BAILII [Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]

England and Wales High Court (Chancery Division) Decisions

You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Starglade Properties Ltd v Nash & Ors [2010] EWHC 148 (Ch) (26 January 2010)
Cite as: [2010] EWHC 148 (Ch), [2010] WTLR 1267

[New search] [Context] [View without highlighting] [Printable RTF version] [Help]

Neutral Citation Number: [2010] EWHC 148 (Ch)

In the High Court of Justice
Chancery Division

26th January 2010

B e f o r e :

Mr. N. Strauss Q.C.
(sitting as a deputy judge)


Starglade Properties Limited Claimant
(1) Roland Nash
(2) Warners Law LLP
(3) Robert Twining Defendants


Mr. Adrian Jack, instructed by Messrs. Vance Harris LLP appeared for the claimant. Mr. Donald McCue, instructed by Shirley Griffiths LLB, appeared for the 1st defendant. The 2nd and 3rd defendants were not represented, as the claim against them had been settled..


Crown Copyright ©

    26th January 2010

  1. This action arises out of the events which were the subject matter of the decision of the Court of Appeal in Offer-Hoare v. Larkstore Limited [2006] 1 WLR 2926. The claimant in the present action ("Starglade") is a property company, which until 2001 owned some land in Hythe. The land sloped from north to south. In order to prepare for its development, Starglade instructed a firm of soil experts, Technotrade Limited ("Technotrade"), to report on the soil conditions, and it did so in 1998. Starglade sold the site to Larkstore Limited ("Larkstore") which was a property development company. The 1st defendant ("Mr. Nash") was its managing director. Larkstore employed another company, Bess Limited ("Bess"), to carry out the work, but in October 2001 there was a landslip which caused damage to properties uphill from the site. The owners of those properties began proceedings for damages against Larkstore and Bess in March 2003.
  2. Starglade was then asked to, and did, assign Technotrade's soil inspection report and its rights under it to Larkstore, which needed it in order to found a claim for damages against Technotrade in third party proceedings. Larkstore had been advised by counsel that, without an assignment, its claim against Technotrade would fail, as Technotrade did not owe it a duty of care; with the benefit of an assignment, the claim might succeed in contract. So it proved. This claim was upheld by the Court of Appeal, which gave judgment on 27th July 2006.
  3. Starglade did not offer its assistance free of charge. Its managing director, Mr. Forward, drove a hard bargain. He insisted on 50% of the proceeds. The negotiations started in August 2003, and were largely between Mr. Forward and Mr. Nash, with occasional conversations between the companies' respective solicitors, the 3rd defendant, Mr. Twining, the partner at the 2nd defendant ("Warners") handling the litigation for Larkstore, and Mr. Macdonald of Vance Harris for Starglade. Mr. Twining tried to negotiate wording which would enable Larkstore to reduce the payment due to Starglade. Predictably Starglade would not have it. Mr. Twining advised Mr. Nash, and Mr. Nash realised for himself anyhow, that Larkstore's bargaining power was non-existent.
  4. After some unexplained delays the agreed terms were set out in a formal assignment dated 23rd February 2004, and in a side letter on Larkstore's headed notepaper which read as follows:-
  5. "In consideration of you making the assignment of even date, we undertake to pay you half of the net monies received from Technotrade Limited.

    "Net monies" means all sums received from Technotrade Limited, whether by Court order or judgement or by compromise or otherwise and whether in respect of the cause of action assigned by you to us or otherwise, but after deduction of our costs of pursuing Technotrade Limited and deduction of any costs we may be ordered to pay Technotrade Limited.

    We agree to hold all monies received from Technotrade Limited on trust for division in accordance with the foregoing. (my emphasis)

    We also agree to keep you informed of all important developments in our pursuit of the claim against Technotrade Limited and to inform you of all such developments as there may be at least once every three months, starting with the date hereof."

  6. Despite the last paragraph of the letter, Larkstore did not report to Starglade about the progress of the action; Mr. Twining said that Vance Harris enquired once or perhaps twice, but there was no regular contact.
  7. Following the Court of Appeal judgment, the action was settled on 26th January 2007 and Warners sent Larkstore the net sum (after deducting their costs) of £309,154.98 on 31st January 2007. It is common ground that (subject to possible further legal costs relating to the action) Larkstore held one half of that sum on trust for Starglade. It had no other funds. However, Larkstore paid Starglade nothing. Mr. Nash caused it to pay the whole amount to its other creditors.
  8. According to Further Information given by Mr. Nash on 19th June 2008, the creditors were as follows:
  9. Creditor Debt Amount paid
    Colomendy Ltd. (joint venture partner) £591,795 £250,000
    Lloyds TSB (guaranteed by Mr. Nash) £10,670 £10,670
    Sherwoods (accountancy fees) £2,010 £2,010
    Hollie Homes Ltd. (an associated company) In excess of what was paid £28,900
    Elizabeth Carter (Mr. Nash's partner) In excess of £10,000 £2,070
    Mr. Nash himself £15,500 £15,500

