the support of what had been decided or assumed in a consistent line of case law and was correct. At para 79, Newey LJ concluded: “In short, a continuing proprietary interest in the relevant property is required for a knowing receipt claim to be possible. A defendant cannot be liable for knowing receipt if he took the property free of any interest of the claimant.”
“It is established by Court of Appeal authority (and was not challenged on this appeal) that, where under the lex situs of the relevant trust property the effect of a transfer of the property by the trustee to a third party is to override any equitable interest which would otherwise subsist, that effect should be recognised as giving the transferee a defence to any claim by the beneficiary, whether proprietary or simply restitutionary: Macmillan Inc v Bishopsgate Investment Trust plc (No 3)[1996] 1 WLR 387 . In that case, bona fide chargees for value of shares situated in New York and held on trust for Macmillan were thus able, by application of New York law, to take the shares free of Macmillan’s prior equitable interest of which the chargees had had no notice.”
“if the equity which is asserted does not exist between the parties to the English litigation, for example where there has been a transfer of the property to a third party with notice of an equity but by the lex situs governing the transfer, the transfer extinguished the plaintiff’s equity, the English court could not then give relief against the third party even though he is within the jurisdiction.”
“The foundation of the claim in knowing receipt seems to me quite different. It is that a person has got their hands on property which belongs to somebody else… [In other words] the foundation …is that the assets do not belong in equity to the recipient; and the foundation of the fact that the assets do not belong to the recipient in equity is that the transfer by which the assets were transferred is a flawed transfer. It may be a voidable transfer, it may indeed, for example if a company’s assets are disposed of in a way that is ultra vires, be an entirely void transfer. But what gives the equity to the claimants is not the knowledge of the defendants by itself, or antecedent breaches of duty, but the fact that the transaction which is impugned is not one which transfers a good title to the recipient. It is in those circumstances that the recipient, unless a bona fide purchaser for value without notice, is liable, if he still has the property, to give it back, and can be made liable to account as constructive trustee, whether he still has the property or not, if he received it in circumstances that make his receipt unconscionable.”
“A breach of trust is usually essential because it is the basis on which the beneficial title is retained by the beneficiaries and does not pass to the recipient. If the beneficial title does pass to the recipient there is no occasion for the imposition of liability in equity on the recipient under the knowing receipt head of constructive trusteeship.”
“It follows that if a claimant in knowing receipt is always required to prove that they retained a proprietary interest in the property in the defendant’s hands, a claim in knowing receipt will always involve an allegation that the defendant either was at some stage, or remains, a true trustee of the relevant property.”
“It is a liability which affects his conscience directly, and is not dependent upon the survival of the claimant’s original beneficial interest as one which binds the Property in his hands. This way of putting the claim is therefore unaffected by the technicalities of overreaching and land registration as [counsel for the defendant] rightly accepted.”
“[S]trangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.”
“It has sometimes been argued that receipt-based claims should be considered together with assistance liability because both are premised upon participation in a primary wrong… However, it is suggested that the better view is that liability in knowing receipt is not participatory at all. Simply receiving misapplied property is inherently passive. It does not necessarily contribute to the primary wrong, and may occur long after the primary breach of duty, once the property has passed through many hands… There are further dissimilarities with assistance-based claims. For instance, the source of a receipt-based claim lies in the realm of property, which is different from participatory accessory liability…”
“It appears that the best view of knowing receipt is that it is equity’s analogue to the common law’s claim in conversion… Probably the main reason for thinking that knowing receipt is equity's conversion is the focus on proprietary rights which the claim demands… [A] wrongful interference with [proprietary] rights in the past appears to be of the essence of the claim… Clearly, if the defendant was a bona fide purchaser of a legal interest for value without notice of the plaintiff's pre-existing equitable rights, the defendant is not liable in knowing receipt… One way to identify that which the law considers a wrong is that it will generate liability for consequential losses. …. It seems clear that a knowing recipient whose actions caused losses greater than the value received could be made liable to repair such losses. There is a hint of this in the old language: he is ‘liable to account as a constructive trustee’. That means that he must render an account of what he did with the property, as if he were an express trustee; and he will be personally liable (as though in breach of trust) to the extent that his account shows improper management of the fund… Again, a defendant who receives property without the requisite mental state is not liable; but he will become so if he acquires that mental state while he still holds the property (or its traceable proceeds) …This ‘supervening liability’ is consistent only with knowing receipt as equity's conversion, since it presupposes a continuing proprietary right in the plaintiff with which the defendant interferes, his interference changing from non-culpable to culpable at a time when the proprietary right still endures.”
