“Knowledge” and the 2nd Limb of Barnes v Addy

A key aspect of any case involving an agent of a Trustee, such as a Fund Administrator, being found to be an accessory to a dishonest and fraudulent design on the par of a Trustee is what “knowledge” does the agent have in relation to the allegations.

The accessorial liability of an agent falls under under the 2nd Limb of Barnes v Addy, if the agent has not received any of the Trust Property.

The leading High Court cases are:

Consul Development v DPC Estates Pty Ltd [1975] HCA 8

Farah Constructions Pty Ltd vs Say-Dee Pty Ltd [2007] HCA22; 230 CLR 89


I draw your attention to what the High Court stated Paragraphs 171-178 in Farah:

“·  What is required by the requirement of “knowledge” expressed in the second limb?

  • In the passage in which Lord Selborne formulated the second limb in terms of assisting with knowledge in a dishonest and fraudulent design on the part of the trustees, he contrasted those “actually participating in any fraudulent conduct of the trustee” and those “dealing honestly as agents” {(1874 9 Ch App 244 at 251-252}.
  • As a matter of ordinary understanding, and as reflected in the criminal law in Australia {Macleod v The Queen [2003] HCA 24; (2003) 214 CLR 230 at 242 [36]- [37]}. a person may have acted dishonestly, judged by the standards of ordinary, decent people, without appreciating that the act in question was dishonest by those standards. Further, as early as 1801, Sir William Grant MR stigmatised those who “shut their eyes” against the receipt of unwelcome information {Hill v Simpson (1801) 7 Ves Jun 153 at 170 [1802] EngR 200;[32 ER 63 at 69]. See further May v Chapman and Gurney (1847) 16 M & W 355 at 361 [1847] EngR148; [153 ER 1255 at 1228]; Jones v Gordon (1877) 2 App Cas 616 at 625, 628-629, 635; English and Scottish Mercantile Investment Company v Brunton [1892] 2 QB 700 at 707-708}.
  • Against this background, it has been customary to analyse the requirement of knowledge in the second limb of Barnes v Addy by reference to the five categories agreed between counsel in Baden v Société Générale pour Favoriser le Dévelopment du Commerce et de l’Industrie en France SA [Note [1993] 1WLR 509 at 575-576, 582; [1992] 4 All ER 161 at 235, 242-243. The case was decided in 1983}]
  • (i) actual knowledge;
  • (ii) wilfully shutting one’s eyes to the obvious;
  • (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make;
  • (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man;
  • (v) knowledge of circumstances which would put an honest and reasonable man on inquiry.

In Bank of Credit and Commerce International (Overseas) Ltd v Akindele (“BCCI”) {[2001] Ch 437 at 454}, Nourse LJ observed that the first three categories have generally been taken to involve “actual knowledge“, as understood both at common law and in equity, and the last two as instances of “constructive knowledge” as developed in equity, particularly in disputes respecting old system conveyancing. After noting that in Royal Brunei [1995] 2 AC 378 at 392. the Privy Council had discounted the utility of the Baden categorisation, Nourse LJ in BCCI [2001] Ch 437 at 455. went on to express his own view that the categorisation was often helpful in identifying the different states of knowledge for the purposes of a knowing assistance case.

Although Baden post-dated the decision in Consul, the five categories found in Baden assist in an analysis of that for which Consul provides authoritative guidance on the question of knowledge for the second limb of Barnes v Addy.

Thus, support in Consul can be found for categories (i), (ii) and (iii) {[1975] HCA 8; (1975) 132 CLR 373 at 398 per Gibbs J, 412 per Stephen J; Barwick CJ concurring at 376-377}. Further, Consul also indicates that category (iv) suffices {[1975] HCA 8; (1975) CLR 373 at 398 per Gibbs J, 412 per Stephen J; Barwick CJ concurring at 376-377. }. However, in Consul, Stephen J held that knowledge of circumstances which would put an honest and reasonable man on inquiry, later identified as the fifth category in Baden, would not suffice. Gibbs J left open the possibility that constructive notice of this description would suffice {[1975] HCA 8; (1975) 132 CLR 373 at 398. }. Barwick CJ agreed with Stephen J.

The result is that Consul supports the proposition that circumstances falling within any of the first four categories of Baden are sufficient to answer the requirement of knowledge in the second limb of Barnes v Addy, but does not travel fully into the field of constructive notice by accepting the fifth category. In this way, there is accommodated, through acceptance of the fourth category, the proposition that the morally obtuse cannot escape by failure to recognise an impropriety that would have been apparent to an ordinary person applying the standards of such persons.

These conclusions in Consul as to what is involved in “knowledge” for the second limb represent the law in Australia. They should be followed by Australian courts, unless and until departed from by decision of this Court.”

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>