  10. The last payment (of £1,000 to Mr. Nash) was made on 17th April 2007. At around this time, according to Mr. Nash, further claims arising from the landslip were notified and on 26th June 2007 he applied to have Larkstore struck off the Register of Companies: it was dissolved on 7th December 2007.
  11. It is not in issue that Larkstore acted in breach of trust. Starglade's principal case is that Mr. Nash knew from the terms of the side letter that half the money received from Technotrade was held on trust for it, and that he is therefore liable for dishonestly assisting a breach of trust. They also claim the £15,500 paid to Mr. Nash himself on the basis of knowing receipt.
  12. Mr. Nash's case is that he did not know that half the money paid by Technotrade was held on trust for Starglade; he saw Starglade as an ordinary creditor. Asked on the pleadings why Larkstore paid its other creditors, but not Starglade, Mr. Nash responded frankly that he "preferred to procure that Larkstore paid other creditors".
  13. Only two witnesses gave oral evidence, Mr. Nash and Mr. Twining. I found both to be straightforward, truthful witnesses except in the case of Mr. Nash on two matters on which, as appears at §41 and §45 below, he was in my view not entirely frank, although not untruthful.
  14. Mr. Nash's main focus in the period between August 2003 and February 2004 was on the commercial terms of the arrangement with Starglade, that is the 50% and the attempt to water this down through the wording of the side letter. There is no suggestion that the trust wording was discussed between either the principals or their respective solicitors. It was inserted in the draft by Vance Harris, but was of little significance to Mr. Nash at the time. I accept Mr, Nash's evidence that, whilst he read the letter in February 2004, and understood that it was valid and binding, he neither understood what holding on trust meant, nor asked Mr. Twining (who had no recollection of being asked). I do not think that this part of the letter made any impression on Mr. Nash at all or, if it did, it was no more than a fleeting one.
  15. Apart from the direct evidence, and the fact that what concerned Mr. Nash was the 50% share taken by Starglade, this conclusion accords with the inherent probabilities. If Mr. Nash had known that half the money belonged directly to Starglade, he would have realised that he would probably be liable himself if he caused Larkstore to pay Starglade's money to other creditors. Whilst Mr Nash is not a highly educated man – he left school at 16 – and does not have a detailed knowledge of legal concepts, he came across as intelligent and astute, and capable of understanding their essentials if they are properly explained to him. For example he understood that a novation meant that a new party to a contract was stepping into an existing party's shoes. If what holding on trust meant had been explained to him, or if he had known from previous experience, I am sure that he would have realised the danger to himself of not paying Starglade, and – notwithstanding his undoubted desire to frustrate Starglade if he could – would not have taken the risk. His actions only make sense if he did not understand that the money belonged to Starglade, and that it was not just one among several creditors.
  16. I must examine in some detail the advice given by Mr. Twining in 2007 in relation to Starglade's alternative case, described below, but the important point for present purposes is that neither he nor Mr. Nash, coming back to consider Starglade nearly 3 years later, saw any reason to examine the wording of the letter in any detail. The issues which Mr. Nash raised with Mr. Twining were whether the agreement could be avoided for duress, and whether Larkstore could prefer other creditors. Neither question required them to look at the detailed wording of the letter.
  17. I accept Mr. Twining's evidence that he had no recollection of the trust wording, and that he looked at the letter only to satisfy himself that Warners had given no undertaking which would require them to collect the money and pay out half to Starglade. Clearly, if he had read the letter carefully, he would have seen the trust obligation, and would have advised Mr. Nash in no uncertain terms that Larkstore had to pay Starglade first, and not the other way round. In fact, not having reread the letter and seen the trust wording, his understanding of the legal position was that a company could prefer whichever creditors it liked, although this might lead to claims to recover the money. He suspected that this was what Mr. Nash would do, but did not advise him that he should not do it.
  18. Equally, I am sure that Mr. Nash did not reread the letter and ask himself what holding on trust meant: if he had, no doubt he would have asked Mr. Twining. If Mr. Nash had understood, either in 2004 or only now in 2007, that Starglade was not just an ordinary creditor, but was directly entitled to 50% of the money, his sense of self-preservation would have prevented him from contemplating anything other than paying it to Starglade.
  19. For these reasons, I reject Starglade's main case. Mr. Nash did not know, at the time that he caused Larkstore to pay its other creditors in preference to Starglade, that Larkstore held the money on trust for Starglade.
  20. Starglade's alternative case is that, even if Mr. Nash did not know of Larkstore's true obligation, he is still liable for dishonest assistance. They submit, correctly, that there is no doubt that Mr. Nash assisted the breach of trust, and that such assistance was dishonest because, knowing that Larkstore was insolvent, he deliberately paid all other creditors in preference to Starglade, without any pressure on their part, simply because he felt that Starglade had taken unfair advantage of him.
  21. This is pleaded succinctly at §33 of the Re-amended Particulars of Claim which, alleges that "preferring other creditors as (Mr. Nash) intended to do … is dishonest". This raises two main issues. First, it being frankly admitted that Mr. Nash did deliberately prefer other creditors, was this dishonest? Secondly, is it necessary for the purposes of a dishonest assistance claim that the dishonesty should relate to the breach of trust? Or, to put it another way, is the fact that Mr. Nash did not know that half the money belonged to Starglade fatal to the claim? In order to consider these issues, I must examine the facts from the end of January 2007 in more detail.
  22. Before doing so, I should mention a second alternative way of putting its case which Starglade included in proposed Re-re-amended particulars of Claim just before the hearing, in which it sought to allege, or at least raise a suspicion, that the defendant may have acted dishonestly by paying debts which were or may not have been genuine debts. I disallowed this, on the ground that it was too late: Mr. Nash could not reasonably be expected to deal with a last minute allegation involving the details of debts paid years earlier.
  23. The particulars of the debts paid had been given in Further Information in June 2008, and Starglade had shown no interest in them. Indeed an application for disclosure of, inter alia, the documents relating to the debts had been made, but not pursued once the details were given. Mr. Jack nevertheless criticised the failure to disclose the documents, and suggested that adverse inferences could be drawn in relation to Mr. Nash's dishonesty. It may be that these documents should have been disclosed as part of standard disclosure, but in circumstances in which the non-disclosure was obvious to Starglade for a long time before the trial, and in which no issue had been raised which involved going into the details of the debts, I do not think that there is any force in Mr. Jack's submissions. Nor do they justify the late application for an amendment.
  24. The terms of the settlement between Larkstore and Technotrade were embodied in the schedule to a Tomlin order dated 26th January 2007, having been agreed a few days earlier. It is clear from a letter dated 17th January 2007 from Warners to Technotrade's solicitors that Technotrade required a confidentiality clause. Warners wrote:
  25. "Whilst this is totally acceptable to our client, we should inform you that during settlement negotiations our client did speak to one of his business advisers to discuss it and therefore that adviser is aware of the settlement."

