England and Wales Court of Appeal (Civil Division) Decisions

IN THE HIGH COURT OF JUSTICE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
MR NICHOLAS STRAUSS QC
(Sitting as a Deputy High Court Judge)
HC07C02860

		Royal Courts of Justice Strand, London, WC2A 2LL
		19 November 2010

The Chancellor :

Introduction
1. In November 1998 the claimant, Starglade Properties Ltd ("Starglade"), instructed Technotrade Ltd ("Technotrade") to produce a site investigation report as to the suitability for development of a sloping site which it then owned known as the Hillside Nursery, Hythe Road, Hythe, Kent. In its report ("the Report") dated 14th December 1998 Technotrade indicated that that site was suitable for development of a number of two-storey houses. On 21st June 1999 Starglade sold the site to Larkstore Ltd ("Larkstore") which duly commenced its development. On 13th October 2001 there was a landslip causing substantial damage to properties uphill from the site. In March 2003 the owners of those properties commenced proceedings against Larkstore.
2. By an agreement made on 23rd February 2004 between Starglade and Larkstore the former assigned to the latter the full benefit, interest and right of Starglade in or under the Report and the right to enforce the same. By a letter of the same date ("the Side Letter") signed on behalf of Larkstore by the defendant Roland Nash ("Mr Nash"), its sole director and member, in consideration of the assignment Larkstore undertook to pay to Starglade half of the net monies (as defined) received from Technotrade. The letter continued:

"We agree to hold all monies received from [Technotrade] on trust for division in accordance with the foregoing.

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

3. On 6th October 2004 Larkstore commenced Part 20 proceedings against Technotrade. On 14th June 2005 an order was made for the determination of a number of preliminary issues arising from the Part 20 proceedings. Such issues were finally determined by the Court of Appeal on 27th July 2006 to the effect that Larkstore was entitled to claim substantial damages from Technotrade for the loss suffered in consequence of the landslip, see Offer-Hoar v Larkstore Ltd [2006] 1 WLR 2926. The Part 20 proceedings were then settled on confidential terms contained in a Tomlin Order made on 26th January 2007 whereunder £365,000 was paid by Technotrade to the solicitors for Larkstore, Warners Law LLP. After deducting their costs those solicitors remitted to Larkstore on 31st January 2007 the sum of £309,154.98.
4. By the terms of the Side Letter, subject to the deduction of any further costs, £154,577.49 was held by Larkstore in trust for Starglade, the balance being its corporate property available for payment of its creditors. It is not disputed that Larkstore was then insolvent nor that Mr Nash knew. But, instead of accounting to Starglade and taking steps to put Larkstore into liquidation or administration, between 31st January and 27th March 2007 Mr Nash, on its behalf, distributed £309,150 as follows:

Payee Amount

Colomendy Ltd £250,000

Lloyds TSB £10,670

Mr Nash £15,500

Hollie Homes Ltd £28,900

Elizabeth Carter £2,070

Sherwoods £2,010

5. These proceedings were commenced by Starglade on 19th October 2007 against Larkstore alone; but on 7th December 2007 Larkstore was struck off the register under s.652(5) of the Companies Act 1985 and dissolved pursuant to the application of Mr Nash made on 26th June 2007. By order of Evans-Lombe J made on 1st February 2008 Mr Nash was substituted for Larkstore as defendant to these proceedings. The claim made by Starglade against Mr Nash in its re-amended particulars of claim was twofold, namely:

(1) restitution of the sum of £154,577 on the basis that Mr Nash dishonestly assisted in the breach of trust by Larkstore,

(2) repayment of £15,500 on the basis that Mr Nash received that sum as money which had been paid to him in breach of the trust in favour of Starglade.

6. The action was heard by Mr Nicholas Strauss QC, sitting as a deputy judge of the Chancery Division, on 14th and 15th October 2009. For the reasons given in his judgment handed down on 26th January 2010 he dismissed the first claim, upheld the second and made no order for costs. Starglade appeals against such dismissal and order in relation to costs with the permission of Jacob LJ. There is no appeal against the judgment on the second claim but Mr Nash seeks permission to appeal against the order in relation to costs. Accordingly the issues for our determination are (1) whether the judge was right to dismiss the first claim, (2) whether Mr Nash should have permission to appeal from the order in relation to costs and (3) whether the order for no costs should be varied either as contended by Starglade and/or as sought by Mr Nash. I will, as necessary, deal with those issues in due course but, first, I should refer in more detail to various factual issues which arose at the trial and to the reasons given by the deputy judge.
Factual Issues
7. I have described the basic chronology in the preceding paragraphs. I should give further details in relation to the following events:

