22.1 Fiduciary Obligations and Liability of Strangers

A trust is only as useful as the people who control it. SQE1 Functioning Legal Knowledge 2 (FLK2) Trusts Law tests whether you can advise when a trustee, a director, a solicitor or a stranger must disgorge a profit, unwind a purchase, or pay compensation. This independent OpenExamPrep section covers the fiduciary relationship and the liability of strangers for assessments from 1 September 2026. OpenExamPrep is not the Solicitors Regulation Authority (SRA) and does not claim official approval, review, partnership or exact equivalence with SRA materials. Creation of the trust is in 21.1 Express Trusts: Certainties, Formalities and Constitution. Here the trust already exists.

The September 2026 FLK2 list names three fiduciary obligations: the duty not to profit from a fiduciary position; the rule that trustees are not to purchase trust property; and the rule that a fiduciary must not put themselves in a position where their interest and duty conflict. It names two stranger claims as knowing receipt and dishonest assistance. Use those names in an answer.

Who owes fiduciary obligations

A fiduciary must act for another in circumstances that justify loyalty. Express trustees are the core example. The same obligations reach company directors, partners, solicitors holding client money or exercising a power for a client, agents with real discretion, and some constructive trustees who have assumed the office. A discretionary object is not a fiduciary. A person who merely receives misapplied funds, without assuming office, is a stranger. Strangers are not trustees, but equity may still make them personally liable under the two claims below. Do not call a knowing recipient a trustee for limitation purposes; that point returns in 22.4 Breach of Trust, Tracing and Equitable Remedies.

Loyalty is stricter than the duty of care in the next section. A careful, well-meaning fiduciary who makes an unauthorized profit still accounts for it.

Duty not to profit from the fiduciary position

The no-profit rule is prophylactic. In Keech v Sandford (1726) Sel Cas t King 61 a trustee of a lease asked the landlord to renew for the infant beneficiary. The landlord refused to renew for the infant but was willing to grant a new lease to the trustee personally. The trustee took it. Lord King LC held that the lease was held on trust. The rule exists so the fiduciary is not tempted to press the beneficiary's interest weakly. Good faith, a fair price, and even a benefit to the trust do not, by themselves, authorize the profit.

Boardman v Phipps [1967] 2 AC 46 is the working SQE illustration. A solicitor to a trust, and a beneficiary, used information and an opportunity that came from the trust to buy shares in a company the trustees would not buy. Their intervention increased the value of the trust's existing holding. The House of Lords still required an account of profits. Knowledge and opportunity were the trust's; the profit was unauthorized. The court could award an allowance for skill and work, but that is a discretion, not a defence. Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 applies the same idea to directors who took shares the company could not then fund.

Unauthorized bribes and secret commissions are held on constructive trust, so the principal has a proprietary claim, not only a personal account: FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45. If the asset remains identifiable, that proprietary consequence matters on insolvency.

Profits are authorized if the trust instrument permits them, if every adult beneficiary with capacity gives fully informed consent, or if the court authorizes them. Trustee Act 2000 s.29 lets a trust corporation, or a trustee acting in a professional capacity, charge reasonable remuneration if the instrument does not prohibit it and (for a non-corporation professional) unless a lay co-trustee objects. Section 31 of the same Act permits reimbursement of proper expenses. There is no general common-law right for a lay trustee to be paid for time. A solicitor-trustee who wants fees needs a charging clause, s.29, informed consent, or a court order. Taking an unauthorized fee is a profit, even if the work was excellent (Guinness plc v Saunders [1990] 2 AC 663).

Trustees not to purchase trust property

This is the self-dealing rule, a dedicated application of no-conflict and no-profit. A trustee must not buy the trust property from themselves, or sell their own property into the trust, unless the instrument, the court, or fully informed beneficiaries authorize it. In Tito v Waddell (No 2) [1977] Ch 106 Megarry V-C stated the consequence: the sale is voidable at the instance of a beneficiary as of right, however honest the trustee and however fair the price. Market value is not a defence. The trustee cannot be both seller and the person judging whether the sale is in the beneficiaries' interests.

Fair-dealing is different. A trustee who buys a beneficiary's equitable interest from that beneficiary is not automatically unwound. The trustee must prove that they took no advantage of their position, that disclosure was full, and that the transaction was fair. The burden sits on the trustee.

Holder v Holder [1968] Ch 353 shows how facts can take a purchase outside self-dealing: an executor who had not really acted in the administration, and beneficiaries who had affirmed an auction sale, could not set it aside. Do not treat Holder as a general licence for sitting trustees to bid. If a trustee wants the cottage, the safe advice is to retire first, obtain the court's blessing, or obtain informed written consent from every adult beneficiary.

