Knowing Receipt

A recipient of property transferred in breach of fiduciary obligation, or of proceeds of such property, is liable to account as constructive trustee when the following criteria are met:

a) Breach of fiduciary obligation. This can be breach of trust or another fiduciary obligation. The breach need not be dishonest (like under the second limb).
b) Receipt of property by the defendant either directly from the fiduciary or from someone who has directly or indirectly received the original property or its traceable proceeds from the fiduciary. The defendant must have beneficially received the property, not as an agent for another party; the principal will be liable in this case. (The account holder, rather than the bank, will be liable under this principal).
  • In Stephens Travel Service International Pty Ltd v Qantas Airways Ltd (1988) 13 NSWLR 331,the bank’s application of money to reduce an overdraft constituted ‘beneficial receipt’ for the purpose of holding the bank accountable as constructive trustee because the bank had applied the money in its own right, not as its customer’s agent.
c) Knowledge of the breach of the fiduciary. This involves two questions: a question of fact – what did the recipient know of the breach of fiduciary duty? and a question of law – what type of knowledge must be proved in order to hold the recipient accountable?

 

Dodds-Streeten J stated in Re-Engine Pty Ltd (in Liq) v Fergusson [2007] VSC 57 at [105]:
“Although there is no High Court authority on the receipt limb, it appears clear that it is unnecessary to establish dishonesty on the part of the recipient. Further, the recent New South Wales Court of Appeal decision in Say-Dee Pty Ltd v Farah Constructions Pty Ltd (“Say-Dee“) indicates that the conceptual basis of liability for receipt is unjust enrichment, so that it is also unnecessary to establish that the stranger had knowledge, whether actual or constructive, of the breach of trust or fiduciary duty”
Dodds-Streeten continued at [106]:

In Say-Dee, the New South Wales Court of Appeal acknowledged that while liability for the first limb of Barnes v Addy did not depend on dishonesty, its conceptual basis remained a matter of controversy. Their Honours at [209] referred to the three principal possible rationales analysed by Hansen J in Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd [1998] 3 VR 16.;  namely:

 

  • the property approach;
  • the conscience approach; and
  • the restitutionary approach.

107 Their Honours observed:

“What is presently important with respect to the differences between these approaches is that, under the first, the recipient must have notice or knowledge of the beneficiary’s interest and, under the second, must be guilty of unconscientious conduct which itself implies some level of knowledge. It is only under the third that actual or constructive knowledge that the property has been received in breach of the fiduciary’s duty is unnecessary {at [218]}.”

108 The restitutionary approach to recipient liability is based on the law of restitution and unjust enrichment. It implies strict liability, subject to defences such as bona fide purchase, or a change of position which would entail injustice to the innocent recipient. The Court of Appeal in Say-Dee endorsed Hansen J’s preference for the restitutionary approach to recipient liability, which had also been favoured by Harper J in NIML Ltd v Man Financial Australia Ltd [2004] VSC 449.by Bryson J in National Australia Bank Ltd v Rusu [2001] NSWSC 32 and by academic commentators such as Professor Peter Birks.

 

109 In the absence of any High Court authority, the New South Wales Court of Appeal bit “the proverbial bullet” and adopted the restitutionary “Birks/Hansen” approach to liability under the first limb of Barnes v Addy.

 

In  NIML Ltd v Man Financial Australia Ltd [2004] VSC 449 Harper J stated at [54]:
A relevant starting point is Black v S Freedman & Co.[1910] HCA 58; (1910) 12 CLR 105.] It is authority for the unremarkable proposition that stolen money is trust money in the hands not only of the thief but also anyone else to whom it has come either as a gift or with notice of its provenance.

 

 

The New South Wales Court of Appeal stated at [219] referring to the trial judgement.

According to Hansen J in Koorootang (at 100):

“[t]here is considerable persuasion in the third view of recipient-liability. According to that view the liability of a person in receipt of misapplied trust property is most appropriately governed and explained by the law of restitution of unjust enrichment. For this reason, and in order to be consistent with other forms of restitutionary liability (such as restitution of mistaken payments, as to which see David Securities Pty Ltd v Commonwealth Bank of Australia [1992] HCA 48; (1992) 175 CLR 353), the liability of the recipient should be strict but subject to defences such as bona fide purchase and change of position. In other words, the knowledge of the recipient of trust property is not relevant in considering whether the elements of recipient-liability are established. Rather, the beneficiary is prima facie entitled to restitution of trust property if he can show that the transaction by which the trust property was transferred to the defendant was vitiated by some recognised ‘unjust’ factor.”

220 Hansen J then considered the academic support for the third view, the leading proponent of which was the late Professor Peter Birks. It is a view which, according to his Honour, derives support from the speech of Lord Goff of Chieveley, with whom Lords Bridge, Griffiths and Ackner agreed, in Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548 at 578-579 although this was not a breach of fiduciary duty case. What their Lordships made clear, however, was that a claim in restitution for the recovery of property by which the recipient has been unjustly enriched at the expense of the claimant can only be denied where the recipient is a bona fide purchaser for value or where an innocent recipient has so changed his or her position that he or she will suffer an injustice if called upon to restore the property in whole or in part. Subject only to those “defences”, the liability of the recipient is strict.

221 The approach in Lipkin received the support of Lord Nicholls, writing extra-judicially in 1998. In his article “Knowing Receipt: The Need for a New Landmark” in W R Cornish et al (eds) Restitution Past, Present and Future, Ch 15, his Lordship opines at 238-9 (omitting citations):

 

The requirements for the first and second limbs of what is referred to as the rule in Barnes v Addy are summarised by Croft J in Taverners J Pty Ltd v Saxo Bank A/S [2011] VSC 27 at [11]- [13]

In order to establish a claim based on “knowing receipt” within the first limb of Barnes v Addy,[13] Taverners must prove that:[14]

(a) the defendant was in receipt of “trust property”; and

(b) the defendant had “knowledge” that:

(i) the property received was “trust property”; and

(ii) circumstances attendant on the transfer of that property made the transfer a breach of trust or fiduciary duty.

Croft J stated at [13]:

This means that, as reaffirmed by the High Court in Farah Constructions Pty Ltd v Say-Dee Pty Ltd:[19] “all that is necessary is that the known facts would have communicated to a reasonable person a general understanding that fraud, breach of trust or fiduciary duty had occurred”.[20] The prevailing view in Australia (both before and after Farah v Say-Dee) is that the same Baden four categories are required for a claim in “knowing receipt”.[21]

Where the authorities for the prevailing view are listed as:

Koorootang Nominees Pty Ltd v Australia and New Zealand Banking Group Limited [1998] 3 VR 16, 85,105;

Hancock Family Memorial Foundation Ltd v Porteous [1999] WASC 55; (1999) 151 FLR 191, 209;

Spangaro v Corporate Investment Australia Funds Management Ltd (2003) 47 ACSR 285, [60];

Group Ltd (in liq) v Westpac Banking Corporation [2008] WASC 239; (2008) 225 FLR 1, [4748], [8733];

Imobilari Pty Ltd v Opes Prime Stockbroking Ltd [2008] FCA 1920; (2008) 252 ALR 41, [27];

Chameleon Mining NL v Murchison Metals Limited [2010] FCA 1129, [132].

Kalls Enterprises Pty Ltd (in liq) v Baloglow [2007] NSWCA 191; (2007) 63 ACSR 557 at [199]

In Artcraft v Dickson [2014] SASC 108 the Supreme Court of South Australia reviewed liability for receiving trust property.

 

 

 

 

 

 

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