Liability of Strangers to the Trust

Trusts > Liability of Strangers to the Trust

Candidates often lose marks because they confuse knowing receipt (liability of a recipient who received the property beneficially) with dishonest assistance (liability of a third party who knowingly assisted a breach), and they misapply the tests for knowledge set out in BCCI v Akindele and Barlow Clowes v Eurotrust.

What Is Liability of Strangers to the Trust in SQE1?

A "stranger" to a trust is a third party who is neither the trustee nor a beneficiary. Strangers can be held liable in equity if they have received trust property improperly (knowing receipt) or if they have dishonestly assisted a trustee's breach (dishonest assistance). These are equitable wrongs distinct from breach of trust by the trustee; the third party may have had no intention to breach trust but can still be liable.

These principles extend the beneficiaries' remedies beyond claims against the trustee alone and are essential to understanding how equitable remedies work in practice.

This topic connects closely to breach of trust and remedies and is a key part of the Trusts syllabus for SQE1.

Key Principles for SQE1

Knowing Receipt: A stranger who receives trust property in circumstances where they have knowledge of the breach, or knowledge that the property should not have been transferred to them, can be held liable as a constructive trustee. The liability arises when the recipient receives the property beneficially and has knowledge that it is trust property transferred in breach of trust.
Test for Knowledge in Knowing Receipt (BCCI v Akindele): The test for liability is not subjective dishonesty but "knowledge" assessed on an objective basis. In BCCI v Akindele, the House of Lords held that the recipient is liable if they had actual knowledge, willfully shut their eyes to the obvious, or willfully and recklessly failed to inquire. The test does not extend to constructive knowledge (knowledge that the recipient should have acquired if they had made reasonable inquiries). This is the key distinction: a recipient who fails to make reasonable inquiries may not be liable.
Liability of Recipient: Once liability as a knowing recipient is established, the recipient becomes a constructive trustee of the property or its proceeds. The beneficiary can trace the property and claim against the recipient. The recipient's liability is limited to the value of the property they received; they are not liable for the trustee's subsequent losses if the property was then transferred on.
Dishonest Assistance: A third party who has not received trust property but has assisted a trustee's breach can be liable if the assistance was dishonest. Unlike knowing receipt, the liability attaches to one who participates in the breach, not to a passive recipient.
Test for Dishonest Assistance (Twinsectra v Yardley / Barlow Clowes v Eurotrust): The test for liability is dishonesty assessed subjectively. In Twinsectra v Yardley, the House of Lords held that liability requires dishonesty on the part of the assister. In Barlow Clowes v Eurotrust, the Supreme Court clarified that "dishonesty" is assessed against the assister's own knowledge and belief: was the conduct dishonest according to the standards of ordinary, honest people, and did the assister realize that the conduct would be regarded as dishonest? This is a subjective test focused on the assister's own belief.
Examples of Dishonest Assistance: A solicitor who prepares documents knowing they will facilitate a breach, a bank that transfers trust funds knowing of the breach, or an accountant who assists in misrepresenting trust assets can be liable for dishonest assistance. The assister must have knowledge that they are assisting a breach.
No "Accessorial Liability" for Knowing Receipt: Importantly, knowing receipt is not "accessorial"; the recipient is not personally liable for the trustee's conduct but is liable as a constructive trustee of the property they received. By contrast, dishonest assistance is a form of accessorial liability; the assister is liable in their personal capacity.
Defences: A stranger may defend a claim by showing they had no knowledge (for knowing receipt) or were not dishonest (for dishonest assistance). Additionally, a recipient who acts in good faith and without notice of the breach is protected; this is the basis of the bona fide purchaser for value without notice defence, which applies to strangers.

Exam tip

A frequent mistake is treating knowing receipt and dishonest assistance as the same test. They are distinct. Knowing receipt focuses on the recipient's knowledge at the time of receipt (actual knowledge or willful blindness); dishonest assistance focuses on the assister's dishonesty according to ordinary standards. A recipient who failed to make reasonable inquiries may not be liable for knowing receipt (they did not have actual knowledge or willful blindness), but an assister who knew they were helping a breach could be liable for dishonest assistance even if they did not benefit.

How This Appears in SQE1 Questions

A scenario might be: "T, a trustee, transferred £100,000 from the trust account to a third party, R, without authorization. R is a property developer. R received the funds and used them to purchase land. R's bank manager inquired about the source of funds; R stated they were from a business investor. R did not ask further questions. Has R received the funds with knowledge of the breach?" The answer requires understanding that while R should perhaps have inquired further, the test is not constructive knowledge but actual knowledge or willful blindness; R may not be liable if they did not actually know or shut their eyes to the obvious.

This is a classic SQE1 trap.

Common Mistakes Students Make

Confusing the test for knowing receipt with constructive knowledge; the test does not extend to knowledge that the recipient should have acquired
Treating dishonest assistance as requiring the same knowledge as knowing receipt; dishonest assistance is focused on the assister's dishonesty, not knowledge alone
Assuming a recipient is liable merely because they received trust property; the recipient must have had the requisite knowledge
Overlooking that dishonest assistance is accessorial liability (personal liability of the assister) while knowing receipt makes the recipient a constructive trustee
Misapplying the bona fide purchaser defence; it protects a recipient who has no notice of the breach, but modern law focuses on the knowledge test rather than notice

Quick Summary

Knowing receipt imposes constructive trust liability on a recipient who received trust property with knowledge of the breach (actual knowledge, willful blindness, or willful failure to inquire).
The test is objective based on the recipient's knowledge, not subjective dishonesty.
Dishonest assistance imposes personal liability on a third party who dishonestly assisted a trustee's breach.
The test for dishonest assistance is subjective: was the conduct dishonest by the standards of ordinary, honest people, and did the assister realize it would be regarded as dishonest?
A recipient who acted in good faith without notice may be protected; a bona fide purchaser for value without notice has a defence.
Knowing receipt and dishonest assistance are distinct categories with different tests and different consequences.

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Liability of Strangers to the Trust for SQE1