(1) the negotiations for the Side Letter,

(2) the terms of the Tomlin Order and the attempts of Starglade to obtain information from Larkstore concerning the terms of the settlement of the Part 20 proceedings,

(3) the identity and interest of the payees,

(4) the insolvency and dissolution of Larkstore,

and

(5) the advice given to Mr Nash by the relevant solicitor with Warner LLP.

8. The negotiations for and execution of the Side Letter were described in some detail by Mr Nash in paragraph 7 of his witness statement and by the solicitor employed by Warner Law LLP, Mr Twining, in paragraphs 11 to 15 of his. They took place between August and December 2003. At the outset it was made clear by Starglade's managing director, Mr Forward, to Mr Nash that Starglade's price for the assignment of the benefit of the Report was half of anything Larkstore received from Technotrade in consequence. Attempts by Mr Nash to limit that amount either by restricting it to half of receipts as a direct result of the Report or by allowing the deduction of all, as contrasted with proper, costs were unsuccessful. The terms of the side letter were provided by the solicitors for Starglade. Mr Nash consulted Mr Twining of Warners Law LLP on those terms and signed the Side Letter on behalf of Larkstore.
9. Both Mr Nash and Mr Twining were cross-examined on their witness statements. Both were described by the judge as straightforward and truthful witnesses but in the case of Mr Nash subject to two reservations in relation to his frankness. In respect of the genesis and execution of the Side Letter the judge concluded in paragraph 12 of his judgment:

"12. 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."

However later in his judgment the judge referred to a description of the position at the time that Mr Forward had Larkstore and Mr Nash 'over a barrel' (paragraph 52) and to the consequential generation of a desire of Mr Nash at a later stage to frustrate Starglade if he could (paragraph 13).

10. The Tomlin order made on 26th January 2006 by which the Part 20 proceedings between Larkstore and Technotrade were settled were disclosed to Starglade pursuant to a third party information order made by Evans-Lombe J on 1st February 2008 directing Warners Law LLP to disclose all documents by which the Part 20 proceedings had been settled and an order of Master Bragge made on 23rd May 2008 entitling Mr Nash to produce it notwithstanding the term as to confidentiality. That term is quoted in paragraph 23 of the judgment of the deputy judge. He rejected the submission of counsel for Starglade that the term had been inserted for the benefit of Mr Nash in order to enable Larkstore to avoid performing the obligation contained in the Side Letter to keep Starglade informed. He added:

"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."

Thus enquiries made by Starglade's solicitors in telephone conversations in January 2007 and in letters in March and April 2007 failed to elicit any information as to the terms of settlement thereby necessitating the applications for the orders I have mentioned.

11. At the commencement of the hearing before the deputy judge, counsel for Starglade applied for permission to re-reamend his particulars of claim so as to allege that the debts due to the respective payees named in paragraph 4 above were not genuine. The deputy judge rejected the application (paragraph 20) on the ground that it came too late. Accordingly, it was accepted that each payee was a creditor of Larkstore in an amount equal to or greater than the amount paid to them by Larkstore. Nevertheless counsel for Starglade was entitled to and did rely on the connection of the payees with Mr Nash. The first, Colomendy Ltd, was described by Mr Nash in further information provided by him in response to a request made on 16th May 2008 and in his witness statement as a 'joint venture partner'. In his oral evidence Mr Twining said that he had never heard that name before the hearing. Under cross-examination Mr Nash explained that Larkstore originally had a joint venture with Glancestyle Care Homes Ltd. The latter sold their business but the purchaser did not wish to acquire the interest of Glancestyle in the joint venture. He explained that the joint venture was novated so that Colomendy took over the position of Glancestyle. Although Glancestyle may have been a secured creditor at some stage counsel for Larkstore conceded that Colomendy was not. No documents relating to the joint venture or novation were produced.
12. The sum due to Lloyds TSB was in respect of an account guaranteed by Mr Nash. Holly Homes Ltd was started up by Mr Nash to operate in parallel with Larkstore. It paid the remuneration and expenses due to Mr Nash when working for Larkstore. Mr Nash is the sole director and shareholder. In relation to Elizabeth Carter, Mr Nash denied that she was, as counsel for Starglade put it to him, 'his life partner' but accepted that they lived together. She was the company secretary of Larkstore. Sherwoods were Larkstore's auditors. Thus of the six payees four were or were connected with Mr Nash.
13. It was not disputed that Larkstore was insolvent at the time the payments were made in the period 31st January to 27th March 2007. Nine months before, on 21st April 2006, Mr Nash had signed the annual audited accounts of Larkstore for the year ended 30th September 2005, being the last available set of annual accounts. They showed a loss for the year of £81,503 and a deficiency of assets of £71,503. Current assets had declined from just under £1.4m to just under £340,000 and an increase in debts due within the year from £21,560 to £330,006. None of them was secured.
14. On 26th June 2007 Mr Nash applied to the Registrar of Companies inviting him to strike off the name of Larkstore. On 21st August 2007 the Registrar gave notice that the name of Larkstore would be struck off in three months time unless cause to the contrary was shown. As I have already indicated Larkstore was struck off on 7th December 2007. It was suggested to him that the striking off was, as it were, part of the reluctance of Mr Nash to reveal the terms of the settlement with Technotrade. In paragraph 45 of his judgment the deputy judge said:

