The Principles of ‘Knowing Receipt’
In the recent case of GP BUILDING HOLDINGS PTY LTD & Anor v VOITIN  VSCA 210, the Victorian Court of Appeal (Niall, Sifris and Walker JJA) considered ‘knowing receipt’ of funds misappropriated by a solicitor for personal expenditure. The matter in issue involved whether the recipient – the solicitor’s wife – had the requisite knowledge to found a claim for knowing receipt. It was held on appeal that she did, with the appeal being allowed in that respect.
The Court of Appeal said as follows on the relevant principles:
- In Barnes v Addy, Lord Selborne LC described two, non-exhaustive, circumstances in which a personal liability will be imposed on a third party in relation to a breach of trust. They form part of the more general principles that attach to third parties in the context of the maladministration of a trust. The first is where the third party receives and becomes chargeable with some trust property. The second is where the third party knowingly assists in a dishonest and fraudulent design on the part of the trustee. This proceeding is only concerned with the former.
- The first limb, which is a recipient-based liability, is not strict but turns on what the third party knew, or had reason to know, of the circumstances constituting the breach of trust. It is a personal liability and is not directed to the recovery of trust property remaining in the hands of a third party to which a defence of being a bona fide purchaser for notice may arise. In Farah Constructions Pty Ltd v Say-Dee Pty Ltd, the High Court held that persons who receive trust property become chargeable if it is established that they received it with notice of the trust. Notice in this context means knowledge that the funds that have been received are trust property and have been transferred in breach of trust.
- In Baden, Peter Gibson J posited five categories of knowledge and notice:
(a) actual knowledge;
(b) the wilful shutting of eyes to the obvious (also known as Nelsonian knowledge);
(c) wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make;
(d) knowledge of circumstances which would indicate the facts to an honest and reasonable person; and
(e) knowledge of circumstances which would put an honest and reasonable person on inquiry (that is, constructive notice as traditionally understood).
- After cautioning against the use of this taxonomy in a formulaic way, the Full Court of the Federal Court offered the following:
The first two categories of ‘knowledge’ require no comment. The third involves such a calculated abstention from inquiry as would disentitle the third party to rely upon lack of actual knowledge of the trustee’s or fiduciary’s wrongdoing. The fourth reflects what seems to have been accepted provisionally by three judges of the High Court in Consul Development Pty Ltd v DPC Estates Pty Ltd. It is, in essence, an understandable, objective, default rule designed to prevent a third party setting up his or her own ‘moral obtuseness’ as the reason for not recognising an impropriety that would have been apparent to an ordinary person. It is the surrogate of actual knowledge. The form of constructive notice used in category (v) derives from the bona fide purchaser for value without notice doctrine.
- In Consul, the High Court discussed the type of knowledge that might found a liability based on the second limb of Barnes v Addy, that is knowing assistance. Stephen J, with whom Barwick CJ agreed, noted that the plaintiff had not only failed to establish actual knowledge as against the relevant defendant, but had also failed to establish that the defendant wilfully shut his eyes to the truth for fear that he should learn of the fiduciary’s dishonesty, so that neither actual knowledge nor a ‘calculated abstention from enquiry’ were proved.
- Stephen J also rejected imputing knowledge from a negligent failure to make inquiry. He said:
If a defendant knows of facts which themselves would, to a reasonable man, tell of fraud or breach of trust the case may well be different, as it clearly will be if the defendant has consciously refrained from enquiry for fear lest he learn of fraud. But to go further is, I think, to disregard equity’s concern for the state of conscience of the defendant.
- His Honour did accept that, at the furthest limit, knowledge includes where the third party is in a situation in which a reasonable and honest person would have knowledge of circumstances telling of a breach of duty. His Honour was concerned to bring the issue back to one of conscience, thus the need to establish a ‘want of probity’. Of course, a third party cannot avoid liability by his or her own ‘moral obtuseness’, and the test is infused with the viewpoint of the honest and reasonable person. Gibbs J put it this way:
It may be that it is going too far to say that a stranger will be liable if the circumstances would have put an honest and reasonable man on inquiry, when the stranger’s failure to inquire has been innocent and he has not wilfully shut his eyes to the obvious. On the other hand, it does not seem to me to be necessary to prove that a stranger who participated in a breach of trust or fiduciary duty with knowledge of all the circumstances did so actually knowing that what he was doing was improper. It would not be just that a person who had full knowledge of all the facts could escape liability because his own moral obtuseness prevented him from recognizing an impropriety that would have been apparent to an ordinary man.
