A guide to secondary liability – part one: dishonest assistance
This article is the first of a two part series. To listen to the full series in audio format, please click on the playlist below.
This means that even if the claimant has a strong case with good evidence, actual recovery of the money or assets of which they have been defrauded may be either very slow and expensive, requiring asset tracing processes that incur significant professional fees, or at worst simply not possible. There may be little practical value in obtaining judgment against such a defendant when what the claimant really wants is to recover its losses. However, fraudsters often have not acted alone…
The fraud might have been facilitated by other parties. Careful thought as to who else might have been involved is worthwhile, as parties with secondary liability might be better able to pay an award of damages if the claimant wins. We published a three-part series on primary liability of multiple wrongdoers in the tort of conspiracy. This two-part series considers some of the forms of secondary liability that might assist a claimant who has been wronged by more than one party. This first article considers dishonest assistance; part two will consider knowing receipt.
What is dishonest assistance?
If a third party (whom we’ll call "the defendant") has helped the primary wrongdoer to commit the fraud, that defendant could be liable for dishonest assistance. There are no detailed requirements on the form the help needs to take. What matters is that the defendant has helped in the commission of the fraud, and that the defendant was dishonest in doing so.
A claim for dishonest assistance requires:
- a breach of trust or fiduciary duty by the primary wrongdoer(s);
- the defendant must have assisted the primary wrongdoer(s) in the breach; and
- the defendant must have had a dishonest state of mind. The first requirement may sound technical, but the law imposes trusts in a variety of situations that render this of broad application.
Given that a breach of trust is usually found in fraud cases, it is common to use a claim for dishonest assistance to pursue an accessory wrongdoer in such claims.
As mentioned above, the second requirement, that the defendant has assisted in the breach, is not prescriptive. Anything the defendant did which in fact helped the primary wrongdoer with the fraud in a more than trivial way will count, provided that the defendant had a dishonest state of mind. Helpfully for claimants, it has also been held that the assistance does not have to be given in relation to the original misconduct – even third parties who assist in “the continuing diversion of the money”1 are liable if the other conditions are satisfied and there is a link between the original misconduct and the assistance. This means that third parties who help with onward dispersion of the proceeds of fraud could be liable.
The final requirement for a successful action in dishonest assistance is proving the defendant’s dishonesty. This has been the subject of some important judicial decisions across both the criminal and civil law. Following the Court of Appeal’s decision in Group Seven Ltd v Notable Services LLP  EWCA Civ 614, for dishonest assistance, a defendant’s conduct will be found dishonest if, given everything that the defendant in fact knew at the time, they acted in a manner which an honest person would not have.
There is no need for a claimant to prove that the defendant knew all the details of the underlying fraud. It is enough to show that the defendant knew the primary wrongdoer was doing something they were not allowed to do. That knowledge does not need to be explicit; if the defendant thought that misconduct was occurring and so deliberately refrained from asking questions or shut their eyes to it, the court will impute knowledge to them. This is commonly referred to as "blind-eye knowledge".
If the third party that provided the assistance was a company, it is important to understand how attribution of state of mind will work. The court has confirmed that you cannot aggregate the knowledge of two or more people in order to show that a company had knowledge; instead, it is necessary to show that one individual whose knowledge is attributable to the company (such as a director) had sufficient knowledge.
Putting all of this together, if a claimant has evidence that a third party helped in the commission of a fraud and thinks it likely the third party either knew what was going on or deliberately ignored it, it may be worth pursuing the third party for dishonest assistance. If the claim succeeds, the third-party assistant will be liable to compensate the claimant for the losses resulting from the underlying fraud, as can be seen in the case example below. The types of third parties who may often find themselves liable in these circumstances include financial institutions and professional services providers which may provide claimants with stronger recovery prospects.
Case example: Group Seven Limited v Notable Services LLP 2
In this case, the Court of Appeal considered the test for, and cemented the seminal case law on, dishonest assistance. The relevant issue that arose was liability for dishonest assistance in a breach of trust and the question as to whether the judge at first instance misstated and misapplied the test for dishonest assistance.
Group Seven Limited (Group Seven) invested €100m in an entity named Allied Investment Corporation Ltd (AIC), which had been incorporated for the purpose of a fraud. AIC, which had promised Group Seven a huge return on its investment, purported to lend the money to Larn Ltd (Larn). Larn was a company owned and directed by one of the fraudsters - Mr Louis Nobre.
AIC transferred the money to the client account of Notable Services LLP (a firm of solicitors) (Notable), where it was held for the benefit of Larn, with Mr Nobre then giving instructions to Notable to make some forty payments out of its client account amounting to €15m. Notable was a multi-disciplinary firm, one of whose members was an accountant named Mr Landman. Mr Landman received a payment of £170,000 out of Notable’s client account as a personal fee for helping Mr Nobre to make the other payments out.
Police intervention brought a halt to the laundering of the fraudulently obtained funds and €88m was returned. Mr Nobre and Larn had been held liable for the balance of the stolen funds in earlier proceedings. These proceedings related to the liability of other people who were involved. The relevant issue that the Court of Appeal dealt with was whether Mr Landman was liable as an accessory for dishonestly assisting breaches of trust by Larn (in its capacity as trustee of the €100m held in Notable’s client account).
First Instance Decision
The judge in the High Court had held that Mr Landman deliberately and knowingly broke rule 14.5 of the Solicitor’s Accounts Rules, which prohibits the provision of banking facilities through a client account. The judge found that the personal fee (which the Court of Appeal went on to describe as a bribe, as explained further below), of £170,000 was unconscionably received by Mr Landman and had been dishonestly concealed from the other members of Notable. Mr Landman was therefore liable for its return.
