(Mr Justice Carnwath)

Royal Courts of Justice


London WC2

Wednesday, 14th June 2000


B e f o r e :
















Mr R Sheldon QC and Mr F Oditah (instructed by Messrs Lovell white Durrant, London EC1) appeared on behalf of the appellant claimants.

Mr G Moss QC and Mr D Marks (instructed by Messrs Finers, London W1) appeared on behalf of the respondent defendant.








This is a claim by liquidators under both the knowing assistance and knowing receipt heads of constructive trust. The argument in this court has been mainly directed to two questions arising in relation to liability under the latter head. What must be the recipient’s state of knowledge? Must he be dishonest?

The first claimant in the action is Bank of Credit and Commerce International (Overseas) Ltd ("BCCI Overseas"), a company incorporated under the laws of the Cayman Islands and at all material times a wholly owned subsidiary of Bank of Credit and Commerce International Holdings (Luxembourg) SA ("BCCI Holdings"). The second claimant is International Credit and Investment Company (Overseas) Ltd ("ICIC Overseas"), also a company incorporated under the laws of the Cayman Islands, whose affairs were at all material times effectively controlled by the BCCI group. At all material times BCCI Overseas and ICIC Overseas held full licences under Cayman Islands law to carry on banking business, in categories A and B respectively. A third claimant, Credit and Finance Corporation Ltd, is no longer a party to the action.

The defendant, Chief Labode Onadimaki Akindele, is a Nigerian citizen and a highly prominent businessman of that country. At the trial of the action before Mr Justice Carnwath the claimants contended that he was liable to account to them for US$6,679,226.33 plus interest as a constructive trustee, alternatively by way of damages for conspiracy to defraud. Since it was not suggested that the latter head of claim added anything to the former, the claim in conspiracy was and can be disregarded. The judge dismissed the action and the claimants now appeal to this court.

The judge’s reserved judgment delivered on 18th December 1998 is reported at [1999] BCC 669. All references to page numbers in the judgment are to the pages in that report. Between pp. 670 and 675 there is a full and careful statement of the material facts under the headings "introduction", "the BCCI group", "the liquidation of the BCCI and ICIC groups", "the defendant’s business background", "the defendant’s relationship with the BCCI group", "the defendant’s BCCI accounts", "the 1985 agreement" and "the divestiture agreement". Since neither side has criticised the judge’s statement of the material facts in any way, it is unnecessary for them to be repeated or elaborated at this stage except in relation, first, to the 1985 agreement and, secondly, to the underlying frauds.


The 1985 agreement

The agreement was dated 10th July 1985. It is clear that it was professionally drawn, we were told by a lawyer from within the BCCI group. It was made between the defendant ("the Investor") of the one part and ICIC Overseas ("the Company") of the other part. It recited, first, that the Company was operating as an investment company, market maker and financier, secondly, that the Investor was desirous of investing US$10m in the shares of a banking group with potential for growth and good return on his investments and, thirdly, that the Company had offered to arrange for investment of the Investor’s funds to the extent of US$10m in the shares of BCCI Holdings on the terms and conditions as set out therein.

Clause 1 of the agreement provided:

"The Investor will invest US$10 million through the Company in the purchase of 250,000 shares of BCCI Holdings of the fully paid up value of US$10.00 each ("the Shares") at the purchase price of US$40.00 per shares and hold the Shares for a minimum period of two years."

Clause 2 provided that the Company would take delivery of the Shares "from the sellers thereof", with transfers in blank signed by the sellers, but that the Shares would continue in the names of the present holders thereof "till such time as the same are transferred in the name of the Investor or his nominee, as per provisions hereof". Clause 3 provided:

"It is agreed between the Investor and the Company that if, at any time after the expiry of two years and up to a period of five years from the date hereof, the Investor desires to sell the shares and the accretions thereto, if any, in the form of stock dividends (Bonus Shares), the Company shall arrange for the sale of the shares, together with accretions thereto at a price that would give the Investor a return of 15% per annum on his investment, compounded annually. It is hereby expressly agreed that the Company shall be entitled to effect such purchase for itself and/or its nominee or nominees."

Clause 4 gave the Investor the option of acquiring any shares issued pursuant to a rights issue by BCCI Holdings. Clause 5 provided:

"If the Investor holds the shares for a period of more than five years, or at any time during the period of five years from the date hereof, conveys to the Company, in writing, his firm intention to hold the shares for more than five years, these shares shall be transferred to his name or to the name of a nominee, subject to the clearance of the transferee’s name by BCCI Holdings and by regulatory authorities if applicable to BCCI Holdings."

Clause 6 provided that on the happening of the event mentioned in clause 5 the terms and conditions of the agreement should cease to be applicable and the Investor and the Company should be free from all the obligations thereunder save and except those mentioned in clause 7 (the Company to have the first refusal on the sale of the Shares etc).

In their statement of claim the claimants alleged that both the defendant and ICIC Overseas intended and knew that the 1985 agreement was a sham, in that ICIC Overseas never intended to sell or procure the sale of any shares in BCCI Holdings to the defendant and that the defendant never intended to purchase any shares, the agreement being merely a device for ICIC Overseas to obtain the use of the US$10m for a minimum period of two years and for the defendant to obtain a 15 per cent guaranteed return on his investment. The judge thought that the agreement was not a sham within the classical definition propounded by Diplock LJ in Snook v. London & West Riding Investments Ltd [1967] 2 QB 786, 802, though he recognised that its artificial nature might be relevant as evidence of dishonesty; see pp. 677H-678B.