  26. The clause in question read as follows:
  27. "The settlement and its terms are confidential. None of the parties shall disclose to any person, other than their professional advisers, their regulatory authorities or their insurers, the existence of this settlement on its terms, without the written permission of all other parties (such permission not to be unreasonably delayed or withheld), except insofar as disclosure may be required by or under compulsion of law."

  28. It was suggested to Mr. Twining and Mr. Nash in cross-examination that this provision was inserted for the benefit of Mr. Nash, so that he could use it as a device to avoid telling Starglade the details of the settlement. However, I am satisfied that it was requested, and drafted, by Technotrade's solicitors. Mr. Twining's evidence was to that effect. He said that Mr. Nash did not express any particular satisfaction, and that the emphatic "totally acceptable" were his words – understandably in the context of wanting to give reassurance in circumstances in which the negotiations had not been kept completely confidential.
  29. Mr. Nash discussed the enforceability of the side letter with Mr. Twining on at least two occasions, in a telephone call on 26th January and at a celebratory lunch on 30th January. Mr. Twining had already made it clear in 2004 that it was binding and he repeated this advice, and rejected Mr. Nash's suggestion that it might be challenged on grounds of duress. Mr. Nash also asked Mr. Twining whether Larkstore could pay its joint venture partner, Glancestyle (later bought out by Colomendy) in preference to Starglade. Mr. Nash did not mention any other creditors. Mr. Twining said that it was clear to him that Mr. Nash was looking for a lawful way by which he could avoid paying Starglade and in which he could prefer other creditors. He also suspected that Mr. Nash might go ahead and do so anyway, but could not recall anything that Mr. Nash said or did to give rise to such a suspicion. I consider that, if Mr. Nash had been advised that to do so would be unlawful, he would not have gone ahead.
  30. It is clear from the evidence that Mr. Twining also discussed with Mr. Nash whether the money should be paid directly to Larkstore, as Mr. Nash wanted. Mr. Twining consulted at least two of his partners, who took the view that he should comply with the client's instructions, provided that the firm had not given an undertaking, which it had not
  31. Mr. Twining's file note of his conversation with Mr. Nash on 26th January 2007 read as follows:-
  32. "Telephone call out to RN.

