Byers & ors v The Saudi National Bank [2022] WTLR 437

Analysis

This action related to a transfer in September 2009 of shares in five Saudi Arabian banks, then collectively worth about US$318m, by Mr Maan Al-Sanea (who at that time held those shares) to Samba Financial Group (Samba). The claimants were the liquidators of Saad Investments Company Ltd (SICL). They alleged that Mr Al-Sanea had at the time of the transfer held those shares on trust for SICL. The claimants brought a number of different actions against Samba in respect of the transfer of the shares, formulating the case on various legal bases in the various different actions. The iteration of the claim that formed the subject of this case was a claim in knowing receipt. The defendant, the Saudi National Bank, came to be part of these actions after the assets and liabilities of Samba were transferred to it on 1 April 2021.

After failing to comply with an order for disclosure, Samba was debarred from defending the claim otherwise than on specific grounds. All factual questions (aside from a particular point of foreign law and an issue concerning valuation, set out in the below) would be deemed to have been resolved in accordance with the claimant’s pleaded case. As such, it was taken to be true that:

1. (a) immediately prior to the transfer, Mr Al-Sanea held the shares on trust for SICL under Cayman Islands law, the law governing their relationship in respect of the shares (Cayman Islands law being identical in every material in respect to English law);
2. (b) the purpose of the September transfer was to discharge indebtedness of Mr Al-Sanea to Samba;
3. (c) Samba knew that Mr Al-Sanea was holding the shares on trust for SICL; and
4. (d) a reasonable bank in Samba’s position would have appreciated that the transfer was a breach of trust, or ought to have made inquiries or sought advice which would have revealed the probability that this was true, and recklessly failed to make such inquiries about the transfer and the shares as an honest and reasonable bank would make.

The only issues that fell to be determined at first instance were:

1. (a) whether the effect of Saudi Arabian law, as the governing law of the 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. (b) whether, if SICL’s interest was so extinguished, any claim in knowing receipt must therefore fail (the law of knowing receipt issue); and
3. (c) what the proper approach would be to the valuation of the shares either at the time of the transfer or at the date of judgment and in particular whether a ‘block discount’ should be applied to the quoted prices of the shares on the Saudi Arabian stock exchange at the relevant times, to account for the fact that were one to effect a sale of such a volume of shares en masse at a particular time, one’s doing so would depress the price obtainable for the shares (the valuation issue).

At first instance the judge ruled in favour of Samba in respect of both the law of knowing receipt issue and the Saudi Arabian law issue. He therefore dismissed the claim, concluding that ‘absent a continuing proprietary interest in the [shares] at the time of Samba’s registration [of the shares], the claim in knowing receipt as pleaded will fail’ and that ‘SICL had no continuing proprietary interest in the [shares] after the… Transfer capable of supporting a claim against Samba in knowing receipt’. In those circumstances the valuation issue did not arise, but the judge considered it nonetheless, explaining that had Samba been liable, he would have agreed that a block discount was applicable.

On appeal, it was argued that the judge had erred in that:

1. (a) the claimants did not need to have a continuing proprietary interest in the shares to succeed in their knowing receipt claim;
2. (b) in any event, SICL’s interest in the shares was not in fact extinguished as a matter of Saudi Arabian law; and
3. (c) the judge was also mistaken in thinking it appropriate to apply a ‘block discount’.

Held:

The appeal would be dismissed.

As to the first issue, the court held that knowing receipt, notwithstanding that it is a species of equitable wrongdoing, requires that the defendant must have received trust property or assets which are traceable as representing trust property. This requirement is satisfied only where the claimant had a continuing proprietary interest after the transfer, and not where the property received was trust property merely in the sense that it had been held subject to the trust prior to the transfer in question. This conclusion was amply supported by the case law. Knowing receipt is not based exclusively on fault. Receipt of trust property is not required simply in order to establish that the defendant has been enriched. Were that the only relevance of such receipt, indirect benefits from trust property (eg having one’s spouse wrongfully spend trust money on a holiday for the defendant and the spouse together) could suffice for a knowing receipt claim, whereas in fact such indirect benefits would not suffice. To that extent, the judgment at first instance was correct.

As to the Saudi Arabian law issue, there was no reason to depart from the great caution to be exercised by appellate courts when reviewing findings of fact made at first instance. Although the relevant finding of fact here related to an issue of foreign law, the appellate court was not in as good a position as the trial judge to evaluate the expert evidence that had been given at trial, since:

1. (a) the only authorised texts of the relevant provisions of Saudi Arabian law were in Arabic and the trial judge had to work from an agreed translation;
2. (b) Saudi Arabian law is an Islamic system of law, whose concepts and principles are far removed from the common law familiar to English judges; and
3. (c) this law had to be considered against the background of practice and culture in the capital markets in Saudi Arabia, with which again the English courts have no inherent familiarity.

There were, moreover, numerous Saudi Arabian court decisions prayed in aid by both experts in support of their contentions as to how the provisions would be interpreted and applied to the facts of the present case. The judge needed the assistance of extensive expert evidence to explain and explore these cases in order to determine the foreign law issues before him. The conclusions of the judge in this case were reasonably open to him on the evidence he heard, and there was nothing in his clear and detailed reasoning which suggested he was wrong in his conclusions. The many specific criticisms made of the judge’s reasoning by the appellant did not come close to satisfying the criteria for interference with a judge’s findings of fact on a matter of foreign law.

Although, in consequence of the above, the valuation issue did not arise, the court commented, obiter, that it would not want to be taken to have endorsed the judge’s conclusions. The court opined that there is a persuasive argument for saying that, 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 reconstitute the trust fund will often 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. That might be said to be the measure most likely to put the trust fund back into the position it would have been in if the misappropriated asset had still been held for the benefit of the beneficiaries, and to represent the full monetary equivalent of the trust property. In those circumstances, a block discount would not have been appropriate. Were the judge’s approach correct, the amount which a person in knowing receipt of trust property in the form of shares would be required to pay by way of compensation for breach of ancillary liability would appear to be less the greater the percentage stake that the misappropriated shares represent in comparison with the company’s issued share capital, which would be a strange result.

JUDGMENT LORD JUSTICE NEWEY: [1] This is the judgment of the Court. All three of us have contributed to it. [2] The appeal is brought by the claimants against the dismissal by Fancourt J (‘the Judge’), in a judgment dated 15 January 2021, of their claim for knowing receipt. The appeal raises issues as to, …

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