Byers & Ors v Saudi National Bank (Rev1) [2023] UKSC 51

Citation:Byers & Ors v Saudi National Bank (Rev1) [2023] UKSC 51

Link to case on BAILII.

Rule of thumb: If a trustee gives their money to an investor, & the trustee’s money does not get ring-fenced but rather gets put in the investor’s bank account, what happens? If the investor goes into insolvency, the trustee has lost all of their money – it is crucial that ring-fencing is done to avoid this.

Subject & issues: This case was in the subject of investment law & insolvency.

Background facts:The facts of this case were that Saad Investment Ltd (Saad) had around $250m of security/assets invested into it by trustees. All the assets of the trustees were under the full control of Saad & as part of their assets – they were not ring-fenced & in the names of their trustees. Saad got into financial difficulties/debt and owed money to the Saudi National Bank & Samba. Saad used all the assets of their trustees to pay off their debt to the Saudi National Bank & Samba. Saad then went bankrupt, and Byers & Dickson were the liquidators of Saad who acted on behalf of all the trustees who put money/assets put into Saad. Byers & Dickson then sued the Saudi National Bank to try to get the trustees assets back off of them which they took out of Saad.

The issue revolved around knowledge Samba & Saudi National Bank had of the trusts Saad had with their trustees. Byers & others argued that the Saudi National Bank & Samba financial group had no right to their assets as it was known that Saad held these on trust for their trustees. The Saudi National Bank & Samba argued that this was what happened if trustees put their assets in the hands of trustors under their complete control & the assets were not ring-fenced - if the trustor goes bankrupt they can lose all of their assets and it is not ring-fenced.

Court held:The Court upheld the arguments of the Saudi National Bank & Samba. The assets of the trustees (who Byers & Others were representing) were not ring-fenced in the Saad group. Saad had complete control over their trustees’ assets. The Court therefore held that this is the downside of a trustee giving away full control of assets to another person as trustor over them without these assets put into a separate ring-fenced account with a level of control retained over them – if the trustor then goes bust then the assets can indeed be lost. The trustees who Byers & Others represented were not able to get any of their money/assets back.

Ratio-decidendi:

12. The facts which have given rise to this issue may be shortly stated. The appellants are Saad Investments Co Ltd ("SICL"), a company registered in the Cayman Islands, and its joint liquidators, Mr Mark Byers and Mr Hugh Dickson. The Grand Court of the Cayman Islands made a winding-up order against SICL on 18 September 2009 pursuant to a petition presented on 30 July 2009. The Cayman Islands proceedings were recognised by the English Court as foreign main proceedings pursuant to the Cross Border Insolvency Regulations 2006 (SI 2006/1030) by orders made on 20 August and 25 September 2009. 13. By a number of transactions between 2002 and 2008, a Mr Maan Al-Sanea ("Mr Al-Sanea") came to hold shares in five Saudi Arabian companies ("the Disputed Securities") on trust for SICL, under various trusts governed by Cayman Islands law (for these purposes being materially identical to English law). 14. On or about 16 September 2009, Mr Al-Sanea transferred the Disputed Securities to a Saudi Arabian financial institution, the Samba Financial Group ("Samba") ("the September Transfer"), the purpose of the transfer being to discharge debts owed by Mr Al-Sanea to Samba. He did so in breach of trust. At the time of Samba's receipt of the Disputed Securities it knew that Mr Al-Sanea was holding the Disputed Securities on trust for SICL. A reasonable bank in Samba's position would have appreciated that (alternatively would or ought to have made inquiries or sought advice which would have revealed the probability that) the September Transfer was a breach of trust; and/or Samba recklessly failed to make such inquiries about the September Transfer and the Disputed Securities as an honest and reasonable bank would make. 15. The governing law of the September Transfer was Saudi Arabian law, which does not recognise a distinction between legal and beneficial ownership as such. As a matter of Saudi Arabian law, the effect of the September Transfer (and in particular the registration of the Disputed Securities in Samba's name) was that SICL had no continuing proprietary interest in the Disputed Securities following the transfer. Samba retained the Disputed Securities and was the sole defendant at the time of the trial. Subsequently its assets and liabilities have become vested in the respondent the Saudi National Bank, but nothing turns on that…

Basic Principles of Equity 18. It is convenient at the outset to set metes and bounds to this battlefield by describing some of the relevant equitable principles which bear on this issue, and which are either common ground or beyond realistic challenge. The first concerns the very nature of an equitable interest in property. By contrast with a legal interest or estate, which is good against all the world, an equitable interest is (statute or foreign law apart) good against all the world except a bona fide purchaser for value of the legal estate without notice of that interest, a person traditionally given the name equity's darling. For brevity I will use that phrase in what follows. Thus, at common law (by which I include the principles of equity) an equitable interest in specific property is unaffected by the transfer of the property in breach of trust to a volunteer, or even to a purchaser for value if the purchaser has notice of the equitable interest (see Pilcher v Rawlins (1872) L.R. 7 Ch. App. 259 and as summarised by Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, 705). If the interest in question amounts to full beneficial ownership then such a purchaser may have bought a pup, but their remedy will lie (if at all) only against the vendor or their own advisors… Uncertainties about Knowing Receipt 29. That question is by no means the only arguable uncertainty about the equitable principles relating to knowing receipt… A Provisional Conclusion by reference to Basic Principle 36. Returning to the central issue… 47. Finally, in the absence of any original fiduciary relationship between the claimant and the defendant, or other relationship giving rise to equitable obligations between them, or fraud, why should a transferee with a clear title unaffected by any equitable interest of the claimant have any liability in equity to the claimant? There is simply no equity between them capable of giving rise to an equitable claim. This may be little more than another way of expressing the first point, but it does accord closely with the prevailing analysis in the leading authorities…

Conclusion 97. The personal liability of a recipient of trust property in knowing receipt, who has no pre-existing relationship with the claimant capable of giving rise to an equity between them, does depend upon the claimant having a continuing equitable interest in the property when it reaches the hands of the defendant. If it has been overreached or overridden (including by the foreign law applicable to the transfer to the defendant), then there is no equity which the claimant may assert against the defendant, and the claim in knowing receipt must fail. 98. I would therefore dismiss the appeal’, Lord Briggs

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