Breach of Trust: "Knowingly Participating"

In Scoretz v Kensam Enterprises Ltd 2017 BCSC 1356 a director of a corporate bare trust was found liable for damages for “knowingly participating” in the breach of trust by failing to deliver shares held in trust .

The court found that it is clear that Mr. Sai knowingly assisted in the breach of trust. Mr. Sai had actual knowledge of the existence of the trust and that the refusal of Kensam to deliver up the shares was a breach of trust. He failed to take the necessary steps to have the release of the LIM Shares and the Napier Shares to Mr. Scoretz and, at the same time, he received a benefit as a result of the breach of trust as LIM Shares were made available to him through his control of Kensam.

He was in a position to sell his LIM Shares in the market without competition from the shares that should have been available for Mr. Scoretz. Mr. Sai knowingly assisted in the breach of trust by failing to cause Kensam to deliver the LIM Shares as was required. Whether by intention, recklessness, or wilful blindness, Mr. Sai participated in the breach of trust which benefited himself. In those circumstances, Mr. Sai is personally liable for the breach of trust of Kensam.

THE LAW

The leading case on the personal liability of strangers to a trust is Air Canada v. M & L Travel Ltd., [1993] 3 S.C.R. 787. There, a travel agency was obliged to hold in trust the proceeds from its sale of Air Canada tickets, breached the trust, and did not provide Air Canada with approximately $25,000 that was owed. The issue was exactly the same as the issue here: whether or not the director and shareholder of the travel agency could be held personally liable for the loss.

68 The starting point for liability for “knowing assistance” is the decision of the Court of Appeal in Chancery in Barnes v. Addy (1874), L.R. 9 Ch. App. 244where Lord Selborne L.C. stated at p. 252 that a stranger to a trust can be liable if they “assist with knowledge in a dishonest and fraudulent design on the part of the trustees”.

69 In Air Canada, supra, the Court noted that actual knowledge is required but that reckless or wilful blindness will also suffice. The Court also noted that, if a stranger receives a benefit as a result of the breach, it may be grounds to infer that the stranger had knowledge of the breach of trust.

70 Given that Kensam is a closely held company and Mr. Sai was the directing mind, this requirement of knowledge is easily satisfied. I have no hesitation in concluding that Mr. Sai had actual knowledge of the refusal of Kensam to deliver up the LIM Shares and the Napier Shares.

71 Concerning the nature of the breach of trust, the Court in Air Canada noted that there had developed two lines of authority: most English authorities required participation by the stranger in a dishonest and fraudulent design as set out originally in the Barnes decision whereas a line of Canadian authorities has developed holding that a person who is the controlling or directing mind of a corporate trustee can be liable for an innocent or negligent breach of trust if the person knowingly assisted in the breach of trust and that, in those circumstances, proof of fraud and dishonesty by the controlling mind of the corporate trustee is not a requirement if a finding can be made that the breach of trust amounts to fraud and dishonesty. In this regard, it is necessary to show that there is proof of fraud and dishonesty by the trustee and not by the controlling and directing mind of the trustee.

72 In Air Canada, supra, Iacobucci J. stated that the divergence in the case law was a result of the application of the traditional rule in the context where the corporate trustee is actually controlled by the stranger to the trust:

Where the trustee is a corporation, rather than an individual, the inquiry as to whether the breach of trust was dishonest and fraudulent may be more difficult to conceptualize, because the corporation can only act through human agents who are often the strangers to the trust whose liability is in issue. Regardless of the type of trustee, in my view, the standard adopted by Peter Gibson J. in the Baden case, following the decision of the English Court of Appeal in Belmont Finance, supra, [Belmont FinanceCorp. v. Williams Furniture Ltd. (No. 1), [1979] 1 All E.R. 118], is a helpful one. I would therefore “take as a relevant description of fraud ‘the taking of a risk to the prejudice of another’s rights, which risk is known to be one which there is no right to take’.” In my opinion, this standard best accords with the basic rationale for the imposition of personal liability on a stranger to a trust which was enunciated in Re Montagu’s Settlement Trusts, supra, [Re Montagu’s Settlement Trusts, [1987] Ch. 264] namely, whether the stranger’s conscience is sufficiently affected to justify the imposition of personal liability. In that respect, the taking of a knowingly wrongful risk resulting in prejudice to the beneficiary is sufficient to ground personal liability. This approach is consistent with both lines of authority previously discussed.

(at para. 60)

73 In British Columbia, there is a line of authority which is binding on me which provides that a person who is a controlling or directing mind of a corporate trustee can be liable for an innocent or negligent breach of trust if the person knowingly assisted in the breach of trust: Horsman Bros. Holdings Ltd. v. Panton, [1976] 3 W.W.R. 745 (B.C.S.C.); Trilec Installations Ltd. v. Bastion Construction Ltd. (1982), 135 D.L.R. (3d) 766 (B.C.C.A.); Henry Electric Ltd. v. Farwell (1986), 5 B.C.L.R. (2d) 273 (C.A.). In Scott v. Riehl (1958), 15 D.L.R. (2d) 67 (B.C.S.C.), Craig J. stated regarding an “innocent” breach of trust:

If a person deals with the funds, which are within the meaning of s. 3 [what was then the Mechanics’ Lien Act, 1956, S.B.C. 1956, c. 27] in a manner inconsistent with the trust, he breaches the trust, even though he may do so “innocently”.

74 Similarly, the courts in other jurisdictions have concluded that proof of fault and dishonesty is not required: Andrea Schmidt Construction Ltd. v. Glatt (1979), 25 O.R. (2d) 567. (C.A.); Austin v. Habitat Development Ltd. (1992), 94 D.L.R. (4th) 359 (N.S.C.A.).