COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
MR NICHOLAS STRAUSS QC
(Sitting as a Deputy High Court Judge)
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE HUGHES
LORD JUSTICE LEVESON
| STARGLADE PROPERTIES LTD
|- and -
MR DONALD McCUE (instructed by Shirley Griffiths) for the Respondent
Hearing date : 9 November 2010
Crown Copyright ©
The Chancellor :
"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."
Colomendy Ltd £250,000
Lloyds TSB £10,670
Mr Nash £15,500
Hollie Homes Ltd £28,900
Elizabeth Carter £2,070
(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.
(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,
(5) the advice given to Mr Nash by the relevant solicitor with Warner LLP.
"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).
"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.
"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.
"25. 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.
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 26th 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 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."
"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."
"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.
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.
"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."
"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."
"Whatever may be the position in some criminal or other contexts (see, for instance, Reg. v. Ghosh  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.
"...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.
"...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."
"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."
"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.
"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.
Lord Justice Hughes:
Lord Justice Leveson
"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."