Third-party proceedings – Settlement — Damages – Defendant director of company holding moneys on trust for claimant – Defendant using moneys to pay other creditors – Company being dissolved – Whether defendant knowing that monies held in trust for claimant – Whether defendant dishonestly assisting breach of trust — Whether defendant receiving sum personally on basis of knowing receipt — Claim allowed in part
Until 2001, the claimant property company owned land that sloped form north to south. In order to develop it, the claimant instructed a firm of soil experts (T) to report on soil conditions. It then sold the site to a property development company (L). The defendant was its managing director. L employed B to carry out the work but a landslip damaged properties uphill from the site. The owners of those properties began proceedings for damages against L and B.
The claimant was asked to and did assign T’s soil inspection report and its rights under it to L, which needed it in order to found a claim for damages against T in third-party proceedings. The Court of Appeal upheld L’s claim in contract: [2006] EWCA Civ 1079; [2006] PLSCS 181; [2006] 31 EG 89 (CS).
The claimant did not offer its assistance for free but insisted on receiving 50% of the net moneys received from T. When the action was settled, L received £309,154 from T and held one-half of that sum in trust for the claimant. However, the claimant received nothing because the defendant caused L to pay the entire amount to its other creditors. L was subsequently dissolved.
It was not in issue that L had acted in breach of trust. The claimant’s principal case was that the defendant had been aware from the terms of a side letter that half the money received from T was held on trust for it and that he was therefore liable for dishonestly assisting a breach of trust. It also claimed £15,500 that had been paid to the defendant on the basis of knowing receipt.
Held: The claim was allowed in part.
(1) The defendant had not been aware, at the time he caused L to pay its other creditors in preference to the claimant, that L held the money on trust for the claimant.
(2) It would usually be obvious in cases of dishonest assistance that the conduct in question was at least objectively dishonest; it was conduct that would be regarded as dishonest by any right-thinking person. However, there might also be subjective elements and cases in which different views could reasonably be held. In such a case, the defendant would not be liable for dishonest assistance. The defendant had to have transgressed accepted standards of conduct that all normal people would regard as being dishonest: Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378, Barlow Clowes International Ltd (in liquidation) v Eurotrust Ltd [2005] UKPC 37; [2006] 1 WLR 1476, and Abou-Rahmah v Abacha [2006] EWCA Civ 1492; [2007] 1 Lloyd’s Reports 115 considered.
In the instant case, the test for dishonesty had not been met. The question of whether a company director might prefer some creditors over others was not one to which most people would know the answer as a matter of law, nor would a general view apply as to what was honest or dishonest in that connection. In the absence of any specific advice or knowledge, the defendant’s conduct would not 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 understanding as to the legal position were additional relevant factors.
(3) With regard to the alternative knowing receipt claim for £15,500, dishonesty was not a prerequisite for liability. The single test was whether the recipient’s knowledge made it unconscionable for him or her to retain the benefit of the receipt. This flexible test which required the court to consider what was right, taking into account the nature and extent of the defendant’s knowledge and the circumstances relating to the receipt. Actual knowledge that would put a reasonable man on inquiry, coupled with a failure to inquire, might suffice.
On the facts of the instant case, although the defendant’s conduct had not been dishonest, the test for knowing receipt had been met in respect of the amount that he personally received which, had he inquired further, he would have known he was not entitled to receive. Accordingly, no one could reasonably think that he should keep it: Bank of Credit & Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 applied.
Adrian Jack (instructed by Vance Harris LLP) appeared for the claimant; Donald McCue (instructed by Shirley Griffiths LLP, of Lympne) appeared for the first defendant; the second and third defendants did not appear and were not represented because the claim against them had been settled.
Eileen O’Grady, barrister
