Personal Liability of Accessories/Recipients

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This article is a topic within the subject Equity and Trusts.


Required Reading

M.W. Bryan & V.J. Vann, Equity and Trusts in Australia (Cambridge University Press, 2012), pp. Textbook Chapter 11.

Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373.

Farah Constructions P/L v Say-Dee P/L (2007) 230 CLR 89 (skim facts then [109]-[188]).

Grimaldi v Chameleon Mining NL (2012) 200 FCR 296 ([249]-[270] and [553]-[559]).


[1]Other parties, apart from fiduciaries, may also be liable for a breach of fiduciary obligation. If the fiduciary is insolvent, the claimant may look to other parties with ‘deep pockets’ to recover their funds.

  • The claims will be based on tracing and claiming or upon the fact that the party is a wrongdoer.
  • Equity will treat wrongdoers as if they were express trustees in some cases, making them liable to restore trust property received in breach of fiduciary obligation and to compensate the trust or principal for loss caused by the breach.
  • The claims can be proprietary and personal.
  • The claimant cannot recover more than the amount misappropriated (this amount includes the compound interest to reflect the loss of its investment value).

Third party liability: the rule in Barnes v Addy

[2]Barnes v Addy[3]

Facts: Addy, the trustee of a family trust, appointed Barnes sole trustee of half the trust fund. Barnes misapplied trust money and became bankrupt. Addy’s solicitor had advised Addy not to appoint Barnes trustee, since placing trust money under control of a sole trustee created a serious risk of misappropriation. Another solicitor was employed to execute the documents appointing Barnes sole trustee. After the trust money had been lost, the beneficiaries attempted to hold the two solicitors accountable.
Held: The claim against the solicitors was rejected by the court. Lord Selbourne laid down the principles of third party liability, distinguishing between two types:
  • Liability for knowingly receiving property in breach of trust or other fiduciary obligation (sometimes referred to as the ‘first limb’ of Barnes v Addy).
  • Liability for knowingly assisting a fiduciary to commit a breach of obligation (sometimes referred as the ‘second limb’ of Barnes v Addy).

Knowing receipt

[4]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,[5] 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?

What type of knowledge?

[6]Most decisions on knowing receipt have refused to apply the doctrine of notice to commercial transactions because it imposes a duty on transferees of property to make reasonable inquiries into the existence of potential adverse equitable interests, which would be unrealistic. Instead, the five point Baden scale”[7] is applied:

1. Actual knowledge
2. Wilfully shutting one’s eyes to the obvious
3. Wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make
4. Knowledge of circumstances which would indicate the facts to an honest and reasonable person
5. Knowledge of circumstances which would out an honest and reasonable person on inquiry

The scale supposedly confines liability to cases where the recipient was genuinely at fault. It is not always easy to distinguish between the points on the scale, particularly between 2, 3 and 4.

Farah Constructions Ptd Ltd v Say-Dee Pty Ltd[8]

The High Court held that Elias was under a fiduciary duty to disclose to Say-Dee the council’s opinion that planning approval would be given if the property were to be developed in amalgamation with adjoining properties, and that the properties were for sale. Elias had made full disclosure. Even assuming that he had failed to make full disclosure, his wife and daughters were not liable for having received the property in breach of fiduciary obligation.

  • Firstly, they had not received it, they had bought it independently.
  • Secondly, they had no knowledge of the (assumed) breach of fiduciary obligation.

A third party will be liable if they have knowledge on any of the first four points of the Baden scale.

Liability is imposed from the time the party becomes aware of the breach. So a recipient of mpney from a fiduciary who spends some of the money prior to becoming aware of the fiduciary’s breach will not be accountable for the amount spent (Re Blundell).[9]

Remedies for knowing receipt

[10]The choice of remedy will depend on whether the recipient is still holding the property taken in breach. If not, the claimant will be limited to a personal remedy of equitable compensation to recover the value of the property. If the recipient still holds the property:

  • In some cases, the claimant will be entitled to trace the property to the recipient and claim it. This is easier for the claimant because the onus of proof will rest upon the defendant to defeat the claim.
  • If the claimant wishes to establish that the recipient is liable for knowing receipt, the claimant will bear the burden of establishing that the recipient had sufficient knowledge.
  • In Farah Constructions, the High Court assumed that proprietary remedies, as well as personal ones, were available for knowing receipt. It is unclear where the burden of proof is placed when a claimant tries to recover specific property from a third party recipient.
  • Where the property is registered land the recipient will be entitled to indefeasible title and will not have to return it unless one of the following exceptions applies:
  • The recipient was party to the trustee’s fraud, in which case the land must be returned.
  • The ‘in personam’ principle (see chapter 23). Farah Constructions held that this principle only applies where the recipient is the primary wrongdoer; they will usually be the secondary wrongdoer.
  • It is not clear whether the defendant must pay equitable compensation instead but it has been argued that this would undermine the principle of indefeasibility.