However, on dishonest assistance, the judge held that the crucial requirement of personal dishonesty by Mr Landman had not been established because (put shortly) he found that Mr Landman did not know or have “blind-eye knowledge” that the money in the client account was not beneficially owned by Larn and was not at Larn’s free disposal. In the absence of such knowledge, the judge held that Mr Landman’s conduct therefore did not constitute dishonest assistance. The result was that he was not liable for the balance of the stolen money (€12m). It was insufficient, according to the judge, that:
- Mr Landman did act dishonestly in facilitating the payments which were made out of the client account;
- that his actions formed a central part of the assistance upon which the claimants relied; or
- that Mr Landman had received a personal fee (or, to use the words of the Court of Appeal, a bribe) of £170,000 to perform them.
Court of Appeal Decision
The Court of Appeal considered the civil law test for dishonesty, given that the only element subject to appeal regarding Mr Landman’s alleged liability for dishonest assistance was whether Mr Landman’s assistance was in fact dishonest. The Court of Appeal agreed with the judge at first instance that the other three elements required to find a person liable for dishonest assistance of a breach of trust were easily made out.
- there was a trust in existence at the material time: at all relevant times, Larn’s interest in the money in the Notable client account was held on trust for Group Seven. This was the consequence of the order of Peter Smith J in the aforementioned earlier proceedings, which declared that purported loan agreements between Group Seven and AIC and between AIC and Larn were void and of no effect. Thus, the €100m in Notable’s client account was held by Notable on trust for Larn, which in turn held it on a bare trust for Group Seven;
- the trustee committed a breach of that trust: it was common ground at trial that this consisted of the payment away by Larn of approximately €15m of trust monies for Larn’s or Mr Nobre’s own purposes (and not for the purposes, or with the consent of the beneficial owner of the money, namely Group Seven); and
- the defendant assisted the trustee to commit that breach of trust: it was also undisputed between the parties that Mr Landman assisted Larn’s breach of trust in paying out the €15m. Mr Landman’s signature was needed in order to authorise payments from Notable’s client account and so, by signing the necessary documents, both Mr Landman personally and Notable provided the necessary assistance for Larn’s breach of trust.
To determine whether Mr Landman’s assistance was dishonest, the Court of Appeal considered the seminal case law on the civil law test for dishonesty:
- Royal Brunei Airlines Sdn Bhd v Tan  2 AC 378;
- Barlow Clowes International Ltd v Eurotrust International Ltd  UKPC 37; and
- Ivey v Genting Casinos UK Ltd  UKSC 67 (which was handed down less than three weeks after the first instance decision).
Ivey gave further clarity to the test for dishonesty established in Tan and Barlow Clowes: “When dishonesty is in question the fact-finding tribunal must first ascertain (subjectively) the actual state of the individual’s knowledge or belief as to the facts […] When once his actual state of mind as to the knowledge or belief as to the facts is established, the question whether his conduct was honest or dishonest is to be determined by the fact-finder by applying the (objective) standards of ordinary decent people. There is no requirement that the defendant must appreciate that what he has done is, by those standards, dishonest”.3
Applying this test to the facts, the crux of the issue was whether Mr Landman had the required knowledge that the money was not at Larn’s free disposal. Given that it had not been argued that Mr Landman had actual knowledge, it fell to be determined whether he had had “blind-eye” knowledge (i.e. whether he had consciously decided to refrain from taking any step to confirm the true state of affairs for fear of what might be discovered). The test for the imputation of blind-eye knowledge requires two conditions to be satisfied:
- the existence of a suspicion that certain facts may exist; and
- a conscious decision to refrain from taking any step to confirm the existence of those facts.4
The Court of Appeal held that the judge at first instance had erred in his “compartmentalised approach” to assessing Mr Landman’s blind-eye knowledge on the basis of the facts, with insufficient weight placed on Mr Landman’s unconscionable receipt and concealment of the £170,000 fee (which the Court of Appeal labelled a bribe). According to the Court of Appeal, the first instance findings in relation to unconscionable receipt made clear that Mr Landman must have turned a blind eye and had clear suspicions as to the true beneficial ownership of the €100m, and that the money was not at Larn’s free disposal. The Court of Appeal pointed out:
- although the first instance judge was influenced by the fact that it was Mr Landman who first proposed that Notable should instruct external solicitors to advise it on the anti-money laundering steps it should take (the Initial Proposal), such advice was in fact “a cynical move on [Mr Landman’s] part”;
- if such advice was to be worth anything, it clearly had to be based on full and honest disclosure of all the relevant facts to members of Notable, including the personal payment which Mr Landman had negotiated with Mr Nobre; and
- such disclosure would, of course, have brought the entire project to an immediate halt, and the Court of Appeal expressed its incomprehension as to how – in its absence - the first instance judge could have imparted any credit on Mr Landman for making the Initial Proposal.
Therefore, the Court of Appeal unanimously found that Mr Landman consciously decided to refrain from taking any step to confirm the true state of affairs (or indeed reveal the true state of affairs) for fear of what he (or his fellow colleagues) might discover. This decision shows that the court is prepared to find the presence of blind-eye knowledge where, considering the defendant’s accompanying dishonest behaviour, the court held that he must have harboured clear suspicions. This will no doubt provide comfort to innocent victims of fraud or breaches of trust, given that it narrows the scope of defence available to accessories for dishonest assistance.
In part two of this series, we will consider the availability of knowing receipt against third parties.
1Twinsectra v Yardley  UKHL 12 at 
2  EWCA Civ 614
3 Ivey v Genting Casinos (UK) t/a Crockfords  UKSC 67 at 
4Manifest Shipping & Co Ltd v Uni-Polaris Insurance Co Ltd  1 AC 469