I agree that the 1985 agreement was not a sham. There was no evidence to suggest that the defendant at any rate intended that it should be incapable of taking effect according to its terms. Accordingly, the requisite common intention that the agreement was not to create the legal rights and obligations which it gave the appearance of creating was absent. A mutual expectation, however definite, that the defendant would sell the shares within three years after the end of the two year period pursuant to clause 3 could not have prevented him from holding them for the full five years and having them transferred into his name pursuant to clause 5. I should add that in December 1985, at a cost to himself of US$330,680, the defendant took up a rights issue of shares in BCCI Holdings pursuant to clause 4 of the 1985 agreement; see p. 674H.


The underlying frauds

The judge had no difficulty in finding that in procuring ICIC Overseas to enter into the 1985 agreement and in procuring BCCI Overseas to pay the defendant the US$16.679m pursuant to the divestiture agreement, Messrs Naqvi, Hafeez and Kazmi acted in fraudulent breach of their fiduciary duties to the claimants; see p. 678C-E. No attempt was made on behalf of the defendant to resist that finding. The claimants’ evidence left us in some doubt as to exactly what went on within the BCCI group. However, on the second day of the hearing in this court and without objection from Mr Moss QC, for the defendant, Mr Sheldon QC, for the claimants, handed in a helpful written statement explaining the underlying frauds.

On the basis of that statement the general position can be summarised as follows. In order fraudulently to boost the amount of its capital in the eyes of the regulators, its depositors and the public at large, BCCI Holdings acquired parcels of its own shares through nominees who included ICIC Overseas and an individual called Wabel Pharaon. The acquisitions were funded by dummy loans made to the nominees by companies within the BCCI group, each of which was entered in the books of both lender and borrower but as between the two of them was not intended to be serviced or repaid. However, there remained the difficulty that if a loan was not serviced or repaid, the lenders’s auditors would require it to be written off, such write offs precipitating losses within the BCCI group and decreasing its reported profits. It was therefore necessary to make it look as if the dummy loans were performing normally.

In early 1985 ICIC Overseas was suffering from acute liquidity problems and needed outside money in order to give the false impression that the dummy loans that had been made by it were performing normally. The money could not be obtained in the form of deposits, since that would have created balance sheet liabilities and the money could not have been used to service or repay the dummy loans. It was for this reason that the defendant’s US$10m were obtained pursuant to the 1985 agreement, which was in a form, so we were told, that was used on other occasions and did not lead to the creation of balance sheet liabilities. The US$10m were in fact used to reduce a dummy loan in the name of Wabel Pharaon and in order to give the false impression that that loan was performing normally.

The method by which the defendant was paid the US$16.679m on the sale of the shares pursuant to the divestiture agreement in December 1988 was described by the judge at p. 675F-G:

"The mechanics of the repayment caused some problems within BCCI. ICIC Overseas did not have a buyer for the defendant’s shares in BCCI Holdings and could not fund the divestiture payment itself. The payment could not be booked as expenses without adversely affecting the reported profits at the year end, 31 December 1988, and it could not safely be booked to the [Wabel Pharaon] nominee account in ICIC at that time, since ICIC’s half-yearly audit was taking place. Accordingly, Mr Naqvi directed that a temporary overdraft account be opened in the books of BCCI Overseas in the defendant’s name. Payment was made through that account. In January the temporary overdraft was ‘repaid’ by debiting an equivalent amount to the loan account of Wabel Pharaon with ICIC Overseas. There is no evidence that the defendant was aware of these internal arrangements."


The evidence in relation to dishonesty

Between pp. 675H and 678C the judge dealt with the issues of law and the authorities cited to him. In stating, at p. 678E-F, that the factual dispute was as to whether the defendant had acted honestly or not, he said that the claimants relied on his knowledge of two factors from which dishonesty was to be inferred: first, the artificial or sham nature of the transaction, which was never intended or expected to result in a share transfer in any normal sense and, secondly, the abnormally high rate of return. The judge then referred to the relevant evidence, reminding himself that the untested witness statements of Messrs Naqvi, Hafeez and Kazmi needed to be treated with considerable caution, particularly on issues going to the alleged dishonesty of the defendant.

Between pp. 679A and 681H the judge considered at some length the evidence on each side as to the question of dishonesty. In the case of the defendant himself he referred not only to his evidence at the trial but also to his answers given during the course of an oral examination conducted in January 1997 (some 21 months earlier) under section 236 of the Insolvency Act 1986. Both here and below Mr Sheldon relied on the answers given by the defendant at his examination as showing that he was well aware of the artificial or sham nature of the transaction. Mr Sheldon relied in particular on the following exchanges:

"Q.Did you ever regard this as an investment in shares?

A.I regard it as taking my money from a deposit account to another deposit account to earn interest. What only interest me was the rate of interest . . .

Q.Was any clearance obtained so far as you were aware for this agreement from either BCCI Holdings or regulatory authorities?

A.I do not know.

Q.Did you not, looking at that, realise that if you were to be registered as a shareholder, then clearances would be required?

A.It never occurred to me because I was not dealing shares; I was dealing in question of additional rate of interest; and I knew in any case that I was not going to get to five years before I get my money because I would see another venture that required capital.

Q.This agreement is all a sham, is it not?

A.Well, I do not know. I only know that it secure my money. That is all I am interested, and it give me additional rate of interest."

Next, the judge referred to the evidence of Mr Philip Haberman FICA, a partner in the London office of KPMG, who was called by the defendant in order to give expert evidence as to the returns that could have been achieved on an investment of US$10m between 1985 and 1988, the purpose of his evidence being to suggest that the 15 per cent compound interest which the defendant received was not out of line with other potential investments during that period. However, the judge was not persuaded by Mr Haberman’s evidence. He summarised his view of it at p. 681D:

". . in the end Mr Haberman was unable to point to any investment which, as viewed in July 1985, would have offered a guaranteed return over two years of more than about 9 per cent. If anything, his evidence tended to reinforce the central point of the plaintiff’s case, that the rate of return offered to the defendant was wholly exceptional for a secure investment."

