Breach of trust – Dishonest assistance – Appellant permitting development company to use report in proceedings in return for share of proceeds of litigation – Proceedings settled and sum paid to company – Appellant receiving none of that sum – Respondent director of company causing entire sum to be paid to other creditors including himself – Whether dishonestly assisting in breach of trust by company – Appeal allowed
In 1999, the appellant sold a sloping piece of land to a development company of which the respondent was the sole director. The appellant had previously obtained a site investigation report that indicated that the site was suitable for certain residential development. The development company duly commenced that development but, in 2001, a landslip damaged properties uphill from the site. The owners of those properties brought proceedings against the development company, which in turn brought a Part 20 claim against T, the company that had produced the site investigation report for the appellant. For the purposes of that claim, the appellant agreed to assign the benefit of the report to the development company in return for half of the net moneys that it received from T. By a side letter signed by the respondent, the development company undertook to hold all moneys received from T on trust to be divided in accordance with that agreement.
The Part 20 proceedings were settled and the development company received the net sum of £309,154.98. By then, it was insolvent and, instead of accounting to the appellant, the respondent distributed the entire sum to the development company’s creditors, including £15,500 to himself and further sums to companies with which he was connected.
The appellant brought a claim against the respondent for restitution of £154,577 on the ground that he had dishonestly assisted in the breach of trust by the development company. Dismissing the claim, the deputy judge found that the test of dishonesty had not been met. He held that, although the appellant had deliberately sought to frustrate the appellant, he had not understood that it was unlawful to pay other creditors in preference to the appellant and that in the absence of specific advice or knowledge, his conduct had not transgressed accepted standards of commercial behaviour on the part of a party in his position: see [2010] PLSCS 30. An alternative claim for the repayment of the £15,500 on the basis of knowing receipt, which required no finding of dishonesty, was allowed. The appellant appealed against the dismissal of the dishonest assistance claim.
Held: The appeal was allowed.
There was a single standard of dishonesty, which was not flexible. It was objectively determined by the court, applying a combined test of whether the defendant’s conduct was dishonest by the ordinary standards of reasonable and honest people and whether he had realised that, by those standards, his conduct was dishonest. That standard was applied to the specific conduct of a specific individual who had the knowledge and qualities that that individual actually enjoyed: Royal Brunei Airlines Sdb Bhd v Tan [1995] 2 AC 378, Twinsectra Ltd v Yardley [2002] UKHL 12; [2002] AC 164, Barlow Clowes International Ltd (in liquidation) v Eurotrust International Ltd [2005] UKPC 37; [2006] 1 WLR 1476 and Rahman v Abacha [2006] EWCA Civ 1492; [2007] 1 Lloyd’s Rep 115 applied. The defendant’s subjective understanding as to whether his conduct was dishonest was irrelevant.
The respondent’s conduct had been dishonest. The deputy judge had asked the wrong question in considering the honesty or otherwise of a company director preferring some creditors over others. The respondent’s concern was not to prefer some creditors over others but to frustrate the appellant. He had known that the development company was insolvent and that the obligation to the appellant was binding, such that he could frustrate the appellant only if he left it to pursue its remedy against an insolvent company without assets. He could not be protected from the consequences of that course of conduct by any advice of his solicitor, since he had neither sought nor received any advice as to the legality of the payments that he made in view of either the insolvency of the development company or his purpose or intention in making them. The deliberate removal of the assets of an insolvent company so as entirely to defeat the just claim of a creditor did not accord with the ordinary standards of honest commercial behaviour, however much such things might occur in practice, and a party in the position could not have thought otherwise, notwithstanding a lack of understanding as to the legal position. The conduct of the respondent in assisting the undoubted breach of the trust in favour of the appellant had therefore been dishonest.
Adrian Jack (instructed by Vance Harris LLP) appeared for the appellant; Donald McCue (instructed by Shirley Griffiths LLP, of Lympne) appeared for the respondent.
Sally Dobson, barrister