If the purchase stands until rescinded, the trustee holds the asset on constructive trust pending election. Rescission restores the asset to the trust against repayment of the price. A co-trustee who joined the conveyance is in the same position.

No conflict between interest and duty

Bray v Ford [1896] AC 44 is still the statement of principle, and the September 2026 FLK2 wording is gender-neutral: a fiduciary must not put themselves in a position where their interest and duty conflict. The rule is about the position, not only a proved preference for self. A solicitor-trustee who also wishes to buy the trust's freehold, or to advise a lender against the trust, has a conflict whether or not they subjectively try to be fair. Aberdeen Railway Co v Blaikie Brothers (1854) 1 Macq 461 made the same point for a director contracting with their own firm.

Authorization works the same way as for profits: the instrument, the court, or informed consent of all sui juris beneficiaries. A secret hope that nobody will mind is not consent. For a solicitor, the SRA Principles (acting with integrity; in each client's best interests; not allowing independence to be compromised) and the Code rules on own-interest conflict bite in the same fact pattern. Pervasive ethics on SQE1 is not a separate conduct question; it is a reason the self-dealing purchase is the wrong advice. Conflicts more generally are in 2.3 Conflicts, Undertakings and Duties to the Court.

Knowing receipt

A stranger who receives trust property transferred in breach can be personally liable in knowing receipt. The claim is personal (to account for the value received). It is not the same as a proprietary tracing claim, which needs the property or a substitute still to be identifiable; that is 22.4.

Working ingredients, drawn from El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 and BCCI (Overseas) Ltd v Akindele [2001] Ch 437:

1. Assets are disposed of in breach of trust or of fiduciary duty.
2. The defendant beneficially receives those assets, or their traceable product — not merely as a ministerial agent who passes them on.
3. The defendant's knowledge makes it unconscionable for them to retain the benefit (Akindele).

Knowledge here is not a five-point Baden scale that you must recite. Unconscionability is the test. Actual knowledge of the breach will almost always suffice. Wilful blindness, and a bank that ignores obvious warning signs, can suffice. Honest receipt as a bona fide purchaser for value without notice will not.

Byers v Saudi National Bank [2023] UKSC 51 adds a limit the exam can use. Knowing receipt protects a claimant who still had a continuing equitable interest at the moment of receipt. If the transfer extinguished that interest — for example because a bona fide purchaser took an unencumbered legal title — the knowing-receipt claim fails even if the recipient later learns of a historic breach. Dishonest assistance, or a claim against the transferring trustee, may still be available. Candidates are not examined on foreign law; the point of Byers for SQE1 is the continuing-interest requirement, not overseas company procedure.

Dishonest assistance

Dishonest assistance is a personal claim against a stranger who helps a breach. The stranger need not receive any property. In Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 the Privy Council held that the assistant's dishonesty is what matters. The trustee can be honest, incompetent, or even a dupe. Negligence by the assistant is not enough.

Dishonesty is judged by the standard adopted for civil cases after Ivey v Genting Casinos (UK) Ltd [2017] UKSC 67, applied to assistance claims in Group Seven Ltd v Notable Services LLP [2019] EWCA Civ 614. First, find the defendant's actual knowledge and genuine beliefs. Second, ask whether ordinary decent people would consider that conduct dishonest in those circumstances. There is no extra requirement that the defendant realized other people would call it dishonest. Twinsectra Ltd v Yardley [2002] UKHL 12 is no longer a safe source for a subjective "I did not know others would call this dishonest" defence.

Assistance is practical help: implementing a transfer, creating a false paper trail, or allowing a client account to be used to move the money. Looking the other way when the facts scream breach can be assistance if it is dishonest. Giving routine advice in good faith is not.

A client-shaped example

Priya is a solicitor and one of two trustees of a will trust holding a shop. She learns from a tenant's repairing covenant that a development next door will lift values. She causes the trust to decline a purchase of the neighbouring freehold, then buys it herself through a nominee. The neighbour purchase is a Boardman profit from information obtained as trustee, and a conflict. If she instead bought the trust's shop from herself and her co-trustee at a surveyor's valuation, that is self-dealing and voidable however fair the price. If she paid the sale proceeds to her brother, who knew the money was trust money being extracted to defeat a beneficiary, the brother is in the territory of knowing receipt. If a conveyancing assistant in her firm, knowing the plan, rushed the transfer to beat an injunction, that is dishonest assistance even if the assistant never touched the proceeds.

A solicitor in Priya's position also has an own-interest conflict under the SRA Code. The right advice is to stop, disclose, and not complete.

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