"As stated earlier, Mr. Nash went on to take steps to dissolve Larkstore. I accept his evidence that part of the reason for 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."

This conclusion was one of the two in respect of which the deputy judge had reservations in respect of the frankness of Mr Nash's evidence.

15. The advice given to Mr Nash by Mr Twining in January 2007 was described by the deputy judge in paragraphs 25 to 32 which I should quote in full:

"25. Mr. Nash discussed the enforceability of the side letter with Mr. Twining on at least two occasions, in a telephone call on 26^th January and at a celebratory lunch on 30^th 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.

26. 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

27. Mr. Twining's file note of his conversation with Mr. Nash on 26^th January 2007 read as follows:-

"Telephone call out to RN.

Informing him that I had a message to ring [Starglade's solicitor].

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 [Starglade's solicitor]."

28. He then sent a memorandum to Mr. Sullivan, a member of Warners' company commercial team, in the following terms:-

"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."

29. 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.

30. 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.

31. 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.

32. At the celebratory lunch on 30^th 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."

16. In paragraphs 33 to 37 the deputy judge considered what he described as Mr Twining's understanding of the law and continued in paragraph 38:

"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."

17. In paragraphs 42 and 43 the deputy judge added:

"42. In the meantime, [Mr Nash] 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).

43. 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."

I turn then to the deputy judge's conclusions.

The judgment of the Deputy Judge
18. After setting the scene in paragraph 17 of his judgment the deputy judge rejected what he described as Starglade's main case. He concluded from the evidence that:

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."

There is no appeal from that finding. The judge then considered the alternative case, namely dishonest assistance in a breach of trust. He accepted that there had been a breach of trust and that Mr Nash had assisted its commission. He recognised that in those circumstances the issue was whether 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."

The deputy judge continued:

"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 due course he answered both questions in the negative. There is no appeal from his conclusion on the second (paragraph 56). Accordingly the only question for this court is whether the deputy judge was correct in answering the first question in the negative.

19. The deputy judge considered (paragraphs 20 to 32 and 38 to 43) the facts and evidence to which I have already referred. In paragraph 44 he concluded that the case was not one of 'blind eye knowledge'. In paragraphs 46 to 50 the Deputy Judge considered a number of authorities to which I shall refer in due course. In paragraph 51 he said:

"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 elements: 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."

20. In paragraphs 52 and 53 he set out the rival submissions for the parties. His conclusion on the first question I have identified in paragraph 18 is contained in paragraphs 54 and 55 in the following terms:

"54. 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 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.

55. For completeness, I would add that, in case Twinsectra in its uninterpreted form represents English law, I find that Mr. Nash did not consider that his own conduct was unlawful or dishonest."

