Remedies against third parties: recipient and accessory liab...

Learning Outcomes

This article outlines the equitable remedy against a third party known as recipient liability, often referred to as knowing receipt. It explains the essential elements required to establish liability, focusing on what amounts to receipt in equity, the necessity of a disposal of assets in breach of trust or fiduciary duty, and how traceability links the asset received to the claimant’s equitable interest. It explores the levels of knowledge that may suffice—actual, wilful blindness, and constructive—and the modern, single standard of unconscionability that the courts now apply. The article clarifies the distinction between personal and proprietary routes to recovery, including when claimants may prefer one over the other, and addresses major defences such as bona fide purchaser for value without notice and where change of position and Re Diplock may be relevant. It also highlights the timing of knowledge (especially whether it arose while the recipient still had the property) and applies these principles to worked examples that model typical SQE1-style scenarios.

SQE1 Syllabus

For SQE1, you are required to understand the equitable remedy of recipient liability (knowing receipt), with a focus on the following syllabus points:

• Core requirements for establishing recipient liability (knowing receipt): breach, beneficial receipt, traceability, and knowledge making retention unconscionable.
• Understanding levels of knowledge and the shift from Baden categories to the unconscionability standard in BCCI v Akindele.
• Timing: knowledge must arise while the recipient still has the property or its traceable proceeds.
• Distinguishing personal claims (liability to account/equitable compensation) from proprietary claims (tracing and recovery of assets or liens).
• Interaction with accessory liability (dishonest assistance) and intermeddling, and avoiding confusion between these forms of liability.
• Availability and scope of defences, notably bona fide purchaser for value without notice, and the role of change of position and Re Diplock in appropriate contexts.
• Practical tracing techniques and choices of remedy, including proportionate claims, charges/lien, and bank account rules.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following elements is NOT strictly required to establish recipient liability?
   1. Receipt of trust property by the defendant.
   2. A breach of fiduciary duty by the trustee.
   3. Dishonesty on the part of the recipient.
   4. Knowledge by the recipient making retention unconscionable.
2. A third party receives assets transferred in breach of trust but provides full market value and has no notice of the breach. Are they likely to be liable for knowing receipt?
   1. Yes, because they received trust property.
   2. Yes, unless they can prove they acted reasonably.
   3. No, because they are likely a bona fide purchaser for value without notice.
   4. No, because the trustee is solely liable for the breach.
3. In the context of knowing receipt, what level of knowledge makes it 'unconscionable' for a recipient to retain trust property?
   1. Only actual knowledge of the breach.
   2. Suspicion of a breach is always sufficient.
   3. Knowledge derived from any source, regardless of reliability.
   4. Knowledge which makes the recipient's conduct contrary to normally acceptable standards of honest behaviour.

Introduction

When trust property is misapplied by a trustee or fiduciary, beneficiaries may seek remedies not only against the trustee but also against third parties who have become involved. One such remedy targets third parties who have received the misapplied trust property. This is known as recipient liability or, more commonly, knowing receipt. It is an equitable, fault-based liability. Establishing a claim requires demonstrating that the third party received assets originating from a breach of trust or fiduciary duty and possessed a level of knowledge about the breach that makes it unconscionable for them to retain the benefit of the receipt. The remedy operates as a personal claim, often expressed as an obligation to account as if the recipient were a trustee, with the possibility of concurrent proprietary claims where the property or its proceeds remain identifiable.

Key Term: Knowing Receipt
An equitable cause of action rendering a third party personally liable to account as if they were a trustee, where they have received trust property transferred in breach of trust with the requisite degree of knowledge that the transfer was a breach.

Key Term: Recipient Liability
The liability imposed on a person who receives trust property transferred in breach of trust with sufficient knowledge of the breach. It is synonymous with 'knowing receipt'.

Elements of Recipient Liability (Knowing Receipt)

To succeed in a claim for knowing receipt, a claimant (typically a beneficiary or a successor trustee) must establish three core elements:

1. A disposal of assets in breach of fiduciary duty or trust.
2. The beneficial receipt by the defendant (the third party) of assets which are traceable as representing the assets of the claimant.
3. Knowledge on the part of the defendant that the assets received are traceable to a breach of fiduciary duty, making it unconscionable for the defendant to retain the benefit of the receipt.

We will examine the nature of receipt and the required level of knowledge in more detail.

