Dishonesty and Accessory Liability

See no evil, hear no evil, speak no evil ¹

In Group Seven Limited & Ors v Notable Services LLP & Ors² the English Court of Appeal clarified the law of dishonest assistance and considered the role of dishonesty as an essential ingredient of accessory liability in light of the Supreme Court’s much-discussed ruling in Ivey v Genting Casinos³ in 2017.

The dispute underpinning the proceedings arose from an attempt by fraudsters to launder the proceeds of a brazen and substantial fraud perpetrated on an investor, Allseas Group SA (“Allseas”), through the client account of a London firm of solicitors, Notable Services LLP (“Notable”).

Allseas specialises in pipe laying for the oil and gas industry. It had funds that it wished to invest. A group of fraudsters persuaded Allseas that they could facilitate an extremely profitable investment, as a result of which Allseas formed a subsidiary company (“Group Seven”) which ultimately transferred funds totalling €100 million to Allied Investment Corporation Ltd (“AIC”). AIC had been incorporated for the purposes of defrauding Group Seven, which it promptly set about doing by purporting to lend the money to Larn Ltd (“Larn”) as part of an investment scheme which involved trading in securities under the auspices and with the approval of the Federal Reserve Board in Washington DC. In fact, there was no such scheme and the proposed investment opportunity was merely the means by which the fraudsters were able to convince Allseas to part with its funds. Larn was owned and controlled by one of the fraudsters, a Mr Luis Nobre (“Mr Nobre”). AIC transferred the funds to the client account of Notable where it was held for the benefit of Larn.

Mr Nobre (on behalf of Larn) subsequently gave instructions to Notable to make payments totalling €15 million out of its client account. One such payment (of £170,000) was made to Nisroy Investments Inc. (“Nisroy”) ostensibly for its services in connection with a property transaction. Nisroy was in fact a nominee of Mr Martin Landman (“Mr Landman”), an accountant and member of Notable, and the payment to Nisroy represented Mr Landman’s personal fee (concealed from other members of Notable) for authorising payments out of Notable’s client account.

The money laundering was successful until police intervention brought it to a halt. €88 million was frozen and later recovered. In earlier proceedings the principals in the fraudulent scheme were found liable for the balance. The present proceedings comprise multiple conjoined appeals and concern attempts to recover by way of compensation the unreturned balance from a range of professionals and organisations alleged to be liable in tort and equity as secondary actors in the fraud, including for dishonest assistance, conspiracy and unconscionable receipt. All appeals were resolved in favour of Group Seven. This author’s focus is the Court of Appeal’s discussion of dishonest assistance.

The trial judge, Morgan J, found that Mr Landman knew facts which would have shown to an honest and reasonable man that Mr Nobre was not entitled to the €100 million paid into Notable’s client account. The judge observed that a reasonable man in Mr Landman’s position would have asked himself “why Mr Nobre wanted Notable to do something which Notable was not allowed to do, namely, use its client account as a bank account for Mr Nobre”, in circumstances in which Notable was not involved in, or independently aware of, the underlying transactions. The judge described Mr Landman’s “propensity for dishonesty” and found that he had not been frank with the court about his dealings with Mr Nobre.

However, Morgan J determined that Mr Landman did not actually know, or have “blind-eye” knowledge (i.e. knowledge which may be imputed to a person who deliberately refrains from taking any step to enquire into the true state of affairs to avoid certain knowledge of what he already suspects to be the case), that the funds held in Notable’s client account were not beneficially owned by Larn and were not at Larn’s free disposal. In the absence of such knowledge Mr Landman’s conduct did not amount to dishonest assistance of the breaches of trust and fiduciary duty, such that Mr Landman was not personally liable for the balance of the funds, as he would have been were there a finding of dishonest assistance.

At the heart of Morgan J’s reasoning was the fact that it was Mr Landman who first proposed that Notable should instruct external solicitors to take advice on the steps that Notable should take to avoid involvement in money laundering and that Notable had asked a large number of questions as to the source of the funds. The judge found that Mr Landman was entitled to rely on the conclusion reached by his colleagues that Mr Nobre had provided adequate information in this regard.

Group Seven challenged this finding on appeal.

Mr Landman was however held liable for the unconscionable receipt of the £170,000 payment made to Nisroy, on the basis that (1) he had deliberately and knowingly breached the SRA Accounts Rules prohibiting the provision of banking facilities through a client account and (2) his conduct in relation to Mr Nobre’s payment instructions was dishonest.

The Court of Appeal’s judgment sets out the current law of dishonest assistance of a breach of trust. To ground a claim of this nature it is necessary to establish that:

1. There was a trust in existence at the material time;
2. The trustee committed a breach of that trust;
3. The defendant assisted the trustee to commit that breach of trust; and
4. The defendant’s assistance was dishonest.

Those same principles apply mutatis mutandis to a claim for dishonest assistance of a breach of the fiduciary duties which are owed to a company by its director in relation to dealings with the company’s assets.

It was common ground on the appeal that all but one of the necessary ingredients of dishonest assistance of a breach of trust were present. The €100 million in the client account of Notable was held by Notable on trust for Larn, which in turn held it on a bare trust for Group Seven. The breach of trust consisted of the payment away by Larn of approximately €15 million of trust monies for Larn’s or Mr Nobre’s own purposes, and not for the purposes (or with the consent) of the beneficial owners of the money, i.e. Group Seven. Mr Landman plainly did assist Larn’s breach of trust in paying out the €15 million through its client account. The fundamental issue on the appeal was whether Morgan J was wrong to have held that Mr Landman’s assistance was not dishonest.