    Informing him that I had a message to ring Mr. Macdonald at Vance Harris.

    We discussed the situation and I advised that i thought that the side agreement would be binding.

    He informed me that he had debts owing to Glancestyle/Mr. Sethna. I said I would investigate whether those debts could be preferred by way of a debenture.

    In the meantime he instructed me not to speak to Mr. MacDonald."

  33. He then sent a memorandum to Mr. Sullivan, a member of Warners' company commercial team, in the following terms:-
  34. "Larkstore Ltd – Dispute with Technotrade Ltd

    I act on behalf of Larkstore Ltd.

    Larkstore are about to receive £365,000.00 from Technotrade Ltd as settlement of proceedings Larkstore brought against Technotrade.

    Larkstore had previously taken the benefit of a soil report prepared by Technotrade Ltd for Starglade Ltd as a result of an assignment. There was a side letter to the assignment which provided for Larkstore paying to Starglade half of any damages it may recover in the litigation against Technotrade Ltd after costs.

    On the face of it therefore Larkstore now owe Starglade a sizeable amount of money.

    Larkstore however are also in debt to a third party company who loaned it money in connection with the development of the site. My client would prefer to pay the monies it receives from Technotrade to that third party as opposed to dividing it up as between the third party and Starglade. Is there any way of preferring the debt to the third party by way of for example a charge/debenture."

  35. The memorandum did not attach a copy of the side letter, otherwise Mr. Sullivan would no doubt have seen the trust provision and advised accordingly. The fact that Mr. Twining did not send a copy of the letter further supports his evidence that he was not at this stage concentrating on its wording.
  36. In his evidence, Mr. Twining said that his understanding of the law at the time was that a company was entitled to pay whichever of its creditors it chose first, but that there was a risk of this being set aside, although this might not happen if the preferred creditor was secured. However, the terms of the file note and the memorandum show that what he had in mind was the creation of a new security.
  37. Mr. Sullivan then carried out a company search, and discovered that there were 3 unsatisfied charges over the property at Hythe and 2 other properties. Either he or Mr. Twining concluded that it was unnecessary to consider the creation of a new security. They apparently did not consider the possibility that the amounts secured by the charges might not constitute substantial pressure in relation to the debt due to Glancestyle which it was proposed to pay. In fact, the charges did not by this stage represent significant security, as the houses had been sold, and only a small patch of land remained.
  38. At the celebratory lunch on 30th January, Mr. Twining again advised Mr. Nash that the side letter was binding. He then advised that, because of the "ongoing charge over all of Larkstore's assets", as he puts it in his witness statement, Mr. Nash "could argue" that Larkstore could prefer Glancestyle's debt. He did not suggest in his evidence that he explained his reasoning, and he accepted that Mr. Nash might have relied on what he said in deciding to pay other creditors in preference to Starglade.
  39. Mr. Twining's understanding of the law, as set out above, represents what I suspect is a not uncommonly held view. It was my own view before being referred to the authorities, and I would refer also to a short passage in the judgment of Briggs J. in Bank of Tokyo and another v. Baskan Gida and others [2008] EWHC 1276 at §921:-
  40. "Fraudulent trading is of course unlawful..but preferential payments of debts and transfers at an undervalue are not, at least in England. Subject to its vires, a company may deal with its assets as it thinks fit, and pay its debtors in such order as it wishes to. If it then goes into insolvent liquidation, liquidators and (sometimes) creditors have statutory powers to unwind such transactions: see generally National Westminster Bank v. Jones [2001] 1 BCLC 98 and Dora v. Simper [2000] 2 BCLC 561".