Receipt of Trust Assets

The defendant must have received the trust property (or its traceable product) for their own use and benefit. Simply acting as an agent for another party in a transaction involving misapplied trust funds (for example, a bank processing a payment or a solicitor executing instructions) does not typically constitute beneficial receipt for the purposes of this liability. The defendant must have received the property in a way that benefits them personally and not merely as a conduit.

Beneficial receipt can take various forms:

• Payment into the recipient’s personal bank account or application to discharge their debt (including overdrafts), thereby conferring a benefit.
• Transfer of chattels or other assets to the recipient’s possession for their use.
• Reduction of a liability owed by the recipient, which counts as value to them.

Receipt need not be of the original asset: it can be of the traceable substitute (for example, a car purchased with trust money), provided the claimant shows the link through equitable tracing rules. If the property has been dissipated such that it is no longer identifiable (for example, spent on unrecoverable services or luxuries), a proprietary claim will generally fail, but a personal claim for knowing receipt may still be available if the recipient’s knowledge makes retention (of the benefit received) unconscionable and the receipt was beneficial.

Beneficial receipt is not made out where:

• The third party holds only temporary custody for someone else and never has beneficial use.
• The third party is a mere stakeholder or agent without personal benefit.
• The third party processes funds mechanically without gaining any advantage.

Key Term: Recipient Liability
The liability imposed on a person who receives trust property transferred in breach of trust with sufficient knowledge of the breach. It is synonymous with 'knowing receipt'.

Breach of Fiduciary Duty or Trust

There must have been a fundamental breach of trust or fiduciary duty which resulted in the misapplication of the trust assets received by the defendant. The breach does not need to have been dishonest on the part of the trustee or fiduciary; an innocent breach suffices. Typical breaches include distributing to the wrong beneficiary, misinterpreting powers (such as exceeding investment authority), or advancing funds without authority. The recipient’s knowledge relates to the breach and the trust nature of the property; it is not necessary to prove the trustee’s subjective dishonesty for recipient liability.

The disposal must have occurred in breach at or before the time of receipt. If a recipient obtains property knowing it to be trust property but not through a breach, and later deals with it inconsistently with the trust, liability can arise on that later inconsistent dealing (this is sometimes referred to as type 3 recipient liability). Equally, if the recipient had no knowledge at receipt but becomes aware while still holding the property and continues to retain or deal with it as their own, liability can arise from that point (sometimes called type 2 recipient liability).

Knowledge

This is often the most contested element. The recipient must possess knowledge that makes it unconscionable for them to retain the property. The courts have moved away from rigid categories of knowledge (for example, the Baden scale) towards a single test of unconscionability.

In Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437, the Court of Appeal held that the test is whether the recipient’s state of knowledge is such as to make it unconscionable for them to retain the benefit of the receipt. The inquiry is objective: would an honest person, in the recipient’s position and with their knowledge, consider retention contrary to normally acceptable standards of honest behaviour?

This test encompasses various levels of awareness, including:

• Actual knowledge: the recipient actually knew the transfer was in breach of trust.
• Wilful blindness: the recipient deliberately shut their eyes to obvious facts or refrained from making inquiries that an honest and reasonable person would make because they suspected the truth.
• Constructive knowledge: knowledge of circumstances which would indicate the facts to an honest and reasonable person or put them on inquiry.

The court’s focus is on the recipient’s conscience given their state of knowledge. Suspicion alone is not always enough. In Abou-Rahmah v Abacha [2006] EWCA Civ 1492, the Court of Appeal stressed that general suspicions about a transferor are insufficient; there must be suspicion on specific matters pointing to breach or trust property, or circumstances that should put the recipient on inquiry. The assessment is fact-sensitive: the greater the value or the more unusual the circumstances, the stronger the obligation to inquire.

Timing of knowledge is critical. A claim for knowing receipt will only succeed if the recipient had the requisite level of knowledge while in receipt of the property (or its traceable proceeds). If the recipient only becomes aware after they have disposed of the property and no longer hold its proceeds, knowing receipt will generally fail. Conversely, if knowledge arises while the property is still held or its traceable substitution remains intact, continuing retention becomes unconscionable.

Key Term: Unconscionability
In the context of knowing receipt, conduct by the recipient in retaining the trust property that is considered contrary to acceptable standards of honest behaviour, given their state of knowledge about the source of the property.