The judge then turned to the evidence for the claimants contained in the witness statements of Messrs Naqvi, Hafeez and Kazmi, in so far as it related to the 1985 and divestiture agreements. It is clear that he found nothing in it which pointed to dishonesty on the part of the defendant. Finally, he referred to the evidence of Mr Shahid Jamil, who gave evidence under a subpoena served by the claimants. He had been an employee of the BCCI group in London between January 1981 and January 1985. The defendant’s evidence was that all his dealings with the group, including the negotiations for the 1985 agreement, were through Mr Jamil. But Mr Jamil said that he had had no direct dealings with the defendant after the end of 1984. Having considered this conflict and the documentary evidence, such as it was, that bore on it, the judge concluded, on balance, that the defendant must have been mistaken about the extent of his dealings with Mr Jamil after 1984, although it remained a mystery as to who exactly made the approaches in relation to the 1985 agreement, if it was not Mr Jamil; see p. 681H.


Dishonesty: the judge’s findings

The judge stated his conclusions on the question of dishonesty at p. 682A:

"In the end it does not seem to me to matter very much who negotiated the 1985 agreement. Whoever was actually dealing with the defendant, it would no doubt have been clear that the offer was being made with the authority of the senior management of BCCI. On the other hand, whoever it was, there is no basis for suggesting guilt by association. There is no evidence that anyone outside BCCI had reason to doubt the integrity of the BCCI management at that time."

I interpose to make a point which, in the light of the arguments presented to us in this court, has assumed a great importance in the case. It is clear both from that passage and from the tenor of his judgment as a whole, in particular from the three concluding paragraphs quoted below, that the judge was of the view that the defendant had no knowledge of the underlying frauds within the BCCI group either in general or in relation to the 1985 and divestiture agreements in particular.

The judge then considered the defendant’s credibility, saying that on the whole he found him to be a credible witness on most points, though on one issue, his interest in BCCI shares, he thought his answers at his oral examination were more reliable. He said that against that background the essential question he had to decide was a very narrow one. Was the defendant’s involvement in the 1985 agreement dishonest, in the sense explained in the cases to which he had referred? At p. 682E, he said:

"I am satisfied that he did not himself see it as a dishonest transaction. He saw it simply as an arm’s-length business transaction with a major bank, for whom he was one of a select group of ‘high net worth’ customers, and was tying up US$10m for two years."

Accordingly, the judge said that the question was whether the defendant was dishonest by the objective standard explained by the Privy Council in Royal Brunei Airlines Sdn Bhd v. Tan [1995] 2 AC 378. At p. 682E-F, he continued:

"The plaintiff’s case depends on the high rate of interest and the artificial nature of the agreement. Were these two factors sufficient to put an honest person in the defendant’s position on notice that some fraud or breach of trust was being perpetrated, even if he did not know its precise nature or purpose? I am not prepared to draw that conclusion. As I have said, in 1985 BCCI were regarded as a reputable international bank. The defendant would have had no reason to question the form of the transaction. It did not concern him, so long as his investment was guaranteed. Even though he was an experienced businessman, he had no duty to the bank or to its regulators which made it dishonest for him to do other than look after his own interests. If he had seen anything suspicious in it, I do not think he would have wanted to have been involved. That would have been a matter of self-interest, just as it was when he decided to disassociate himself from BCCI in 1988. The form of the agreement was undoubtedly artificial, but there was nothing obviously illegal about it. The interest was very high, but he was entitled to assume that the bank were offering it in good faith and for proper reasons.

The same considerations apply to the 1988 agreement. Although by that time the defendant did have suspicions as to the conduct of BCCI’s affairs, he was entitled to take steps to protect his own interest. There was nothing dishonest in his seeking to enforce the 1985 agreement. As I have said, there is no suggestion that he was directly involved in the internal mechanics within BCCI, designed to avoid the scrutiny of the auditors.

Dishonesty in one form or another is the essential foundation of the plaintiffs’ case. They have not established it and accordingly the claim must be dismissed."


The claimants’ case in this court

At p. 675H, the judge identified the two main issues arising on the pleadings as being, first, was the defendant liable for dishonestly assisting or participating in breaches of trust by Messrs Naqvi, Hafeez and Kazmi (knowing assistance) and, secondly, was the defendant liable for receiving the divestiture payment with knowledge of the breaches of trust (knowing receipt). In this court the claimants’ case has been maintained under both heads. In regard to knowing assistance, while accepting the judge’s findings of primary fact, Mr Sheldon submitted that he was wrong not to infer from them that the defendant had acted dishonestly. I cannot accept that submission. Having seen and heard the defendant give evidence and found him to be a credible witness on most points, and after a conscientious consideration of the evidence as a whole, the judge was entitled to find that he had acted honestly. It cannot be said either that there was no evidence to support that finding or that it was against the weight of the evidence as a whole. The defendant not having acted dishonestly, the case in knowing assistance is bound to fail. If the claim is to succeed at all, it can only be in knowing receipt.


Knowing receipt

The essential requirements of knowing receipt were stated by Hoffmann LJ in El Ajou v. Dollar Land Holdings Plc [1994] 1 All ER 685, 700:

"For this purpose the plaintiff must show, first, a disposal of his assets in breach of fiduciary duty; secondly, the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff; and thirdly, knowledge on the part of the defendant that the assets received are traceable to a breach of fiduciary duty."

In the present case the first two requirements were satisfied in relation to the defendant’s receipt of the US$16.679m paid to him pursuant to the divestiture agreement. But the satisfaction of the third requirement, knowledge on the part of the defendant that the sum received by him was traceable to a breach or breaches of fiduciary duty by Messrs Naqvi, Hafeez and Kazmi, is problematical.