  41. However, there are some circumstances at least in which a director who is responsible for preferential payments may be held, in the liquidation of the company, to be personally liable for misfeasance. Thus, in the case of In re Washington Diamond Mining Company [1893] 3 Ch 95, in which the directors of an insolvent company paid the amount into its bank account for the purpose of settling their own fees, the Court of Appeal held that the payments were intended to obtain an advantage of which the probably imminent winding-up of a company would have deprived them, and that this was "a preference which by the terms of the statute should be deemed to be fraudulent". The directors who had concurred in the making of the payments were guilty of the misfeasance and were directed jointly and severally to repay the amounts drawn.
  42. This was followed by the Court of Appeal in West Mercia Safetywear Limited (in liquidation) v. Dodd [1988] BCLC 250, in which the defendant director was held to be liable for a payment of £4,000 to the company's bank, to reduce a debt which was guaranteed by the director, at a time when the company was known to be insolvent. It was held that, once a company was insolvent, the interests of the creditors prevailed over those of the shareholders, and the defendant was therefore liable for misfeasance because the principle purpose of the payment was to relieve his own liability under the guarantee.
  43. It may well be, therefore, that if Larkstore had been in liquidation, or was now restored to the register and then placed into liquidation, the liquidator could successfully establish that Mr. Nash was liable for misfeasance in relation to at least some of the payments. It is questionable whether such a claim could be assigned by the liquidator. Mr. McCue referred me to the decision of the Court of Appeal in re Oasis Merchandising Services Limited [1998] Ch 170, in which it was held that the liquidator could not assign claims which were not the property of the company at the commencement of the liquidation, such as a claim for wrongful trading, which was a claim acquired by the liquidator pursuant to his statutory rights. It is unlikely that this would apply to a claim for misfeasance such as the one made in the West Mercia, which would arise from breaches of fiduciary duty which were complete at the time of the payments, but the point does not arise for decision in the present case.
  44. Mr. McCue has also correctly reminded me – and it is of relevance to the question of dishonesty discussed below – that while an unjustified preferential payment was referred to in previous statutory law as a "fraudulent preference", such payments did not necessarily involve fraud or dishonesty. As Kay L.J. said in the authority cited above, such payments were deemed by statute to be fraudulent. In current legislation they are referred to as "voidable" preferences.
  45. For present purposes, the relevant fact is that Mr. Twining did not advise Mr. Nash, as he would have done had he been aware of the authorities, that in some circumstances a preferential payment was not merely liable to be set aside, but might also be regarded as an unlawful act giving rise to personal liability. Had he done so, it is very unlikely that Mr. Nash would have caused Larkstore to make the payments which are in issue in the present case.
  46. On 29th January 2007, Mr. MacDonald followed up the unanswered call referred to in Mr. Twining's file note. It is clear from his letter that Starglade was aware of the Court of Appeal decision and Mr. MacDonald asked for a full update. Mr. Twining said in the course of his evidence that he was "embarrassed". He and Mr. Nash decided that Warners' retainer for Larkstore should be terminated and Mr. Nash confirmed this in a letter dated 2nd February 2007:-
  47. "Just a note to thank you for all of your hard work on this matter and confirm that we have reached the point where we no longer require representation.

    We are carefully reviewing the witness statements presented in defence of Technotrade's position and may well seek your opinion as to the merits of pursuing Starglade or their representatives in the matter of misrepresentation when they sold the site to us. "

  48. Mr. Nash did nothing about Mr. MacDonald's enquiry until 2nd March 2007, when he replied as follows:-
  49. "We have received your request to make contact with you, presumably in respect of the above matter.

    Whilst we appreciate your interest in this situation, due to the imposition of a confidentiality agreement upon us, we are not at liberty to divulge details of the arrangements arrived at with Technotrade and as a result are not able to discuss any aspects of this matter with you or any other party whatsoever.

    We trust that you understand the difficult position in which we find ourselves."