The submissions for the parties and my conclusion
21. Counsel for Starglade submits that the deputy judge was wrong in three specific respects. First, though he may have correctly analysed the law as to the ingredients of dishonesty he failed correctly to apply the law to the facts. Second, there is no sliding scale of honesty, as the judge appears to have thought in paragraph 51 of his judgment. Third, the judge misinterpreted the advice given by Mr Twining to Mr Nash in that it related only to Glancestyle and its security, not to any of the six payees to whom the money was paid.
22. Counsel for Mr Nash disputed these propositions. He pointed out that the issue of what preferences might not be properly made had been ordained by Parliament in the terms of ss 239 to 241 Insolvency Act 1986 and their statutory predecessors. He contended that even if conduct came within the scope of those provisions it did not follow that the relevant conduct was dishonest. In any event there could only be a preference in relation to that part of the money paid to Larkstore as was its corporate property. He stressed that the judge had found Mr Nash to be an honest witness, considered the evidence at length and in depth and arrived at a conclusion with which, on conventional grounds, this court is not entitled to interfere.
23. Before expressing any view as to those rival submissions it is essential to consider the relevant authorities. They are, in chronological order, Royal Brunei Airlines v Tan [1995] 2 AC 378; Twinsectra Ltd v Yardley [2002] 2 AC 164, Barlow Clowes Ltd v Eurotrust Ltd [2006] 1 WLR 1476 and Abu Rahman v Abacha [2007] 1 Lloyd's Rep 115. I will consider them in that order.
24. In Royal Brunei Airlines v Tan [1995] 2 AC 378 an airline agent received the money paid on the purchase of tickets for travel with that airline in trust for the airline. Its director and shareholder paid the money so received in discharge of the agent's trade debts owed to third parties. The agent was insolvent and the airline sought relief against the director and shareholder. The claim succeeded on the basis of dishonest assistance in a breach of trust by the agent. The advice of the Privy Council delivered by Lord Nicholls of Birkenhead clearly identified dishonesty as the touchstone of liability (p.387H) and as synonymous with a want of probity (p.389C) and commercially unacceptable conduct (p.390C). At p.389C-F the Privy Council analysed 'dishonesty' in this context in these terms:

"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 dishonesty 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."

As counsel from Mr Nash points out the examples of dishonesty which follow are not this case.

25. Later (p.391B) Lord Nicholls of Birkenhead emphasised that:

"...when called upon to decide whether a person was acting honestly, a court will look at all the circumstances known to the third party at the time. The court will also have regard to personal attributes of the third party such as his experience and intelligence, and the reason why he acted as he did."

These propositions appear to me to support the second objection to the judgment of the Deputy Judge of counsel for Starglade which I have summarised in paragraph 21 above. There is a single standard of honesty objectively determined by the court. That standard is applied to specific conduct of a specific individual possessing the knowledge and qualities he actually enjoyed.

26. In Twinsectra Ltd v Yardley [2002] 2 AC 164 a solicitor (A), acting for a borrower, had given an undertaking to a lender to retain the moneys advanced by him pending their application to the acquisition of property by the borrower. Contrary to that undertaking A paid the loan moneys to a second solicitor acting for the borrower (B). B paid the money to the borrower or his order for purposes other than the acquisition of property. The loan was not repaid. The lender sued, amongst others, B alleging dishonest assistance in the breach of trust by A. The House of Lords, by a majority (Lord Millett dissenting) and reversing the decision of the Court of Appeal dismissed that claim. Each of the members of the Appellate Committee considered the speech of Lord Nicholls of Birkenhead in Royal Brunei Airlines v Tan at some length. The majority concluded that the test of dishonesty was a combination of an objective and subjective test. The combined test was described by Lord Hutton (p.172D) as one

"...which requires that before there can be a finding of dishonesty it must be established that the defendant's conduct was dishonest by the ordinary standards of reasonable and honest people and that he himself realised that by those standards his conduct was dishonest."

27. This was explained by Lord Hutton, with whom the majority agreed, in paragraph 36 in these terms:

"It would be open to your Lordships to depart from the principle stated by Lord Nicholls that dishonesty is a necessary ingredient of accessory liability and to hold that knowledge is a sufficient ingredient. But the statement of that principle by Lord Nicholls has been widely regarded as clarifying this area of the law and, as he observed, the tide of authority in England has flowed strongly in favour of the test of dishonesty. Therefore 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."

28. There is no suggestion in any of the speeches in Twinsectra Ltd v Yardley that the standard of dishonesty is flexible or determined by any one other than by the court on an objective basis having regard to the ingredients of the combined test explained by Lord Hutton.
29. In the third of the relevant authorities I have listed in paragraph 23 above, Barlow Clowes Ltd v Eurotrust Ltd [2006] 1 WLR 1476, the Privy Council accepted that (para 10):

"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.