So far as the law is concerned, the comprehensive arguments of Mr Sheldon and Mr Moss have demonstrated that there are two questions which, though closely related, are distinct: first, what, in this context, is meant by knowledge; second, is it necessary for the recipient to act dishonestly? Because the answer to it is the simpler, the convenient course is to deal with the second of those questions first.


Knowing receipt - dishonesty

As appears from the penultimate sentence of his judgment, Mr Justice Carnwath proceeded on an assumption that dishonesty in one form or another was the essential foundation of the claimants’ case, whether in knowing assistance or knowing receipt. That was no doubt caused by the acceptance before him (though not at any higher level) by Mr Sheldon, recorded at p. 677F, that the thrust of the recent authorities at first instance was that the recipient’s state of knowledge must fall into one of the first three categories listed by Peter Gibson J in the Baden case [1993] 1 WLR 509, 575-576, on which basis, said Mr Justice Carnwath, it was doubtful whether the test differed materially in practice from that for knowing assistance. However, the assumption on which the judge proceeded, derived as I believe from an omission to distinguish between the questions of knowledge and dishonesty, was incorrect in law. While a knowing recipient will often be found to have acted dishonestly, it has never been a prerequisite of the liability that he should.

An authoritative decision on this question, the complexity of whose subject transactions has sometimes caused it to be overlooked in this particular context, is Belmont Finance Corporation v. Williams Furniture Ltd (No. 2) [1980] 1 All ER 393, where the plaintiff ("Belmont") was the wholly-owned subsidiary of the second defendant ("City"), which in turn was the wholly-owned subsidiary of the first defendant ("Williams"). The chairman of all three companies and the sole effective force in the management of their affairs was Mr John James. Reduced to its essentials, what had happened there was that the shareholders of a fourth company ("Maximum") had agreed to sell its shares to Belmont for £500,000 and to buy the share capital of Belmont from City for £489,000, a transaction which, as carried out, constituted a contravention of section 54 of the Companies Act 1948 (prohibition of provision of financial assistance by a company for the purchase of its own shares) and was thus a misapplication of Belmont’s funds.

Belmont having subsequently become insolvent, its receiver obtained an independent valuation of the shares in Maximum as at the date of the transaction which suggested that, instead of being worth £500,000, they were only worth some £60,000. The receiver brought an action in Belmont’s name principally against Williams, City and the shareholders of Maximum, claiming that they were liable to Belmont, first, for damages for conspiracy and, secondly, as constructive trustees on the grounds of both knowing assistance and knowing receipt. At the trial, Foster J found that Mr James genuinely believed that to buy the capital of Maximum for £500,000 was a good commercial proposition for Belmont. He held that there had been no contravention of section 54 and dismissed the action.

On Belmont’s successful appeal to this court Buckley LJ is recorded, at p. 403A-B, as having pointed out that Mr James had genuinely believed that the transaction was a good commercial proposition for Belmont without having any good grounds for that belief. He continued:

"After careful consideration I do not feel that we should be justified in disturbing the judge’s finding that Mr James genuinely believed that the agreement was a good commercial proposition for Belmont. It was a belief which, on his view of the commercial aspects of the case, Mr James could have sincerely held."

Having observed, at p. 404E, that Mr James, as a director of both Williams and City knew perfectly well what the objects of the transaction were, that other officers of City had the same knowledge and that their knowledge must be "imputed" to the respective companies, and having referred, at p. 405C, to the judgment of Lord Selborne LC in Barnes v. Addy (1874) 9 Ch App 244, 251, Buckley LJ dealt with the claim in constructive trust at p. 405F:

"In the present case, the payment of the £500,000 by Belmont to [the shareholders of Maximum], being an unlawful contravention of section 54, was a mis-application of Belmont’s money and was in breach of the duties of the directors of Belmont. £489,000 of the £500,000 so misapplied found their way into the hands of City with City’s knowledge of the whole circumstances of the transaction. It must follow, in my opinion, that City is accountable to Belmont as a constructive trustee of the £489,000 under the first of Lord Selborne LC’s two heads.

There remains the question whether City is chargeable as a constructive trustee under Lord Selborne’s second head on the ground that Belmont’s directors were guilty of dishonesty in buying the shares of Maximum and that City with knowledge of the facts assisted them in that dishonest design. As I understand Lord Selborne LC’s second head, a stranger to a trust not- withstanding that he may not have received any of the trust fund which has been misapplied will be treated as accountable as a constructive trustee if he has knowingly participated in a dishonest design on the part of the trustee to misapply the fund; he must himself have been in some way a party to the dishonesty of the trustees. It follows from what I have already held that the directors of Belmont were guilty of misfeasance but not that they acted dishonestly."

Goff LJ also held that City was liable in knowing receipt; see pp. 410- 412. Waller LJ did not add anything of his own on the question of constructive trust. Accordingly, though the claim in knowing assistance failed because the directors of Belmont did not act dishonestly, the claim in knowing receipt succeeded. I will return to that decision when dealing with the question of knowledge.

The decision in Belmont (No. 2) is clear authority for the proposition that dishonesty is not a necessary ingredient of liability in knowing receipt. There have been other, more recent, judicial pronouncements to the same effect. Thus in Polly Peck International Plc v. Nadir (No. 2) [1992] 4 All ER 769, 777D, Scott LJ said that liability in a knowing receipt case did not require that the misapplication of the trust funds should be fraudulent. While in theory it is possible for a misapplication not to be fraudulent and the recipient to be dishonest, in practice such a combination must be rare. Similarly, in Agip (Africa) Ltd v. Jackson [1990] Ch. 265, 292A, Millett J said that in knowing receipt it was immaterial whether the breach of trust was fraudulent or not. The point was made most clearly by Vinelott J in Eagle Trust Plc v. SBC Securities Ltd [1993] 1 WLR 484, 497E:

"What the decision in Belmont (No. 2) shows is that in a ‘knowing receipt’ case it is only necessary to show that the defendant knew that the moneys paid to him were trust moneys and of circumstances which made the payment a misapplication of them. Unlike a ‘knowing assistance’ case it is not necessary, and never has been necessary, to show that the defendant was in any sense a participator in a fraud."