The Baden categories can be used descriptively but are not determinative. Under Akindele, the question is whether the recipient’s knowledge—whatever its source—renders retention unconscionable. Where the recipient is a company, knowledge is assessed by reference to the directing mind and will or those whose knowledge is imputed to the company in the relevant transaction. Corporate structures do not insulate recipients from equitable liability where the appropriate knowledge exists within the entity.

Worked Example 1.1

A trustee, David, improperly transfers £50,000 of trust funds to his friend, Sarah, telling her it is a gift from a recent inheritance. Sarah knows David is a trustee and is aware he has faced financial difficulties recently. She finds the large gift surprising but accepts it without asking further questions and uses it to buy a car. The beneficiaries discover the breach. Can they establish recipient liability against Sarah?

Answer:
The beneficiaries must show:

1. Breach: David breached his trust by improperly transferring funds.
2. Receipt: Sarah received the funds beneficially.
3. Knowledge: Sarah had actual knowledge that David was a trustee and knew of his financial issues. The large, unexpected gift might be considered circumstances that would put an honest and reasonable person on inquiry. By not asking questions despite these suspicious circumstances, Sarah might be deemed to have sufficient knowledge (potentially constructive knowledge or wilful blindness) to make her retention of the benefit unconscionable. A court would assess if her state of knowledge crossed the threshold of unconscionability. If so, she could be personally liable for the £50,000.

Additional considerations on knowledge and receipt

• Knowledge can crystallise after receipt. If a recipient learns of the breach while they still hold the property (or its proceeds), ongoing retention becomes unconscionable. If the recipient has already spent the property and no proceeds remain when they first learn of the breach, knowing receipt is unlikely to be made out (although other claims may be possible).
• Suspicious circumstances include unusually large gifts, transfers from accounts labelled as trust accounts, or transactions inconsistent with the known financial means of the transferor. The higher the suspicion, the greater the need to inquire; failure to inquire may amount to wilful blindness or constructive knowledge.
• Beneficial receipt includes application of funds to the recipient’s debts. For example, a credit to a recipient’s overdrawn account reduces their liability and is treated as a benefit to them.

Nature of the Claim

A claim for knowing receipt is primarily a personal claim against the recipient. This means the recipient is liable to pay monetary compensation to restore the value of the property received, typically equivalent to the value of the property at the date of receipt plus interest. In practice, the recipient is treated as if they were a constructive trustee for the value received and must account accordingly.

Where the recipient still holds the original trust property or its traceable proceeds, the claimant may also assert an equitable proprietary claim to recover that property. Tracing rules used against trustees apply similarly against knowing recipients:

• If the recipient uses trust money mixed with their own to purchase an asset, the beneficiaries may claim a proportionate share of the asset or elect to take a charge/lien for the misapplied trust money. Against a wrongdoer recipient, the lien is usually preferred, as it allows recovery of the full amount misapplied from the sale proceeds without sharing reductions in value.
• If trust funds are mixed in the recipient’s bank account with their own funds, the recipient is generally presumed to spend their own money first (as with trustees), safeguarding the claimant’s ability to claim the remaining traceable balance. Where funds of two different trusts are mixed, the first in, first out rule may apply to current accounts unless displaced in favour of a fairer proportionate approach; for savings accounts, a proportionate solution is the default.

The availability of proprietary remedies does not displace the personal claim: claimants often plead both. Practical choice depends on whether the property has increased in value or is still identifiable, and on the solvency of the recipient.

Worked Example 1.2

Continuing from Worked Example 1.1, assume Sarah is found liable for knowing receipt. The beneficiaries discover she used the entire £50,000 to buy the car, which is now worth £40,000. What remedies might the beneficiaries seek?

Answer:
The beneficiaries have a personal claim against Sarah for £50,000 (plus interest). They can also potentially bring a proprietary claim against the car. Since the car was purchased entirely with trust funds (a clean substitution), they could claim ownership of the car. However, as it has decreased in value, they would likely prefer the personal claim for £50,000 and might assert an equitable lien (a charge) over the car to secure part of that personal claim up to the car’s current value (£40,000).

Worked Example 1.3

A trustee wrongfully transfers £200 of trust funds to Katherine as a birthday present. Katherine has no idea the money came from the trust and spends it immediately. A month later, she is informed of the breach. Is Katherine liable for knowing receipt?