It added:

"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 Twinsectra 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.

16. 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 to require him to have thought about what those standards were.

17. On the facts of Twinsectra, neither the judge who acquitted Mr Leach of dishonesty nor the House undertook any inquiry into the views of the defendant solicitor Mr Leach about ordinary standards of honest behaviour. He had received on behalf of his client a payment from another solicitor whom he knew had given an undertaking to pay it to Mr Leach's client only for a particular use. But the other solicitor had paid the money to Mr Leach without requiring any undertaking. The judge found that he was not dishonest because he honestly believed that the undertaking did not, so to speak, run with the money and that, as between him and his client, he held it for his client unconditionally. He was therefore bound to pay it upon his client's instructions without restriction on its use. The majority in the House of Lords considered that a solicitor who held this view of the law, even though he knew all the facts, was not by normal standards dishonest."

There is no suggestion in this case either that the standard of dishonesty is flexible or determined by any one other than by the court on an objective basis having regard to the ingredients of the combined test as explained by Lord Hutton in Twinsectra and Lord Hoffmann in Barlow Clowes.

30. In the fourth case to which I referred in paragraph 23 above, Abu Rahman v Abacha [2007] 1 Lloyd's Rep 115, the Court of Appeal indicated that the correct approach to questions of dishonesty is that indicated by the Privy Council in Barlow Clowes. At paragraph 26 Rix LJ indicated that it is now sufficient to concentrate on what was said in Barlow Clowes about the element of knowledge required to set up and investigation of the subsequent element of dishonesty. Arden LJ considered (paragraph 69) that the law of England and Wales is that laid down in Twinsectra as interpreted in Barlow Clowes. Pill LJ acknowledged (paragraph 94) the value of Barlow Clowes in its explanation of Twinsectra. He considered that its implications should await further consideration in a case in which a real issue arises on its impact.
31. Having referred to the relevant authorities at some length I return to the rival submissions I summarised in paragraphs 21 and 22 above. It is convenient to start with the second submission of counsel for Starglade. He contends that the statement of the deputy judge in paragraph 51 of his judgment, quoted in paragraph 19 above, that the appropriate standard is "what all [as opposed to some only] normal people would regard as dishonest" is wrong in law. He contends that it is not supported by any of the cases to which I have referred and is contrary to principle in that it is ultimately a question of law for the court.
32. For my part, I consider that the deputy judge's comments are apt to mislead. 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.
33. I would also accept the third submission of counsel for Starglade summarised in paragraph 21 above. The advice Mr Twining gave Mr Nash is set out in the passages from the judgment of the deputy judge I have quoted in paragraph 15 above. It is clear that it related only to Glancestyle and the possibility that Glancestyle was or might be made a secured creditor. Nothing was said about Colomendy or the other payees. No advice was sought or given as to the honesty of a director of an insolvent company paying amounts due to himself, for his benefit or to others with whom he was connected. And it is those considerations which give rise to the first submission of counsel for Starglade to which I now turn.
34. The conclusion of the deputy judge, as expressed in paragraph 54 of his judgment, related to the honesty or otherwise of "whether a company director may prefer some creditors over others". The deputy judge considered that that might depend on the nature of the advice received. In my view that was the wrong question. Mr Nash's concern was not to prefer some creditors over others but, as the judge put it in paragraph 13, "to frustrate Starglade". To that end he "used the confidentiality provision [in the Tomlin Order] as a means of deflecting enquiries [from Starglade]" and caused Larkstore to be dissolved "to put another barrier up against Starglade's claim".
35. Mr Nash knew that Larkstore was insolvent but that the obligation of Larkstore to Starglade was binding. Thus he could only 'frustrate' Starglade if he left Starglade to pursue its remedy against an insolvent company without assets. He could only remove Larkstore's assets by paying its other creditors. This is what he did. He cannot, in my view, be protected from the consequences of that course of conduct by the advice of Mr Twining. Mr Twining was not asked, and expressed no view, as to the legality or otherwise of the payments actually made in view of either the undoubted insolvency of Larkstore or the purpose or intention of Mr Nash in making them.
36. Mr Nash described himself in his witness statement as a property developer. He had controlled and directed Larkstore in its business as such a developer since 1982. The deputy judge described him as "intelligent and astute". The deputy judge recognised that Mr Nash could not have been wholly satisfied, whether from the advice of Mr Twining or otherwise, that he was lawfully entitled to do what he did.
37. I accept the submissions of counsel for Mr Nash that the dividing line between preferences which may or may not be made in relation to a company's assets has been laid down by Parliament in ss.239 to 241 Insolvency Act 1986 and its statutory predecessors. I also accept that the fact that a payment is, in accordance with those provisions, a voidable preference does not involve any conclusion as to its honesty. It may or may not be. But neither of those considerations is relevant to the proper determination of this appeal. The claim is not brought by a liquidator of an insolvent company seeking to recover assets by avoiding a pre-liquidation payment. It is unarguable that Mr Nash by his conduct assisted in the breach of the trust by Larkstore by paying away the money held by Larkstore on such trust. The question is whether that assistance was dishonest.
38. I accept that the deputy judge found Mr Nash to be an honest witness; but that has no bearing on the honesty or otherwise of his conduct under consideration. I also accept that this court should be very cautious indeed of substituting its own view of the honesty of Mr Nash's conduct for that of the judge. But, if this court concludes that the deputy judge asked the wrong question and approached it from the wrong perspective then it is its duty to say so.
39. That is my conclusion. As I have already said, 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.
40. For all these reasons I would accept the first submission of counsel for Starglade and, notwithstanding those of counsel for Mr Nash, recognise the conduct of Mr Nash in assisting the undoubted breach of trust in favour of Starglade as dishonest by the ordinary standards of honest commercial behaviour. I would allow this appeal, make the orders set out in paragraphs 1 and 2 of Section 7 of the Appellant's notice. I would dismiss the application of Mr Nash for permission to appeal from the deputy judge's order as to costs. In these circumstances the order for costs made by the judge cannot stand either. Subject to any further argument, I would order Mr Nash to pay the costs of Starglade in this court and below, including the costs of the application to Evans-Lombe J made on 1st February 2008, to be assessed on the standard basis if not agreed.