Knowing receipt - the authorities on knowledge

With the proliferation in the last 20 years or so of cases in which the misapplied assets of companies have come into the hands of third parties, there has been a sustained judicial and extra-judicial debate as to the knowledge on the part of the recipient which is required in order to found liability in knowing receipt. Expressed in its simplest terms, the question is whether the recipient must have actual knowledge (or the equivalent) that the assets received are traceable to a breach of trust or whether constructive knowledge is enough. The instinctive approach of most equity judges, especially in this court, has been to assume that constructive knowledge is enough. But there is now a series of decisions of eminent first instance judges who, after considering the question in greater depth, have come to the contrary conclusion, at all events when commercial transactions are in point. In the Commonwealth, on the other hand, the preponderance of authority has been in favour of the view that constructive knowledge is enough.

In Karak Rubber Co Ltd v. Burden [1972] 1 WLR 602, 632H, Brightman J referred to a person:

"who is a constructive trustee because (though not nominated as a trustee) he has received trust property with actual or constructive notice that it is trust property transferred in breach of trust."

In Belmont No. 2, at p. 405C-D, Buckley LJ referred to the principle, established by the decision of this court in Re Lands Allotment Co [1894] 1 Ch. 616, that the directors of a company are treated as if they were actual trustees of the assets of the company which are in their hands or under their control. He continued:

"So, if the directors of a company in breach of their fiduciary duties misapply the funds of their company so that they come into the hands of some stranger to the trust who receives them with knowledge (actual or constructive) of the breach, he cannot conscientiously retain those funds against the company unless he has some better equity. He becomes a constructive trustee for the company of the misapplied funds."

At p. 410H-I, Goff LJ said that what Belmont had to show, amongst other things, was that City received all or part of the £500,000 "knowing or in circumstances in which it ought to know, that it was a breach of trust". He answered that question at p. 412E, saying:

"In my judgment the answer to that question must plainly be Yes for they are fixed with all the knowledge that Mr James had. Now, he had actual knowledge of all the facts which made the agreement illegal and his belief that the agreement was a good commercial proposition for Belmont can be no more a defence to City’s liability as constructive trustees than in conspiracy.

Apart from this, clearly, in my judgment, Mr James knew or ought to have known all the facts that I have rehearsed, showing that there was in any event a misfeasance apart from illegality."

Similarly, in Rolled Steel Products (Holdings) Ltd v. British Steel Corporation [1986] Ch. 246, 306H, Browne-Wilkinson LJ said:

"A third party who has notice - actual or constructive - that a transaction, although intra vires the company, was entered into in excess or abuse of the powers of the company cannot enforce such transaction against the company and will be accountable as constructive trustee for any money or property of the company received by [him]."

In Agip (Africa) Ltd v. Jackson, at p. 291, Millett J, in reference to a person who receives for his own benefit trust property transferred to him in breach of trust, said:

"He is liable as a constructive trustee if he received it with notice, actual or constructive, that it was trust property and that the transfer to him was a breach of trust . . ."

In Houghton v. Fayers [2000] 1 BCLC 511, 516, I myself said that it was enough for the claimant company to establish that the second defendant "knew or ought to have known that the money had been paid to him in breach of [the first defendant’s] fiduciary duty to [the claimant]".

Collectively, those observations might be thought to provide strong support for the view that constructive knowledge is enough. But it must at once be said that in each of the three cases in this court (including, despite some apparent uncertainty in the judgment of Goff LJ at p. 412F, Belmont (No. 2)), actual knowledge was found and, further, that the decisions in Karak and Agip were based on knowing assistance, not knowing receipt. Thus in none of the five cases was it necessary for the question to be examined in any depth and there appears to be no case in which such an examination has been conducted in this court. The groundwork has been done in other cases at first instance. I will refer to those of them in which the question has been considered in depth.

The seminal judgment, characteristically penetrative in its treatment of authority and, in the best sense, argumentative, is that of Megarry VC in Re Montagu’s Settlement Trusts [1987] Ch. 264. It was he who first plumbed the distinction between notice and knowledge. It was he who, building on a passage in the judgment of this court in Re Diplock [1948] Ch. 465, 478-479, first emphasised the fundamental difference between the questions which arise in respect of the doctrine of purchaser without notice on the one hand and the doctrine of constructive trusts on the other. Reading from his earlier judgment in the same case, he said at p. 278B-C:

"The former is concerned with the question whether a person takes property subject to or free from some equity. The latter is concerned with whether or not a person is to have imposed upon him the personal burdens and obligations of trusteeship. I do not see why one of the touchstones for determining the burdens on property should be the same as that for deciding whether to impose a personal obligation on a [person]. The cold calculus of constructive and imputed notice does not seem to me to be an appropriate instrument for deciding whether a [person’s] conscience is sufficiently affected for it to be right to bind him by the obligations of a constructive trustee."

He added that there is more to being made a trustee than merely taking property subject to an equity.

The practical importance of that distinction had been explained by the Vice-Chancellor in his earlier judgment. The question in that case was whether the widow and executrix of the will of the 10th Duke of Manchester was liable to account to the 11th Duke in respect of certain settled chattels or the proceeds of sale thereof. Having found that the 10th Duke had had no knowledge that the chattels received by him were still subject to any trust and that he believed that they had been lawfully and properly released to him by the trustees, Megarry VC continued (see p. 272A):

"If liability as a constructive trustee depended on his knowledge, then he was not liable as a constructive trustee, and his estate is not liable for any chattels that have been disposed of, as distinct from any traceable proceeds of them. Even if he was not a constructive trustee and was a mere volunteer, his estate is liable to yield up any chattels that remain, or the traceable proceeds of any that have gone ... But unless he was a constructive trustee, there appears to be no liability if the chattels have gone and there are no traceable proceeds."

