Test for dishonest assistance in commercial dealings

Relying on the Privy Council’s interpretation (in Barlow Clowes v Eurotrust Ltd [2006] 1 WLR 1476) of the House of Lords’ finding in Twinsectra Ltd v Yardley [2002] 2 AC 164, the Court of Appeal described it as a single standard of honesty, objectively determined by the court. The standard is applied to the specific conduct of a specific individual possessing the knowledge and qualities he actually enjoyed. The relevant standard is the ordinary standard of honest behaviour. The subjective understanding of the person concerned as to whether his conduct is dishonest is irrelevant. It is also irrelevant that there may be a body of opinion which regards the ordinary standard of honest behaviour as being set too high.

The defendant, Mr Nash, was the director of a company, Larkstore, which owed money to Starglade Properties. The debt arose as a result of an agreement under which Larkstore agreed to share the money it received as damages in litigation against a third party. Starglade had originally assigned its rights in the litigation to Larkstore, and by a side letter Larkstore agreed to hold on trust any moneys it received from the third party. At the time the damages were paid to Larkstore, it was technically insolvent. Mr Nash obtained advice from his solicitor in relation to payment of that money to another creditor (Glancestyle) instead of Starglade. Mr Nash subsequently paid the money to other creditors (not Glancestyle) to deliberately frustrate Starglade’s attempts to recover the money. Mr Nash then applied for Larkstore to be dissolved and taken off the Companies Register.

Starglade sued Mr Nash, claiming that he was liable for dishonest assistance in a breach of trust by Larkstore. It was accepted that there had been a breach of trust and Mr Nash had assisted in the breach. The only question was whether the assistance had been dishonest. It was argued by Mr Nash, among other things, that his conduct was not something that would be considered dishonest in the commercial world.

At first instance Mr Nicholas Strauss QC, sitting as a deputy judge of the Chancery Division, dismissed the claim. Although Mr Nash admitted that he had deliberately preferred the other creditors, the judge did not think Mr Nash was dishonest because he was not “guilty of conduct which transgressed normally accepted standards of conduct, ie conduct which all normal people would regard as dishonest”. The judge did not think that Mr Nash knew what he was doing was unlawful. Although he had received some legal advice, it had been very vague and unclear, and it was reasonable for him to have concluded that the point was sufficiently arguable. The judge held that a company director would only be acting dishonestly in preferring some creditors over others if he had received advice that it was unlawful, or had knowledge that it was.

The Court of Appeal disagreed. The Chancellor, Sir Anthony Morritt, gave the leading judgment, which analysed the relevant authorities on dishonesty: Royal Brunei Airlines v Tan [1995] 2 AC 378, followed by Twinsectra Ltd v Yardley [2002] 2 AC 164, as interpreted by the Privy Council in Barlow Clowes v Eurotrust Ltd [2006] 1 WLR 1476. From these authorities, he extracted the following principles:

• there is a single standard of honesty objectively determined by the court. The standard is applied to the specific conduct of a specific individual possessing the knowledge and qualities he actually enjoyed;
• the relevant standard is the ordinary standard of honest behaviour;
• just as the subjective understanding of the person concerned as to whether his conduct is dishonest is irrelevant, so also is it irrelevant that there may be a body of opinion which regards the ordinary standard of honest behaviour as being set too high; and
• ultimately it is for the court to determine what that standard is and to apply it to the facts of the case.

The Court of Appeal took into account Mr Nash’s relevant knowledge. He was aware that he was preferring other creditors, most of them related in some way to Mr Nash, over Starglade. No specific advice had been sought or given as to the honesty of a director of an insolvent company paying amounts due to himself, for his benefit or to others with whom he was connected. He was intelligent and commercially astute and knew that the company was bound to make the payment to Starglade. He could not have been wholly satisfied, from the legal advice that he received, that he was lawfully entitled to do what he did. Thus, the question to be asked was whether Mr Nash’s conduct (the frustration of Starglade’s rights) could be considered as being dishonest, applying the ordinary standard of honest behaviour.

The Court of Appeal held that the deliberate removal of the assets of an insolvent company so as to entirely defeat the just claim of a creditor was not in accordance with the ordinary standards of honest commercial behaviour, “however much it may occur…nor could a person in the position of Mr Nash have thought otherwise notwithstanding a lack of understanding as to the legal position”.

The fact that the payment was, in accordance with ss239-241 of the Insolvency Act 1986, a voidable preference did not affect the question of dishonesty. Nor did the judge’s finding that Mr Nash was an honest witness.
The Court of Appeal concluded that Mr Nash had therefore dishonestly assisted in a breach of trust.

Jason Rix, Senior Professional Support Lawyer, comments: The case law in this area has been the subject of academic debate, particularly the analysis by the Privy Council in Barlow Clowes of the House of Lords’ decision in Twinsectra. This case has followed the Barlow Clowes take on Twinsectra, using a combined test of an objective standard, but applied to a particular defendant, taking into account the knowledge of that defendant. The defendant’s own belief as to whether his conduct was dishonest is irrelevant. Leveson LJ added a note of warning in the judgment, though it did not arise on the facts before him, that the law on dishonesty for the purposes of civil liability should not differ markedly from the position under criminal law.

Reading between the lines it seems that the Court of Appeal simply did not believe Mr Nash, despite agreeing that he was an honest witness, and Mr Nash did not appear to give his solicitor all the information necessary to have prompted him to consider the question of dishonest assistance.

Practically, if you were in a situation like Mr Nash the correct approach would have been to put Larkstore into liquidation or administration and to allow the moneys to be distributed in the ordinary way. An alternative solution in the appropriate circumstances is to put the moneys in escrow and to seek directions from the court.

Further Information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 (0)20 3088 3710.