Saturday, November 27, 2010

The Court of Appeals on Dishonest Assistance

The United Kingdom Court of Appeals recently considered an interesting case concerning the standard of dishonesty required to hold a person guilty of assisting in the breach of trust. The factual background in Starglade Properties v. Roland Nash is complex, but for the purposes of this discussion, it is sufficient to note that as a result of certain contractual obligations, Larkstore Ltd., the company of which the defendant Mr. Nash was the sole director, held certain amounts in trust for the claimants Starglade Properties Ltd. However, in breach of this trust, Mr. Nash distributed large parts of the amount held to several persons. On facts, it was not argued that these payments in themselves were fraudulent, and they were considered to be discharges of debt. However, it was established on facts that all the debts discharged were owed to people who were connected with Mr. Nash. Also, it was established that although Mr. Nash had legal advice, that legal advice was vague, and only dealt with the question of whether he could pay off the largest creditor (which was not ultimately paid off) in preference to Starglade.

The crux of the appeal hinged around what the legal test for determining dishonesty is. The High Court Judge, Nicholas Strauss QC, came to the following conclusion,

The question whether a company director may prefer some creditors over others is not one to which most people would know the answer as a matter of law, nor in my judgment would there be a general view as to what was honest or dishonest in this connection. It might well be dishonest to prefer creditors having received advice that it was unlawful, or having actual knowledge of the decided cases referred to above establishing that it was unlawful, but not in my view otherwise. In the absence of such specific advice of knowledge, Mr. Nash's conduct was not conduct which would have transgressed generally accepted standards of commercial behaviour on the part of a person in his position, even if he had had greater commercial experience. His lack of experience and lack of understanding as to the legal position are additional relevant factors. [emphases supplied]

The meaning of dishonest assistance has had a chequered history in English law, with two Privy Council decisions, and one House of Lords decision, arriving at seemingly different conclusions. Lord Nicholls, in Royal Brunei Airlines v Tan, [1995] 2 AC 378, observed that honesty is to be determined by an objective standard, but “does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated.” At the same time, he also clarified that “these subjective characteristics of honesty do not mean that individuals are free to set their own standard of honesty in particular circumstances”. The House of Lords however, in Twinsectra Ltd v Yardley, [2002] 2 AC 164, complicated matters. Lord Hutton, approved of the test laid down by Lord Nicholls, observing, “I consider that the courts should continue to apply that test and that your Lordships should state that dishonesty requires knowledge by the defendant that what he was doing would be regarded as dishonest by honest people, although he should not escape a finding of dishonesty because he sets his own standards of honesty and does not regard as dishonest what he knows would offend the normally accepted standards of honest conduct”.

The House of Lords thus added two components to Lord Nicholls’ test- (1) that while the conduct need not be dishonest according to the defendant’s subjective standards of honesty, it needs to be dishonest according to the beliefs of reasonable and honest people; and (2) that the defendant should know that his conduct is dishonest according to the beliefs of reasonable and honest people. The second of these additions was successfully challenged before the Privy Council in Barlow Clowes Ltd v Eurotrust Ltd, [2006] 1 WLR 1476. Lord Hoffman observes that Lord Hutton’s speech was “intended to require consciousness of those elements of the transaction which make participation transgress ordinary standards of honest behaviour. It did not also to require him to have thought about what those standards were”.

So, the position that seems to emerge from the three decisions discussed above is that the conduct of a person is to be determined in light of his knowledge at the time of his act (subjective), and whether such conduct was dishonest given his knowledge is to be determined by the beliefs of reasonable and honest people (objective). On facts here, Mr. Nash was aware that he was preferring other creditors over Starglade. He was also aware that the company was bound to make the payment to Starglade since the money was held in a trust for Starglade. Thus, the question to be asked according to the Court of Appeals was whether such a frustration of Starglade’s rights could be considered as being honest.

It was argued by the counsel for Mr. Nash that his conduct was not something that would be considered dishonest in the commercial world. This clearly derived some force from the first addition which Twinsectra had made to Royal Brunei Airlines. However, the Court of Appeals rejected this argument, observing that,

The relevant standard, described variously in the statements I have quoted, 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. Ultimately, in civil proceedings, it is for the court to determine what that standard is and to apply it to the facts of the case.

...

the question was whether the relevant conduct of Mr Nash in seeking to frustrate Starglade, given that he knew that Larkstore was insolvent but otherwise had sufficient assets to pay a dividend to its creditors, was dishonest. The deputy judge never looked at that issue. He concentrated on whether payments to or security given to Glancestyle might be set aside in due course by a liquidator of Larkstore. No advice was sought or given on what Mr Nash proposed to do or did or his reasons for doing so. The deliberate removal of the assets of an insolvent company so as entirely to defeat the just claim of a creditor is, in my view, 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.

Thus, the test for determining whether a particular act amounts to dishonest assistance of a breach of trust is whether given the knowledge of the defendant, the acts alleged to be assisting the breach would be considered dishonest by objective standards. In that sense, the test does not depart from that which emerged after Barlow Clowes. However, what the Court of Appeals does clarify is the nature of objective inquiry. When talking of ‘the beliefs of reasonable and honest people’, it is not the actual subjective beliefs of people that is conclusive, but the hypothetical reasonable man test adopted in many different areas of the law.

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