At p. 285B Megarry VC summarised his conclusions in eight subparagraphs. I read the first three:

"(1) The equitable doctrine of tracing and the imposition of a constructive trust by reason of the knowing receipt of trust property are governed by different rules and must be kept distinct. Tracing is primarily a means of determining the rights of property, whereas the imposition of a constructive trust creates personal obligations that go beyond mere property rights.

(2) In considering whether a constructive trust has arisen in a case of the knowing receipt of trust property, the basic question is whether the conscience of the recipient is sufficiently affected to justify the imposition of such a trust.

(3) Whether a constructive trust arises in such a case primarily depends on the knowledge of the recipient, and not on notice to him; and for clarity it is desirable to use the word ‘knowledge’ and avoid the word ‘notice’ in such cases."

The effect of the Vice-Chancellor’s decision, broadly stated, was that, in order to establish liability in knowing receipt, the recipient must have actual knowledge (or the equivalent) that the assets received are traceable to a breach of trust and that constructive knowledge is not enough.

In Eagle Trust Plc v. SBC Securities Ltd (supra), at p. 503E, Vinelott J did not think it would be right to found a decision that the statement of claim in that case disclosed no cause of action solely on the authority of Re Montagu’s Settlement Trusts. However, on the ground that he (unlike Megarry VC) was dealing with a commercial transaction, he arrived at the same conclusion and held that in such a transaction constructive knowledge is not enough. At p.504D, he cited a well known passage in the judgment of Lindley LJ in Manchester Trust v. Furness [1895] 2 QB 539, 545, the latter part of which reads thus:

"In dealing with estates in land title is everything, and it can be leisurely investigated; in commercial transactions possession is everything, and there is no time to investigate title; and if we were to extend the doctrine of constructive notice to commercial transactions we should be doing infinite mischief and paralyzing the trade of the country."

The decision of Vinelott J was followed by Knox J in Cowan de Groot Properties Ltd v. Eagle Trust Plc [1992] 4 All ER 700 (another case of a commercial transaction) and the decisions of both of them by Arden J at the trial of the action in Eagle Trust Plc v. SBC Securities Ltd; see [1996] 1 BCLC 121.

We were also referred to three decisions in New Zealand and one in Canada. In each of Westpac Banking Corp. v Savin [1985] 2 NZLR 41, Equiticorp Industries Group Ltd v. Hawkins [1991] 3 NZLR 700 and Lankshear v. ANZ Banking Group (New Zealand) Ltd [1993] 1 NZLR 481 the preferred view was that constructive knowledge was enough, although in the last-named case the point went by concession. All of them were cases of commercial transactions. In Westpac Banking Corp. v Savin, a decision of the Court of Appeal, Richardson J, having expressed a provisional preference for the view that constructive knowledge was enough, said at p. 53:

"Clearly Courts would not readily import a duty to enquire in the case of commercial transactions where they must be conscious of the seriously inhibiting effects of a wide application of the doctrine. Nevertheless there must be cases where there is no justification on the known facts for allowing a commercial man who has received funds paid to him in breach of trust to plead the shelter of the exigencies of commercial life."

In Citadel General Assurance Co v. Lloyds Bank Canada (1997) 152 DLR (4th) 411, another case of a commercial transaction, the Supreme Court of Canada held, as a matter of decision, that constructive knowledge was enough.


The Baden case

It will have been observed that up to this stage I have made no more than a passing reference to the fivefold categorisation of knowledge accepted by Peter Gibson J in the Baden case [1993] 1 WLR 509, 575-576: (i) actual knowledge; (ii) wilfully shutting one’s eyes to the obvious; (iii) wilfully and recklessly failing to make such enquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man; (v) knowledge of circumstances which will put an honest and reasonable man on inquiry. Reference to the categorisation has been made in most of the knowing receipt cases to which I have referred from Re Montagu’s Settlement Trusts onwards. In many of them it has been influential in the decision. In general, the first three categories have been taken to constitute actual knowledge (or its equivalent) and the last two constructive knowledge.

Two important points must be made about the Baden categorisation. First, it appears to have been propounded by counsel for the plaintiffs, accepted by counsel for the defendant and then put to the judge on an agreed basis. Secondly, though both counsel accepted that all five categories of knowledge were relevant and neither sought to submit that there was any distinction for that purpose between knowing receipt and knowing assistance (a view with which the judge expressed his agreement -see p. 582E-F), the claim in constructive trust was based squarely on knowing assistance and not on knowing receipt; see p. 572D. In the circumstances, whatever may have been agreed between counsel, it is natural to assume that the categorisation was not formulated with knowing receipt primarily in mind. This, I think, may be confirmed by the references to "an honest and reasonable man" in categories (iv) and (v). Moreover, in Agip Millett J warned against over refinement or a too ready assumption that categories (iv) and (v) are necessarily cases of constructive knowledge only - see [1990] Ch. at 293, reservations which were shared by Knox J in Cowan de Groot [1992] 4 All ER, at 761G.


Knowing receipt - the recipient’s state of knowledge

In Royal Brunei Airlines Sdn Bhd v. Tan (supra), which is now the leading authority on knowing assistance, Lord Nicholls of Birkenhead, in delivering the judgment of the Privy Council, said that "knowingly" was better avoided as a defining ingredient of the liability, and that in that context the Baden categorisation was best forgotten; see [1995] 2 AC at p. 392H. Although my own view is that the categorisation is often helpful in identifying different states of knowledge which may or may not result in a finding of dishonesty for the purposes of knowing assistance, I have grave doubts about its utility in cases of knowing receipt. Quite apart from its origins in a context of knowing assistance and the reservations of Millett and Knox JJ, any categorisation is of little value unless the purpose it is to serve is adequately defined, whether it be fivefold, as in Baden, or twofold, as in the classical division between actual and constructive knowledge, a division which has itself become blurred in recent authorities.

