Recent Developments In The Law Of Knowing Receipt In The Cayman Islands

• Published date: 23 January 2023
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Criminal Law, Corporate and Company Law, Trials & Appeals & Compensation, White Collar Crime, Anti-Corruption & Fraud, Trusts
• Law Firm: Ogier
• Author: Ms Jennifer Fox and James Clifford

A plaintiff's ability to pursue a claim for knowing receipt may be lost if the property passes through a jurisdiction in which its beneficial interest is extinguished by the law of that jurisdiction.

Fraud litigators have significant weapons in their arsenal to trace and recover assets that have been transferred in breach of trust (such as company assets that have been transferred on the orders of delinquent directors, where there is no benefit to the company, or trust assets that have been transferred on the orders of delinquent trustees). One common claim that can be brought against third party recipients of such assets is a claim for knowing receipt.

A claim for knowing receipt can be established where the third party knows the assets were transferred in breach of duty. However, in a recent decision in England (which is likely to be followed in the Cayman Islands), it was held that a claim for knowing receipt may not be available if the beneficial interest in the assets has been extinguished by the law of a jurisdiction through which the assets have passed.

Byers v Saudi National Bank

Mr A held shares in five Saudi Arabian banks on trust for a Cayman Islands company (S). The trust was governed by Cayman Islands law. In breach of trust, Mr A transferred the shares to a Saudi Arabian bank (the Bank) to discharge his indebtedness to it.

The Bank knew that Mr A held the shares on trust for S, and a reasonable bank would have appreciated that the transfer was a breach of trust and/or the Bank recklessly failed to make such inquiries about the transfer as an honest and reasonable bank would have made. ¹ So, could S recover the value of the shares from the Bank on the grounds of knowing receipt?

One might have thought that the answer was yes. However, in Byers v Saudi National Bank [2022] EWCA Civ 43; [2022] 4 1 W.L.R. 22 (Byers) the English Court of Appeal held that S could not do so. The reason?

For a claim for knowing receipt to succeed, the property must be subject to a trust at the time it is received. ² The law governing the question "who has title to the shares?" is the law of the lex situs (the place where the property is situated) rather than, say, the law of the lex loci actus (the place where the wrongful act took place). The law of the lex situs in Byers was Saudi Arabian law, and under Saudi Arabian law the shares ceased to be subject to any trust the moment they were registered in the name of the Bank. ³

Byers therefore makes it clear that under...