Answer:
Knowing receipt requires the requisite knowledge while the recipient is in possession of the property (or its proceeds). Katherine had no knowledge at the time she received and spent the funds. By the time she learned of the breach, she no longer held the money or its traceable proceeds. A claim in knowing receipt will likely fail on these facts. Other avenues (such as a claim against the trustee) remain available.

Worked Example 1.4

A trustee, aware of a trust restriction, transfers £20,000 of trust money to his girlfriend, who knows it is trust money but believes the trustee is authorised to make such gifts under the trust instrument. She later learns the trustee had no authority and continues to keep the money. Is she liable?

Answer:
She knew the funds were trust property at receipt but believed the transfer was authorised. Once she learned there was no authority and continued to retain the money, her retention becomes unconscionable. Liability can arise from the point at which knowledge renders her retention unconscionable (sometimes described as type 2 recipient liability).

Worked Example 1.5

A company receives £100,000 credited to its bank account from a trustee in breach of trust. The finance director, who authorised the receipt, knew the funds came from a trust account but declined to ask questions. The company uses the money to pay trade creditors. Can the beneficiaries bring a knowing receipt claim against the company?

Answer:
Corporate recipients are assessed by the knowledge of those whose actions represent the company in the relevant transaction. The finance director’s knowledge can be imputed to the company. The company’s use of the funds to discharge its debts is beneficial receipt. If the director’s knowledge and failure to inquire amount to wilful blindness or constructive knowledge making retention unconscionable, the company is likely liable for knowing receipt. BFPVWN will not apply because the company did not acquire legal title to specific property but received a payment, and it had the requisite notice.

Tracing and Quantification in Recipient Claims

Understanding tracing principles helps frame both personal and proprietary relief:

• Property not mixed: If the asset is still in its original form, the beneficiary may claim it directly.
• Clean substitution: If trust funds entirely purchase a new asset, the claimant can adopt the asset as trust property or take a charge up to the misapplied amount.
• Mixed assets with wrongdoers: Where a knowing recipient buys an asset with a mix of trust and personal money, the claimant may elect a charge to recover the full misapplied amount from sale proceeds, rather than take a proportionate share of the asset.
• Mixed assets with innocent volunteers: For innocent recipients, claims are proportionate and a charge may not be available; losses are shared proportionately to contributions.
• Bank accounts: For trustee or wrongdoer mixing with personal money, withdrawals are generally presumed to be of the wrongdoer’s own money first, preserving the trust’s interest in the remaining balance. If different trusts are mixed, courts may apply first in, first out or adopt a proportionate method to avoid injustice. In savings accounts, a proportionate rule commonly applies.

Subrogation can bolster proprietary recovery where trust money discharges a secured debt. If a recipient uses trust funds to pay off their mortgage, beneficiaries may revive the mortgage by subrogation on the same terms, effectively stepping into the mortgagee’s shoes to the extent of the payment.

Defences

A key defence against a knowing receipt claim is that the recipient is a bona fide purchaser for value without notice (BFPVWN), sometimes referred to as 'equity's darling'.

Key Term: Bona Fide Purchaser for Value Without Notice
A person who acquires legal title to property (i) in good faith (bona fide), (ii) for valuable consideration (value), and (iii) without actual, constructive, or imputed notice of any pre-existing equitable interests (without notice). Such a purchaser takes the property free from those equitable interests.

This defence defeats proprietary claims and typically undermines personal recipient liability because the purchaser lacks the requisite knowledge to make retention unconscionable. “Value” requires more than nominal consideration; market value is not compulsory, but the consideration must be real. Notice includes actual knowledge and constructive notice (circumstances that would put an honest and reasonable person on inquiry). As to timing, if the recipient acquires legal title for value and without notice, the equitable interest is extinguished as against them even if they later acquire notice.

Change of position may arise more squarely in unjust enrichment claims and the personal action in Re Diplock (where innocent recipients of estate funds spend in reliance on the payment). In knowing receipt, because liability is fault-based and depends on unconscionability, change of position will rarely assist a recipient whose conscience is found to be affected. By contrast, Re Diplock allows a limited personal claim against innocent volunteers who received wrongful payments from estates only after other remedies are exhausted; the defence may prevent inequitable recovery where property has been dissipated or improvements to homes would otherwise require sales.