What then, in the context of knowing receipt, is the purpose to be served by a categorisation of knowledge? It can only be to enable the court to determine whether, in the words of Buckley LJ in Belmont No. 2, the recipient can "conscientiously retain [the] funds against the company" or, in the words of Megarry VC in Re Montagu’s Settlement Trusts, "[the recipient’s] conscience is sufficiently affected for it to be right to bind him by the obligations of a constructive trustee". But if that is the purpose, there is no need for categorisation. All that is necessary is that the recipient’s state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt.

For these reasons I have come to the view that, just as there is now a single test of dishonesty for knowing assistance, so ought there to be a single test of knowledge for knowing receipt. The recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt. A test in that form, though it cannot, any more than any other, avoid difficulties of application, ought to avoid those of definition and allocation to which the previous categorisations have led. Moreover, it should better enable the courts to give common-sense decisions in the commercial context in which claims in knowing receipt are now frequently made, paying equal regard to the wisdom of Lindley LJ on the one hand and of Richardson J on the other.


Knowing receipt - a footnote

We were referred in argument to "Knowing Receipt: The Need for a New Landmark", an essay by Lord Nicholls in Cornish, Nolan, O’Sullivan and Virgo (eds.) "Restitution Past, Present and Future" (1998); a work of insight and scholarship taking forward the writings of academic authors, in particular those of Professors Birks, Burrows and Gareth Jones. It is impossible to do justice to such a work within the compass of a judgment such as this. Most pertinent for present purposes is the suggestion made by Lord Nicholls, at p. 238, in reference to the decision of the House of Lords in Lipkin Gorman v. Karpnale Ltd [1991] 2 AC 548:

"In this respect equity should now follow the law. Restitutionary liability, applicable regardless of fault but subject to a defence of change of position, would be a better-tailored response to the underlying mischief of misapplied property than personal liability which is exclusively fault-based. Personal liability would flow from having received the property of another, from having been unjustly enriched at the expense of another. It would be triggered by the mere fact of receipt, thus recognising the endurance of property rights. But fairness would be ensured by the need to identify a gain, and by making change of position available as a default in suitable cases when, for instance, the recipient had changed his position in reliance on the receipt."

Lord Nicholls goes on to examine the Diplock principle, suggesting that it could be reshaped by being extended to all trusts but in a form modified to take proper account of the decision in Lipkin Gorman v. Karpnale Ltd; see p. 241.

No argument before us was based on the suggestions made in Lord Nicholls’ essay. Indeed, at this level of decision, it would have been a fruitless exercise. We must continue to do our best with the accepted formulation of the liability in knowing receipt, seeking to simplify and improve it where we may. While in general it may be possible to sympathise with a tendency to subsume a further part of our law of restitution under the principles of unjust enrichment, I beg leave to doubt whether strict liability coupled with a change of position defence would be preferable to fault-based liability in many commercial transactions, for example where, as here, the receipt is of a company’s funds which have been misapplied by its directors. Without having heard argument it is unwise to be dogmatic, but in such a case it would appear to be commercially unworkable and contrary to the spirit of the rule in Royal British Bank v. Turquand (1856) 6 E&B 327 that, simply on proof of an internal misapplication of the company’s funds, the burden should shift to the recipient to defend the receipt either by a change of position or perhaps in some other way. Moreover, if the circumstances of the receipt are such as to make it unconscionable for the recipient to retain the benefit of it, there is an obvious difficulty in saying that it is equitable for a change of position to afford him a defence.


Knowing receipt - the facts of the present case

I return to the facts of the present case, in order to determine whether the defendant is liable in knowing receipt to repay (together with interest) US$6.679m of the sum received by him pursuant to the divestiture agreement, being the excess over the US$10m he paid to ICIC Overseas pursuant to the 1985 agreement. (By a decision whose forensic good sense dispensed with an analysis of its juristic foundation the claimants abandoned a claim for the full US$16.679m.) The answer to that question depends on whether the judge’s findings, though made in the course of an inquiry as to the defendant’s honesty, are equally supportive of a conclusion that his state of knowledge was not such as to make it unconscionable for him to retain the benefit of the receipt.

I start with the defendant’s state of knowledge at the date of the 1985 agreement. As to that, the judge found that there was no evidence that anyone outside BCCI had reason to doubt the integrity of its management at that time. More specifically, it is clear that the judge was of the view that the defendant had no knowledge of the underlying frauds within the BCCI group either in general or in relation to the 1985 agreement. He found that the defendant saw it simply as an arm’s-length business transaction. Moreover, he was not prepared to draw the conclusion that the high rate of interest and the artificial nature of the agreement were sufficient to put an honest person in the defendant’s position on notice that some fraud or breach of trust was being perpetrated. He said that the defendant would have had no reason to question the form of the transaction.

Those findings, expressed in language equally appropriate to an inquiry as to constructive notice, appear to me to be consistent only with the view that the defendant’s state of knowledge at the date of the 1985 agreement was not such as to make it unconscionable for him to enter into it. However, that point, though of great importance, is not in itself decisive. We have also to consider the defendant’s state of knowledge at the date of the divestiture agreement, by which time, as the judge said, he did have suspicions as to the conduct of BCCI’s affairs.