Knowing assistance

[11]Under the ‘second limb’ of Barnes v Addy, a person who knowingly assists the commission of a breach of fiduciary duty is liable to compensate for loss caused by the breach if the following criteria are met:

a) Dishonest and fraudulent breach of trust. In Royal Brunei Airlines Sdn Bhd v Tan,[12] the Privy Council held that an assister will be liable even if the breach itself is honest, when they had dishonestly assisted an honest fiduciary to commit a breach of obligation. In Farah Constructions, the High Court insisted on strictly applying Barnes v Addy and holding that the breach must be dishonest and fraudulent.
b) Assistance in the breach. It is suggested that the third party will be liable as an assister where either the breach would not have occurred without the assistance or where the breach was committed earlier than would have been the case because of the assistance. Re-Engine Pty Ltd (in liq) v Fergusson & Ors[13] held that the assistance should “forward or advance the primary breach or misconduct in some way. Mere passive acquiescence in the breach would not, in the ordinary case, suffice to establish liability on the ground of assistance.” Omissions, if not constituting mere acquiescence, can amount to assistance.

What type of knowledge?

[14]Farah Constructions reaffirmed the knowledge test applied in Consul Development Pty Ltd v DPC Estates Pty Ltd,[15] and restated it in terms of the “Baden scale” of knowledge. Knowledge of the breach of duty on any of the first four points of the Baden scale will lead to liability.

Remedies for knowing assistance

[16]Only personal relief can be awarded because the assister does not hold the property or its traceable proceeds. The usual remedy will be equitable compensation. The assister is liable to compensate the full loss caused by the breach, although they can obtain contribution from the fiduciary or other assisters.

Exceptionally, an assister will be liable to account for profits made by the breach where the profits were made by the assister, not the fiduciary. If the assistance has caused both loss to the beneficiary and gain to the assister, the beneficiary must elect between compensation and an account of profits.

Other forms of participatory liability

(a) Claims based on tracing

[17]Tracing claims can be combined with claims under both limbs of Barnes v Addy.

(b) Inducing a breach of trust

[18]Before Barnes v Addy, liability was sometimes imposed for knowingly inducing or procuring a breach of trust where the trustee had not acted with an improper motive. In Farah Constructions Pty Ltd[19] the High Court noted the existence of liability for knowing inducement but did not confirm whether it was recognised in modern Australian equity. If it does exist it would fill a gap in knowing assistance, where the trustee acts honestly.

(c) Trusteeship de son tort

[20]Someone who acts in the capacity of a trustee without being properly appointed, and administers the trust, is called a trustee de son tort and is liable to compensate the trust for any loss caused by their administration as if they had been properly appointed a trustee.

  • The person must have sufficient control over the property to enable them to dispose of it.
  • ‘Executor de son tort’ applies where a third person assumes the role of executor of an estate and ‘agency de son tort’ applies where the role of an agent is assumed without proper appointment.


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Textbook refers to M.W. Bryan & V.J. Vann, Equity and Trusts in Australia (Cambridge University Press, 2012).

  1. Textbook, pp 174-6.
  2. Textbook, pp 176-7.
  3. (1874) LR 9 Ch App 244.
  4. Textbook, pp 177-9.
  5. (1988) 13 NSWLR 331.
  6. Textbook, pp 179-82.
  7. Baden, Delvaux and Lecuit v Société Generale [1992] 4 All Er 161.
  8. (2007) 230 CLR 89.
  9. (1988) 40 Ch D 370.
  10. Textbook, pp 182-3.
  11. Textbook, pp 183-4.
  12. [1995] 2 AC 378.
  13. [2007] VSC 57.
  14. Textbook, pp 185-6.
  15. (1975) 132 CLR 373.
  16. Textbook, pp 186-7.
  17. Textbook, pp 187.
  18. Textbook, pp 187-8.
  19. (2007) 230 CLR 89.
  20. Textbook, p 188.
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