  50. It is at least arguable that Larkstore's obligation under the side letter to keep Starglade informed took precedence over the confidentiality provision in the Schedule to the Tomlin order, and in any event Technotrade would clearly have been obliged, if asked, to consent to disclosure without delay. However, although aware of the conflict between the two agreements, Mr. Twining said (and I accept) that he did not give the matter any detailed consideration, nor did he give Mr. Nash any advice. I also accept Mr. Nash's evidence that he did not give the conflicting terms any real consideration. I have no doubt that he found it convenient to be able to use the confidentiality provision as a means of deflecting enquiries, but I do not think that he was aware of the legal justification for overriding it.
  51. In the meantime, he got on with paying his creditors, as already explained. Although he had set out to discover whether he could lawfully do this, I do not see how he could have been wholly satisfied that he was. It is true that Mr. Twining had advised him that it was arguable that Glancestyle, by far the largest creditor, could be preferred, but it is difficult to imagine that he was not at least a bit puzzled as to why the charges over property which was almost entirely sold should support such an argument. Also, he had not asked about paying other creditors, and Mr. Twining had not advised him in accordance with his general understanding of the position (see §30 above).
  52. On the other hand, I do not think that Mr. Nash knew that what he was doing was unlawful. He had asked whether he could pay the largest creditor, he had received vague and not very clear advice that he might be entitled to do so and in my view he concluded, without really understanding why, that the position was sufficiently arguable to go ahead and take the risk. Had he been advised correctly as to the legal position he would not have done so.
  53. I do not consider that he abstained from further enquiry as to the legal position because he believed that it was likely that what he proposed to do was unlawful, but did not wish this confirmed. This is not a case of blind eye knowledge within the principle explained by Lord Scott in Manifest Shipping co Ltd v. Uni-Polaris Insurance Co. Ltd [2003] 1 AC 469. I think that he felt that he had done his best to obtain legal advice, and that the position was not clearcut either way. Given the financial circumstances of the company, and his lack of experience as to such issues, I do not think that the fact that he did not seek more sophisticated advice denotes dishonesty, although he might reasonably have done so.
  54. As stated earlier, Mr. Nash went on to take steps to dissolve Larkstore. I accept his evidence that part of the reason or this was the emergence of new claims, which would not have been passed on to Technotrade, but I think that he must have also have found it convenient to put another barrier up against Starglade's claim.
  55. The law as to what constitutes dishonesty is set out by the Privy Council in Barlow Clowes Ltd v. Eurotrust Ltd [2006] 1 WLR 1476 in the following passage:
  56. "10. The judge stated the law in terms largely derived from the advice of the Board given by Lord Nicholls of Birkenhead in Royal Brunei Airlines Sdn Bhd v Tan [1985] 2 AC 378. In summary, she said that liability for dishonest assistance requires a dishonest state of mind on the part of the person who assists in a breach of trust. Such a state of mind may consists in knowledge that the transaction is one in which he cannot honestly participate (for example, a misappropriation of other people's money), or it may consists in suspicion combined with a conscious decision not to make inquiries which might result in knowledge: see Manifest Shipping co Ltd v Uni-Polaris Insurance Co Ltd [2003] 1 AC 469. Although a dishonest state of mind is a subjective mental state, the standard by which the law determines whether it is dishonest is objective. If by ordinary standards a defendant's mental state would be characterised as dishonest, it is irrelevant that the defendant judges by different standards. The Court of Appeal held this to be a correct state of the law and their Lordships agree.

  57. The judge found that during and after June 1987 Mr. Henwood strongly suspects that the funds passing through his hands were moneys which Barlow Clowes had received from members of the public who thought that they were subscribing to a scheme of investment in gilt-edged securities. If those suspicions were correct, no honest person could have assisted Mr. Clowes and Mr. Cramer to dispose of the funds for their personal use. But Mr. Henwood consciously decided not to make inquiries because he preferred in his own interest not to run the risk of discovering the truth.
  58. Their Lordships consider that by ordinary standards such a state of mind is dishonest. The judge found that Mr. Henwood may well have lived by different standards and seen nothing wrong in what he was doing. He had an
  59. "exaggerated notion of dutiful service to clients, which produced a warped moral approach that it was not improper to treat carrying out clients' instructions as being all important. Mr. Henwood may well have thought this to be an honest attitude, but, if so, he was wrong.""

  60. In relation to the earlier House of Lords decision in Twinsectra Ltd v Yardley [2002] 2 AC 164, Lord Hoffmann said:
  61. "15. Their Lordships accept that there is an element of ambiguity in these remarks which may have encouraged a belief, expressed in some academic writing, that the Twinsectra case had departed from the law as previously understood and invited inquiry not merely into the defendant's mental state about the nature of the transaction in which he was participating but also into his views about generally acceptable standards of honesty. But they do not consider that this is what Lord Hutton meant. The reference to "what he knows would offend normally accepted standards of honest conduct" meant only that his knowledge of the transaction had to be such as to render his participation contrary to normally acceptable standards of honest conduct. It did not require that he should have had reflections about what those normally acceptable standards were.