- In Farah, the High Court authoritatively determined that, for the purposes of the second limb of Barnes v Addy, that is knowing assistance, the first four categories, but not the fifth category of knowledge are sufficient to found liability. That is, the fifth category, based on constructive notice, will not be enough to establish a personal liability on the part of the accessory.
- In Grimaldi, the Full Court of the Federal Court considered whether the level of knowledge required might be different as between knowing receipt and knowing assistance cases, and concluded that it was not. The Full Court in Grimaldi noted that from at least the 1990s and in the wake of the five Baden categories, judges commenced, in recipient liability cases, to generalise from what had been said by both Gibbs J (at 398) and Stephen J (at 412), with whom Barwick CJ agreed, about the insufficiency of traditional, or fifth category, constructive notice — though not of fourth category notice — as a basis for personal liability under the first limb.
- In Kalls Enterprises Pty Ltd (in liq) v Baloglow, the New South Wales Court of Appeal (Giles JA, with whom Ipp and Basten JJA agreed) held that it is sufficient, in a claim for knowing receipt, that the third party had constructive knowledge of the kind captured in the fourth category (but not the fifth category) in the classification deployed in Baden.
- Given that one of the arguments in the application concerns the standard of persuasion that a court must bring to bear in determining a claim of knowing receipt, and more particularly whether the approach in Briginshaw applies, it is convenient to refer briefly to the conceptual underpinning of the two limbs of Barnes v Addy.
- The issue of third party liability often arises where there has been a payment or transfer in breach of trust or in breach of fiduciary duty and the third party assists in the breach or receives the proceeds. As already noted, the knowing assistance limb requires that the trustee has engaged in some fraudulent and dishonest design and that the third party has knowingly participated in the wrongdoing of the trustee. The requirement that the third party know of the fraudulent and dishonest design ensures that liability attaches where there is some relevant fault on the part of the third party, albeit a form of accessorial liability that subsists together with the wrongdoing of the trustee. There is a deal of authority that supports the proposition that a finding of liability under the second limb is of a kind that requires a court to apply Briginshaw principles. In Farah, the High Court said a claim under the second limb comprises ‘an allegation the seriousness of which means that it ought to have been pleaded and particularised, and the assessment required by [Briginshaw] kept in mind’.
- The first limb, that of knowing receipt, requires that the third party know the receipt is of trust property transferred in breach of trust. It is not necessary to show a dishonest or fraudulent design on the part of the trustee or the third party. There is authority in the United Kingdom to the effect that the rationale for the first limb is proprietary and serves to maintain the integrity of the trust fund rather than a liability that attaches to personal wrongdoing. In Grimaldi, the Full Court of the Federal Court referred to this line of authority but concluded that the more powerful rationale for the liability was also fault based — that is, that liability arises from the fact that the recipient acts in the knowledge of, and benefits from, a breach of trust. That approach serves to assimilate the two limbs of Barnes v Addy at least to the extent that both may be regarded as, to some degree, fault based. Given the requirement to prove knowledge of a breach of trust, it is certainly arguable that this reasoning might require Briginshaw principles to be kept in mind, but neither party was able to identify any authority directly on point. It will be necessary to further consider this matter later in these reasons when dealing with one of the grounds of appeal.
 Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR 1, 585  (Owen J);  WASC 239.
 (1975) 132 CLR 373;  HCA 8. See also NCR Australia Pty Ltd v Credit Connection Pty Ltd (in liq)  NSWSC 1.
 Farah (2007) 230 CLR 89, 159–160 – (Gleeson CJ Gummow, Callinan, Heydon and Crennan JJ);  HCA 22; Harstedt Pty Ltd v Tomanek, (2018) 55 VR 158, 174  (Santamaria, McLeish and Niall JJA);  VSCA 84.