The Court of Appeal’s judgment contains an exposition of the test for dishonesty for the purposes of establishing accessory liability. It concluded that the law is settled as a result of the decisions of the Privy Council in Royal Brunei Airlines v Tan⁵ and Barlow Clowes International Limited v Eurotrust International Limited⁶ and more recently of the Supreme Court in Ivey. What constitutes dishonesty in the context of dishonest assistance was explained in the following way by Lord Hoffman in Tan:

“Whatever may be the position in some criminal or other contexts (see for instance, Reg. v Ghosh [1982] Q.B. 1053)⁷, in the context of the accessory liability principle acting dishonestly… means simply not acting as an honest person would in the circumstances. This is an objective standard. At first sight this may seem surprising. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, 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… Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety. However, these subjective characteristics do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual.”⁸

Lord Hughes put it this way in Ivey:

“When dishonesty is in question the fact-finding tribunal must first ascertain (subjectively) the actual state of the individual’s knowledge or belief as to the facts… [which the Court of Appeal confirmed included an individual’s blind-eye knowledge]. When once his actual state of mind as to knowledge or belief as to facts is established, the question whether his conduct was honest or dishonest is to be determined by the fact-finder by applying the (objective) standards of ordinary decent people. There is no requirement that the defendant must appreciate that what he has done is, by those standards, dishonest.” ⁹

On the facts the core issue in the context of assessing whether Mr Landman’s assistance was dishonest was whether he had the requisite knowledge (or suspicion) about the ownership of the funds in Notable’s client account and that Larn was not entitled to use that money as if it were its own. It had not been alleged that Mr Landman had actual knowledge and so it fell to the Court of Appeal to determine whether he had blind-eye knowledge. The court referred to the House of Lords decision in Manifest Shipping & Co Ltd v Uni-Polaris Insurance Co Ltd¹⁰ which had established that the imputation of blind-eye knowledge required, first, the existence of a suspicion that certain facts may exist and, second, a conscious decision to refrain from taking any step to confirm their existence.

The Court of Appeal held that Morgan J had erred in his assessment of Mr Landman’s blind-eye knowledge, having placed insufficient weight on his unconscionable receipt and concealment of the £170,000 payment, which it described as a “bribe”. Mr Landman could not properly rely on his colleagues’ conclusions as to the source of the client funds when he had himself failed to disclose this material fact. Similarly, his failure to disclose the payment to Notable’s external solicitors rendered their advice worthless. This conduct must have been at the core of what the Court of Appeal described as Mr Landman’s “dishonest strategy” and it created an irresistible inference that Mr Landman clearly suspected that the money was not Larn’s, and that he consciously decided to refrain from taking any step to confirm the true state of affairs for fear of what he might discover.

On the one hand, the Court of Appeal’s decision serves merely to reinforce the prevailing law in Jersey, namely that the test for dishonesty in claims for dishonest assistance is an objective one.¹¹ Yet the judgment’s treatment of the legal concept of dishonesty is worthy of note to the Island’s trust and fiduciary services businesses and the wider group of professionals which deal with them.

To date there have been no reported decisions in Jersey on the interpretation of dishonesty post-Ivey. It is readily apparent from the Court of Appeal’s decision that the Supreme Court’s judgment is now the leading English authority on the meaning of dishonesty in civil cases, thereby narrowing the scope of defences available to accessories to a breach of trust or fiduciary duty.  While the long term effect of the decision is yet to be determined, it is likely that Ivey also marks the end of the more rigorous Ghosh test in criminal cases in that jurisdiction. It will be interesting to observe whether Jersey follows the approach of the English courts, which is to be considered likely.

The Court of Appeal made clear that even suspicions which fall short of constituting blind-eye knowledge are relevant to the question of whether an accessory has acted dishonestly, and these are matters which will be taken into account in forming the overall picture of an accessory’s state of mind, and to which the objective standard of dishonesty is to be applied.

For those working in (and with) the Island’s trust and fiduciary services businesses the decision reiterates the importance of being naturally sceptical about information provided by a client or third party and of avoiding the temptation to close one’s eyes and ears to potentially material facts. If you do harbour any suspicion at all about a transaction, it is important to take proper steps to confirm the true state of affairs.

By Philip Brown, Jersey Solicitor and Associate

¹ A proverbial maxim thought to derive from the 4th century BC Analects of Confucius and often represented pictorially by the ‘Three Wise Monkeys’. In western tradition, the proverb has generally been construed as relating to those who refuse to acknowledge impropriety by turning a blind eye.

² Group Seven Limited & Ors v Notable Services LLP & Ors [2019] EWCA Civ 614

³ [2017] UKSC 67

⁴ [2017] EWHC 2466 (Ch)

⁵ [1995] 2 A.C. 378

⁶ [2006] 1 All E.R. 333

⁷ The two-limb test in Ghosh was this: (1) whether according to ordinary standards of reasonable and honest people what was done was dishonest; and (2) if it was dishonest by those standards, whether the defendant himself must have realised that what he was doing was by those standards dishonest. This test has now been discredited in the context of civil claims. Interestingly, in Ivey, the Supreme Court stated that there was no logical or principled basis for the meaning of dishonesty to differ according to whether it arises in a civil action or a criminal prosecution.

⁸ [1995] 2 A.C. 378, 389

⁹ [2017] UKSC 67, para 74

¹⁰ [2003] 1 AC 469

¹¹ See Nolan v Minerva Trust Company Ltd [2014] JRC 078A at 178, citing Cunningham v Cunningham [2009] JLR 227, paras 36-40