  62. Similarly in the speech of Lord Hoffmann, the statement (in para 20) that a dishonest state of mind meant "consciousness that one is transgressing ordinary standards of honest behaviour" was in their Lordships' view intended to require consciousness of those elements of the transaction which make participation transgress ordinary standards of honest behaviour. It did not also require him to have thought about what those standards were."
  63. In Abou-Rama v. Abacha [2007] 1 Lloyd's Reports 115, Arden L.J. considered the status of the decision 0f the Privy Council in Barlow Clowes in the light of the differences between it and Twinsectra on the issue of dishonesty. She held at §69 that the law of England is " is as laid down in the Twinsectra case, as interpreted in Barlow Clowes". However, as I read the judgments of Rix and Pill LJJ, they do not express a view as to whether Twinsectra and Barlow Clowes can be reconciled: see §23, §90-1.
  64. It is also helpful to consider the relevant passage in the speech of Lord Nicholls in Royal Brunei Airlines v. Tan [1995] 2 AC 378 at 389:
  65. "Dishonesty

    Before considering this issue further it will be helpful to define the terms being used by looking more closely at what dishonesty means in this context. Whatever may be the position in some criminal or other contexts (see, for instance, Reg. v. Ghosh [1982] QB 1053), in the context of the accessory liability principle acting dishonestly, or with a lack of probity, which is synonymous, 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. Further, honesty and its counterpart dishonest are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety. However, these subjective characteristics of honesty do not mean that individuals are free to set their own standard 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. If a person knowingly appropriates another's property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour.

    In most situations there is a little difficulty in identifying how an honest person would behave. Honest people do not intentionally deceive others to their detriment. Honest people do not knowingly take others' property. Unless there is a very good and compelling reason, an honest person does not participate in a transaction if he knows it involves a misapplication of trust assets to the detriment of the beneficiaries. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless.…"

  66. In this passage, Lord Nicholls draws attention to one subjective element in the assessment of a person's honesty, namely the extent of his knowledge. Another, or possibly part of the same, subjective element is the person's intelligence, experience and general attributes, which are also to be taken into account in deciding whether he was dishonest: see Lewin on Trusts 18th ed. at §40-23; Twinsectra at {121-2 per Lord Millett (I do not think that this passage is affected by the fact that Lord Millett dissented, and anyhow it is doubtful whether he would have dissented from the Barlow Clowes "interpretation" of the decision in Twinsectra: see Abou-Rahmah at §19-21 per Rix L.J.).
  67. The authorities suggest that it will usually be obvious in cases of dishonest assistance that the conduct in question is at least objectively dishonest; it is conduct which would be regarded as dishonest by any right-thinking person. However, as indicated, it is not always just a question of looking at the conduct and deciding whether, objectively, it was dishonest. There may be subjective questions: see also Abou-Rahmah at §66 per Arden L.J. Further, there may be cases in which different views could reasonably be held: some might think the conduct dishonest, others not. In such a case, in my view, the defendant is not liable for dishonest assistance. The tenor of the speeches of Lord Hoffmann in Barlow Clowes and Lord Nicholls in Royal Brunei Airlines is that the defendant must be guilty of conduct which transgresses normally accepted standards of conduct i.e. conduct which all normal people would regard as dishonest.
  68. In this case, Mr. Jack submits that, once a company is insolvent, the only honest course for a director (unless pressured by particular creditors) is to share assets fairly between all creditors, and not to prefer some of the expense of others, and especially not himself or those closely connected with him. Mr. Nash was dishonest because he blatantly preferred all other creditors to Starglade, including himself and others with whom he was connected, and Lloyds Bank of which he was a guarantor. On the other hand, Mr. McCue submits that Mr. Nash was just adopting a hard-nosed attitude to commercial life, just as Mr. Forward had in negotiating the terms of the side letter, when he had Mr. Nash over a barrel. He did not put it in this way, but it was a case of the biter bit. It was not generally known that preferential payments could be unlawful, and Mr. Nash was looking for a legitimate way in which to prefer other creditors, and had sought legal advice.
  69. These seem to me to be at extreme ends of a spectrum of views which might reasonably be held about Mr. Nash's conduct. In between, Mr. Nash's conduct might be seen as improper, morally dubious or borderline, but not outright dishonest, especially for someone with limited experience and understanding (unless properly advised) of legal issues. Further, some might think it was not dishonest to make value judgments as to which debtors had provided greater value, or were more deserving. Others might distinguish between the debts which were paid because of Mr. Twining's advice. It would be easier to see the payment of the smaller debts, as to which no advice was sought or given, as dishonest, especially the debts payment of which directly or indirectly benefited Mr. Nash himself, than the payment to Colomendy, which stood in the shoes of Glancestyle, as to which he had had some advice.
  70. My conclusion is that, even in relation to the smaller payments, the test for dishonesty is not met. 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 in the face of advice that it was unlawful, or personal knowledge of the decided cases referred to above establishing that it was unlawful, but not in my view otherwise. Therefore, in my opinion, 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.
  71. For completeness, I would add that if, contrary to the view of Arden L.J., Twinsectra in its uninterpreted form represents English law, I find that Mr. Nash did not consider that his conduct was unlawful or dishonest.
  72. This makes it unnecessary to decide the second question, namely whether if the payments were dishonest, Mr. Nash would escape liability on the ground that the dishonesty did not involve knowledge of the trust. However, in my view Mr. Jack's submission that it is enough that the defendant's assistance in the breach of trust involves knowledge that the payments are in some way dishonest is correct. Therefore, if Mr. Nash had acted dishonestly in procuring Larkstore to make the payments, I would have held that he was liable, even though the dishonesty had nothing to do with the fiduciary duty owed by Larkshire to Starglade. This seems to me to follow from what Lord Hoffmann says in Barlow Clowes:
  73. "27. The appellate court then went on to say that because Mr. Henwood knew the general nature of the businesses of the members of the Barlow Clowes group, it was not a necessary inference that he would have concluded that the disposals were of moneys held in trust. That was because there was no evidence that Mr. Henwood