Lord Justice Hughes:

41. I agree. I also agree with the additional observations made by Leveson LJ.

Lord Justice Leveson

42. I entirely agree with the approach of the Chancellor and with his conclusions. In particular, I endorse his analysis of the authorities in relation to the appropriate test of dishonesty in the context of the liability of an accessory. Having said that, however, and although the issue does not arise in the context of this case, I would add a note of concern if the concept of dishonesty for the purposes of civil liability differed to any marked extent from the concept of dishonesty as understood in the criminal law.
43. In Royal Brunei Airlines v Tan [1995] 2 AC 378, Lord Nicholls, referring to Reg. v. Ghosh [1982] QB 1053, specifically put to one side "the position in some criminal or other contexts" in which Lord Lane CJ described the test of dishonesty as subjective with the standard of honesty to be applied being objective. Lord Lane explained (at 1064D):

"In determining whether the prosecution has proved that the defendant was acting dishonestly, a jury must first of all decide whether according to the ordinary standards of reasonable and honest people what was done was dishonest. If it was not dishonest by those standards, that is the end of the matter and the prosecution fails.

If it was dishonest by those standards, then the jury must consider whether the defendant himself must have realised that what he was doing was by those standards dishonest. In most cases, where the actions are obviously dishonest by ordinary standards, there will be no doubt about dishonesty. It is dishonest for a defendant to act in a way which he knows ordinary people consider to be dishonest, even if he asserts or genuinely believes that he is morally justified in acting as he did. ...

Cases which might be described as borderline ... will depend upon the view taken by the jury as to whether the defendant may have believed what he was doing was in accordance with the ordinary man's idea of honesty."

44. These observations suggest that the analysis which has governed the approach of the criminal law may fit more readily into the language of the House of Lords in Twinsectra prior to the explanation of the remarks in that case in Barlow Clowes in the Privy Council and Abu Rahman in the Court of Appeal. It is all the more important, therefore, that at some stage the opportunity to revisit this issue should be taken by the Court of Appeal (Criminal Division).
45. I repeat that none of this affects the present case: I entirely agree that the deliberate removal of the assets of an insolvent company specifically for the purpose of defeating the just claim of a creditor should not and does not accord with honest standards of commercial behaviour. Furthermore, I simply do not accept that Mr Nash could, in fact, have thought otherwise.