The Re Diplock defence can also defeat proprietary claims where an innocent volunteer has used funds to improve their property (for example, installing a kitchen). Courts may refuse a lien or charge if enforcement would require sale of the property and lead to disproportionate hardship to an innocent recipient. This defence does not apply to wrongdoer recipients (such as knowing recipients), nor does it generally bar proportionate claims to mixed assets purchased with misapplied funds.

Limitation periods can affect personal claims. Personal claims in equity, including against third parties, are generally subject to the six-year period under the Limitation Act 1980, subject to exceptions (such as fraud). Proprietary claims to recover trust property or its proceeds from a trustee or knowing recipient can be less constrained where the claim is framed as recovery of property rather than damages, but the availability and scope of limitation defences are fact-specific.

Worked Example 1.6

Trustees sell trust land to Buyer Ltd, which pays market value and registers legal title. Buyer Ltd has no notice of the trust’s restrictions. The trustees misapply the proceeds. Can the beneficiaries recover the land from Buyer Ltd?

Answer:
Buyer Ltd is likely a bona fide purchaser for value without notice and takes free from the beneficiaries’ equitable interests. The beneficiaries’ remedy lies against the trustees for breach and potentially against subsequent recipients of the misapplied sale proceeds. A knowing receipt claim against Buyer Ltd will not succeed absent knowledge rendering retention unconscionable.

Exam Warning

Do not confuse the requirements for recipient liability (knowing receipt) with those for accessory liability (dishonest assistance). Knowing receipt focuses on the recipient’s knowledge regarding the receipt of property, whereas dishonest assistance requires dishonesty on the part of the third party in assisting the breach, even if they never received trust property. A dishonest accessory claim is a personal claim; tracing is generally not available against a dishonest assistant because they did not receive trust property.

Additional Practical Points and Variations

• Beneficial receipt versus mere possession: Possession alone is insufficient where the recipient acts only as a conduit or representative without benefiting personally. Always identify whether the third party’s position has been improved (for example, a debt reduced) by the transfer.
• Knowledge while in receipt: If the third party learns of the breach while holding the property and continues to treat it as their own, liability can arise from that moment. Absence of knowledge until after disposition generally defeats knowing receipt.
• Corporate recipients: Attribute knowledge to the company via those with authority over the transaction. A company that benefits by paying its own debts or receiving asset transfers can be a recipient if the knowledge requirement is met.
• Choice of remedy: When property has appreciated, proprietary claims may be more attractive; when it has depreciated, a personal claim for the full value at receipt plus interest is often preferable, sometimes secured by a lien over current assets.
• Tracing pitfalls: Tracing into consumption (holidays, services) will usually fail; tracing into secured debt repayments may be resurrected by subrogation; bank account analysis depends on mixing and account type, with fairness adjustments to avoid unjust outcomes.

Key Point Checklist

This article has covered the following key knowledge points:

• Recipient liability (knowing receipt) is an equitable claim against a third party who receives trust property transferred in breach of trust or fiduciary duty.
• Establishing liability requires proving a breach of trust/fiduciary duty, beneficial receipt of trust assets by the third party, and knowledge making retention unconscionable.
• The unconscionability standard in BCCI v Akindele assesses whether, given the recipient’s state of knowledge, retaining the benefit is contrary to acceptable standards of honest conduct.
• Knowledge must arise while the recipient still holds the property or its traceable proceeds; knowledge acquired only after disposal generally defeats knowing receipt.
• Beneficial receipt includes reduction of a recipient’s liabilities (such as overdrafts) and acquisition of assets or proceeds for personal use; mere agency or conduit roles are insufficient.
• Personal and proprietary claims may be pleaded in tandem; proprietary claims depend on traceability and can include proportionate shares and charges/lien over assets.
• Tracing rules against knowing recipients mirror trustee rules: presumption of spending own money first, proportionate sharing for mixed assets, and subrogation where secured debts are discharged with trust funds.
• The bona fide purchaser for value without notice defence defeats proprietary claims and typically prevents knowing receipt because of lack of requisite knowledge.
• Change of position and Re Diplock can assist innocent volunteers in specific contexts but do not protect wrongdoer recipients whose retention is unconscionable.
• Do not confuse recipient liability with dishonest assistance; the latter requires proof of dishonesty in assisting, not receipt.

Key Terms and Concepts

• Knowing Receipt
• Recipient Liability
• Unconscionability
• Bona Fide Purchaser for Value Without Notice