    "knew anything about, for example, the actual conduct of the businesses of members of the Barlow Clowes group, the contractual arrangements made with investors, the mechanisms for management of funds under the group's control, the investment and distribution policies and the precise involvement of Mr. Cramer in the group's affairs."

  74. Their Lordships consider that this passage displays two errors of law. First, it was not necessary (as the Staff of Government Division had themselves said earlier in the judgment) that Mr. Henwood should have concluded that the disposals were of moneys held in trust. It was sufficient that he should have entertained a clear suspicion that this was the case. Secondly, it is quite unreal to suppose that Mr. Henwood needed to know all the details to which the court referred before he had grounds to suspect that Mr. Clowes and Mr. Cramer were misappropriating their investors' money. The money in Barlow Clowes was either held on trust for the investors or else belonged to the company and was subject to fiduciary duties on the part of the directors. In either case, Mr. Clowes and Mr. Cramer could not have been entitled to make free with it as they pleased. In Brinks Ltd v Abu-Saleh [1996] CLC 133, 141 Rimer J expressed the opinion that a person cannot be liable for dishonest assistance in a breach of trust unless he knows of the existence of the trust or at least the facts giving rise to the trust. But their Lordships do not agree. Someone can know, and can certainly suspect, that he is assisting in a misappropriation of money without knowing that the money is held on trust or what a trust means: see the Twinsectra case [2002] 2 AC 164, paragraph. 19 (Lord Hoffmann) and paragraph. 135 (Lord Millett). And it was not necessary to know the "precise involvement" of Mr. Cramer in the group's affairs in order to suspect that neither he nor anyone else had the right to use Barlow Clowes money for speculative investments of their own." (my emphasis).
  75. Finally, there is the alternative knowing receipt claim for £15,500. The leading case on this is now B.C.C.I. v. Akindele [2001] Ch 437, in which the Court of Appeal held that dishonesty was not a pre-requisite for liability. The single test is whether the recipient's state of knowledge was such as to make it "unconscionable" for him to retain the benefit of the receipt. This is a flexible test, which requires the court to consider what is right, taking into account the nature and extent of the defendant's knowledge and all the circumstances relating to the receipt. Actual knowledge which would put a reasonable man on enquiry, coupled with a failure to enquire, may suffice, as Millett J.'s comment in Agip (Africa) Ltd v. Jackson [1990] Ch. 265, 293 about the last two Baden categories of knowledge, cited by Nourse L.J. in Akindele at 454H, indicates.
  76. In this case, Mr. Nash's state of knowledge was that he knew that there was a letter defining his obligations to Starglade, which he had not looked at for 3 years, and that it was "arguable" that he could prefer Larkstore's joint venture partner. In my view, on the facts of this case, Mr. Nash's knowledge, together with his failure to read the letter again or to enquire further as to the law, is enough. Whilst I do not consider that his conduct was dishonest, the test for knowing receipt is clearly met in relation to the amount he personally received which, had he enquired further, he would have known he was not entitled to receive: nobody could reasonably think that it would be right for him to keep it.
  77. I will hear counsel on the outstanding question of costs, as well as any matters arising from this judgment.
  78. N.Strauss Q.C.

    Deputy judge Ch. D.

BAILII: Copyright Policy | Disclaimers | Privacy Policy | Feedback | Donate to BAILII