No knowing receipt claim where equitable interest is destroyed: Byers v Saudi National Bank

The Court of Appeal has held that a claim in knowing receipt will fail if, at the moment of receipt, the beneficiary’s equitable proprietary interest is destroyed or overridden so that the recipient holds the property as beneficial owner.

A continuing proprietary interest in the relevant property is required for a knowing receipt claim to be possible.

The case(1) arises in the context of the continuing legal fallout from the corporate collapse of both the Ahmad Hamad Algosaibi & Brothers Company (AHAB) and the Saad Group in 2009.  Those collapses, the creditors pursuit of recoveries and the subsequent allegations of fraud involving those behind the Saad Group have played out in courts around the world over the last 13 years.  The latest judgment, this time from the English Court of Appeal, arises out of an ultimately unsuccessful attempt by liquidators of a Saad Group company in Cayman to bring a claim in knowing receipt in relation to its alleged interests in various shares transferred to a bank in Saudi Arabia shortly before the Saad Group's collapse. 

Whilst this case ultimately turned on issues of Saudi Arabian law, the principles examined at first instance and in the Court of Appeal are of wider interest to those who may be looking to advance a claim in knowing receipt.

Facts

The Claimants are Saad Investments Company Limited (SICL), a company registered in the Cayman Islands, and its joint official liquidators, Mr Mark Byers and Mr Hugh Dickson. A winding up order was made against SICL on 18 September 2009.

The claim arises from a transfer of shares in 5 Saudi Arabian banks from Mr Maan Al-Sanea, the driving force behind the Saad Group, to Samba (a Saudi Arabian bank, whose assets and liabilities were transferred on 1 April 2021 to the Defendant) in September 2009 (the September Transfer). The Claimants alleged that the September Transfer was made in breach of trust, and that Samba was liable as a knowing recipient of the shares because it had knowledge of SICL’s interest in the shares.  Samba failed to comply with an order for disclosure and was consequently debarred from defending the claim except in respect of certain limited issues. The First Instance judge stated "all factual questions other than the content of Saudi Arabian law and the valuation issues were deemed to have been resolved in accordance with the claimants' pleaded case"(2). The only substantive issues which fell to be determined by the High Court and subsequently the Court of Appeal were:

1. Whether the effect of Saudi Arabian law, as the governing law of the September Transfer, was to extinguish SICL's rights in the shares even if Samba had knowledge of SICL's interest ('the Saudi Arabian Law Issue');
2. Whether the claim, pleaded by the Claimants as governed by Cayman Islands or English law, must fail if SICL's interest was so extinguished ('the Law of Knowing Receipt Issue'); and
3. The value of the shares at the date of the September Transfer and at the date of judgment – the question was whether a block discount should be applied to the quoted prices of the shares on the Saudi Arabian stock exchange ('the Valuation Issue').

First instance decision: no continuing proprietary interest to support knowing receipt claim

At trial the judge, Fancourt J, determined both the Law of Knowing Receipt Issue and the Saudi Arabian Law Issue in favour of Samba. He held that "SICL had no continuing proprietary interest in the Disputed Securities [shares] after the September Transfer capable of supporting a claim against Samba in knowing receipt"(3). Fancourt J thought it unnecessary to decide the Valuation Issue given his findings on the first two issues, but noted that if he had found differently in respect of those he would have agreed that a block discount was applicable.

Court of Appeal confirms approach but considers block discount inappropriate

The Claimants appealed Fancourt J's decision submitting that:

1. the Claimants did not need to have a continuing proprietary interest in the shares to succeed in their knowing receipt claim,
2. in any event, SICL's interest in the shares was not in fact extinguished as a matter of Saudi Arabian law; and
3. the Judge was mistaken in thinking it appropriate to apply a "block discount".

The Court of Appeal held that:

1. there was nothing in Fancourt J's reasoning to suggest he was wrong in his conclusion with regards to the Saudi Arabian Law Issue.
2. Fancourt J was right in his conclusion on the Law of Knowing Receipt Issue. It was held that a continuing proprietary interest in the relevant property (in this case shares) is required for a knowing receipt claim to be possible. A defendant cannot be liable for knowing receipt if he took the property free of any interest of the claimant.
3. Fancourt J was mistaken in thinking that applying a block discount would be appropriate. The Court of Appeal's reasoning was based on consideration of the circumstance where a trustee has elected to receive the value of an asset rather than its return in specie. The sum which is necessary to restore or re-constitute the trust fund will be best determined by reference to the cost of the asset had it been purchased by the trustee rather than what the asset would have fetched on a sale.

(1) [2022] EWCA Civ 43
(2) Paragraph 6
(3) Paragraph 9