In order to understand the judge’s reference, it is necessary to go back to what he said at p. 675B-C:

"Towards the end of 1988 the defendant decided to end his relationship with BCCI, and in particular to terminate the share agreement. A number of factors led to this decision. In late 1987 there had been rumours in the Nigerian press of irregularities involving BCCI. He had received warnings from senior business figures in Nigeria. One was Dr Onaolapo Soleye, a former Nigerian Minister of Finance, who has provided a witness statement. He says that he informed the defendant of ‘unorthodox and irregular banking practices around the world’, and warned him of the effect a scandal relating to BCCI could have on his business image and that of BCCI Nigeria. The defendant also became aware later in 1988 that various BCCI officials had been arrested by US Customs in Tampa in connection with money laundering offences. He considered selling his shares in BCCI Nigeria, but was dissuaded from doing so by Dr Soleye and others, because of the tribal imbalance it would create within the bank.

At this time the defendant was seeking to realise £20m of his own money, and to raise a further £40m, to finance a property investment venture in the UK. The major banks involved including N M Rothschild in London and BNP, objected to him raising part of the finance from BCCI."

So in late 1987, more than two years after the 1985 agreement was entered into, there were press rumours of irregularities involving BCCI and warnings to the defendant from senior business figures in Nigeria of unorthodox and irregular banking practices around the world. Later in 1988 the defendant became aware that various BCCI officials had been arrested in connection with money laundering offences. He also knew that the major banks involved in financing his property investment venture in the United Kingdom objected to his raising part of the finance from BCCI.

There having been no evidence that the defendant was aware of the internal arrangements within BCCI which led to the payment to him of the US$16.679m pursuant to the divestiture agreement, did the additional knowledge which he acquired between July 1985 and December 1988 make it unconscionable for him to retain the benefit of the receipt? In my judgment it did not. The additional knowledge went to the general reputation of the BCCI group from late 1987 onwards. It was not a sufficient reason for questioning the propriety of a particular transaction entered into more than two years earlier, at a time when no one outside BCCI had reason to doubt the integrity of its management and in a form which the defendant had no reason to question. The judge said that the defendant was entitled to take steps to protect his own interest, and that there was nothing dishonest in his seeking to enforce the 1985 agreement. Nor was there anything unconscionable in his seeking to do so. Equally, had I thought that that was still the appropriate test, I would have held that the defendant did not have actual or constructive knowledge that his receipt of the US$6.79m was traceable to a breach or breaches of fiduciary duty by Messrs Naqvi, Hafeez and Kazmi.



For these reasons, though by a different route in relation to knowing receipt, I have come to the conclusion that Mr Justice Carnwath’s decision to dismiss the action was correct. I would affirm it and dismiss the claimants’ appeal.



I agree.



I also agree.



For the reasons given in the judgments that have been handed down, this appeal will be dismissed.



My Lords, we seek our costs.



That is pretty clear, is it not?



It is, my Lord.



Yes, certainly. We dismiss the appeal with costs.



My Lords, I have an application for permission to appeal. Could I make it clear that the liquidators have not obviously had an opportunity to consider the judgments, so that no firm decision has been taken, but I do have instructions to seek permission to appeal to the House of Lords.

Very briefly, we would respectfully suggest that this is a generally unsettled area of the law. Your Lordships have now come up with a single test, but we would venture to suggest that there may be scope for debate as to the appropriateness of the test.



Whether it is or was an unsettled area of the law.



It would be "was", yes. Can I merely indicate that the test of unconscionability was of course considered in Tan and in that, in the context of knowing assistance, was rejected as not being sufficiently clear.



That was because the question there was whether it was the same thing as dishonesty or something different. But once you establish a dishonesty test for knowing assistance you do not need to worry about unconscionability.



I appreciate it is a different context. I appreciate that. I am not going to take that point any further. But, I think as your Lordships accept in the judgments, this is also obviously an area where there may be scope for developments by the House of Lords.



Certainly, there is no doubt about that, Mr Sheldon. But the real question is whether, whatever the law might be declared to be, the appeal would, on the facts found by the judge, be allowed. Clearly, if we give you leave to appeal, Mr Moss may very well want to put in a cross-plea on dishonesty, but on dishonesty the judge was quite clear on the facts that there was no dishonesty. As I say, the question I think we have to decide is whether there is a real possibility that in the end the appeal would be allowed. If it is difficult to see how it could be allowed on the facts, it is not really fair to Chief Akindele that he should be put to further proceedings simply to resolve a point of law.



I do not want to push it too hard. But could I just make the point that, if the House of Lords did come up with a much lower test which was more restitution based, then the facts may take on a very different complexion. My Lords, I think that is all I would say on the matter.



That is a perfectly fair application, Mr Sheldon, and we will consider it.


(Their Lordships conferred)



Mr Sheldon, we do not think that this is a case in which we should give leave.



I am obliged.

My Lords, very embarrassingly, could I just point out that, having looked at the judgments very carefully and we thought they were perfect in terms of typographical errors, this morning it has been drawn to our attention that on the title page BCCI is described as the claimants/respondents. Of course it should be claimants/appellants. Chief Akindele should be the defendant/respondent. Likewise the representation will also need correcting.



I am sure that the shorthand writer will get that right.



Also very embarrassingly - although we did look at it very closely, I am afraid it was only picked up this morning - on page 6, which is a page that we did look at particularly closely, there is a very small correction to be made in the second paragraph, three lines down: "that the dummy loans that had been made to it". It should of course be "by it". I am very sorry that we did not pick that up earlier.



That is right, is it - it should be "by it"?



Yes, it should be "by it". I think that is quite clear from the rest of the paragraph, where it shows what the purpose was.



Are you happy with that, Mr Moss?



We have always relied on my learned friend’s side on the matters on this page, so I do not think there is anything I can usefully say about it.



Very well, thank you. We will amend "to" to "by". Apart from that, it is accurate?



It is accurate. I apologise for not coming back to your Lordships beforehand on that.



Do not worry at all, Mr Sheldon. Thank you very much for looking at it so carefully.



Nothing to correct in my judgment.



Thank you.


Order: appeal dismissed with costs; leave to appeal to the House of Lords refused.