“Tracing at [common law] is relevant where the claimant has a legal proprietary base; the equitable tracing rules apply where a claim is founded on an equitable proprietary base.”
“If he is a bona fide purchaser for value of a legal estate without notice, he will take the property free from the equitable interest of the beneficiaries and so cannot become a constructive trustee on the basis of after-acquired knowledge.”
“[K]nowing receipt cannot lie when the claimant does not have an equitable right in property that the defendant receives. So, if a recipient takes property as a bona fide purchaser for value without notice of the breach of trust, she will be protected from a knowing receipt claim even if she is later made aware of the property's provenance. She could even transfer the property on to someone who was always aware of the initial breach and that second recipient would not be liable in knowing receipt. This is because the claimant's equitable right had already been extinguished.”
“Although directors are not properly speaking trustees, yet they have always been considered and treated as trustees of money which comes to their hands or which is actually under their control…”
“[Directors] are only trustees quathe particular property which is put into their hands or under their control, and which they have applied in a manner which is beyond the powers of the company. I conceive that quasuch fund they are constructive trustees, or trustees by implication of law…”
“A limited company is of course not a trustee of its own funds: it is their beneficial owner; but in consequence of the fiduciary character of their duties the directors of a limited company are treated as if they were trustees of those funds of the company which are in their hands or under their control, and if they misapply them they commit a breach of trust (Re Lands AllotmentCo, per Lindley and Kay LJJ). So, if the directors of a company in breach of their fiduciary duties misapply the funds of their company so that they come into the hands of some stranger to the trust who receives them with knowledge (actual or constructive) of the breach, he cannot conscientiously retain those funds against the company unless he has some better equity.”
“Although a company is the legal and beneficial owner of its own assets, there is no difficulty in classifying property belonging to a company as trust property for the purpose of knowing receipt, where the company's property has been alienated by its directors in breach of their fiduciary duty.”
“My Lords, I must express my respectful disagreement with the approach both of Hart J and of the Court of Appeal to the critical issue in this case. This is neither a case of ‘knowing receipt’ nor one of ‘knowing assistance’. The word ‘receipt’ in the expression ‘knowing receipt’ refers to the receipt by one person from another of assets. A person who enters into a binding contract acquires contractual rights that are created by the contract. There may be a ‘receipt’ of assets when the contract is completed and the question whether there is ‘knowing receipt’ may become a relevant question at that stage. But until then there is simply an executory contract which may or may not be enforceable. The creation by the contract of contractual rights does not constitute a ‘receipt’ of assets in the sense that a ‘knowing receipt’ involves a receipt of assets. The question whether an executory contract is enforceable is quite different from the question whether assets of which there has been a ‘knowing receipt’ are recoverable from the recipient. To confuse these two questions is likely to lead, and in the present case has, in my opinion, led, to further confusion. It is fair to say, however, that it appears to me that the courts below dealt with the case on the basis on which it was presented to them by counsel. It was indeed presented to your Lordships as being a case to which the principles of ‘knowing receipt’ ought to be applied.”
“Unfortunately, in the courts below [the] ‘want of authority’ issue was approached on the basis that the outcome turned on whether Oaktree's conduct was unconscionable. This seems to have been the test applied by the Court of Appeal in Bank of Credit and Commerce International (Overseas) Ltd v Akindele[2001] Ch 437 both to questions of ‘want of authority’ and to liability for what traditionally has been labelled ‘knowing receipt’. I respectfully consider the Court of Appeal in Akindele's case fell into error on this point. If a company (A) enters into an agreement with B under which B acquires benefits from A, A's ability to recover these benefits from B depends essentially on whether the agreement is binding on A. If the directors of A were acting for an improper purpose when they entered into the agreement, A's ability to have the agreement set aside depends upon the application of familiar principles of agency and company law. If, applying these principles, the agreement is found to be valid and is therefore not set aside, questions of ‘knowing receipt’ by B do not arise. So far as B is concerned there can be no question of A's assets having been misapplied. B acquired the assets from A, the legal and beneficial owner of the assets, under a valid agreement made between him and A. If, however, the agreement is set aside, B will be accountable for any benefits he may have received from A under the agreement. A will have a proprietary claim, if B still has the assets. Additionally, and irrespective of whether B still has the assets in question, A will have a personal claim against B for unjust enrichment, subject always to a defence of change of position. B's personal accountability will not be dependent upon proof of fault or ‘unconscionable’ conduct on his part. B's accountability, in this regard, will be ‘strict’. Either way, therefore, whether the … agreement is set aside or not, questions of unconscionability do not arise on Criterion's application for summary judgment.”