Accessory Liabilities II

ACCESSORY
LIABILITY-
CONSTRUCTIVE
TRUSTEE (CT)-Part II
MARK HSIAO
1
Legal Conditions ( Brief map )
1. Fiduciary Breach
(b) Assistance liability (dishonest

assistance)
1. Assist (act as accomplice, no
need to receive the equitable
interest of the breach)
2. Knowledge of the wrong ( A
reasonable honest person:
dishonest test: objective)
2
(b) Assistance liability (Knowing assistance)
a breach of trust or fiduciary duty

 assistance by the defendant
 dishonestly
3
In order to establish liability on the part of a third party

for dishonest assistance in a breach of trust, a plaintiff
must establish:
a breach of trust or fiduciary duty
 assistance by the defendant
 dishonestly
4
 No need to show receipt of trust property by the defendant
 There is usually no possibility of the claimant (usually the beneficiary)

bringing a proprietary action. It is personal liability which is the issue.
 As the claimant does not need to show that a defendant has received trust
property, it is not strictly correct to describe the defendant who has
dishonestly assisted in a breach of trust as a “constructive trustee.”
5
Paragon Finance plc v D.B. Thakerar & Co [1999] 1 All ER 400, CA, 408-409.
Millett L.J. :
 Equity has always given relief against fraud by making any person sufficiently
implicated in the fraud accountable in equity.
 In such a case, he (fraud) is traditionally thought, I think, unfortunately, described as a
constructive trustee and said to be “liable to account as a constructive trustee”. Such a
person is not in fact a trustee at all, even though he may be liable to account as if he
were... In such a case the expressions “constructive trust” and “constructive trustee” are
misleading, for there is no trust and usually no possibility of a proprietary remedy;
6
1. Need to show breach of trust

In suing a third party on the basis of dishonest
assistance in a breach of trust, there is no need to show
that the trustee was dishonest: Royal Brunei Airlines
Sdn Bhd v. Tan [1995] 2 AC 378, PC.
7
Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378.

 The plaintiffs appointed Borneo Leisure Travel Sdn Bhd as its
general travel agent.
 Under the terms of the appointment, Borneo Leisure Travel Sdn Bhd
was made an express trustee of the proceeds of all ticket sales for
the plaintiffs.
 In breach of trust, it used the proceeds as part of its general business.
 As Borneo Leisure Travel Sdn Bhd was insolvent, the plaintiffs sued
Philip Tan, its managing director and principal shareholder.
8
 According to Lord Nicholls:

“Drawing the threads together, their Lordships' overall conclusion
is that dishonesty is a necessary ingredient of accessory liability.
It is also a sufficient ingredient. A liability in equity to make good
resulting loss attaches to a person who dishonestly procures or
assists in a breach of trust or fiduciary obligation. … ‘Knowingly’
is better avoided as a defining ingredient of the principle, and in
the context of this principle the Baden (1983) [1993] 1 WLR 509
scale of knowledge is best forgotten.”
9
2. Need to show assistance

Brinks Ltd v. Abu-Saleh (No. 3) (1999) CLC 133.
 A large amount of gold bullion was stolen in the Brinks Mat robbery. The
gold was melted down and then sold. The defendant was the wife of a
man convicted of money laundering. She had travelled with her husband
from England to Switzerland, keeping him company in the car £3 million
of Brinks Mat money was laundered using this method.
10
3. Dishonestly?
It must be shown that the third party was
dishonest.
11
What level of knowledge is required to make an agent personally liable?
 Five levels of knowledge were set out by Gibson J. in Baden Delvaux v. Societe Generale pour
Favoriser le Developpement du Commerce et de l`Industrie en France SA (1983) BCLC 325,
[1993] 1 WLR 509 :
(i) actual knowledge;

(ii) shutting one`s eyes;
(iii) recklessness;
(iv)knowledge of any circumstances which would indicate the facts to an
honest and reasonable man;
(v) knowledge of circumstances which would put an honest and reasonable
man on inquiry.
12
Cases in the 1960s: all five levels used (negligence sufficed)
 Certain cases held banks liable because they ought to have known what
was going on. i.e. liability if negligent.
 See Baden Delvaux (conceded by counsel); Selangor United Rubber
Estates Ltd v. Cradock (No 3) [1968] 1 WLR 1555; Karak Rubber Co.
Ltd v. Burden (No 2) [1972] 1 WLR 602.
13
Cases: dishonesty as the test
Agip (Africa) v Jackson [1990] 1 Ch 365
 An employee altered cheques so that they were made payable
to companies which had been established by the defendant
accountants. The money went into these companies' accounts
and was then withdrawn and disappeared. The defendants
assumed that they were assisting in evading exchange controls.
14
Cases: dishonesty as the test
Royal Brunei Airlines Sdn Bhd v. Tan [1995] 2 AC 378, PC
 Recall Royal Brunei. The defendant, Tan, was the managing
director of that company. The contract stated that the money
collected would be paid into a trust account. This was not done.
 How do you know he was acting negligently or dishonesty?


15
 Guidance regarding the nature inherent in the concept of
dishonesty?
An objective standard of dishonesty:
Royal Brunei Airlines Sdn Bhd v. Tan [1995] 2 AC 378, PC, 389.
Lord Nicholls of Birkenhead:
… acting dishonestly … means simply not acting as an honest person
would in the circumstances. This is an objective standard.
 [This does] not mean that individuals are free to set their own standards of
honesty in particular circumstances. The standard of what constitutes
honest conduct is not subjective.
16
dishonesty?
Royal Brunei Airlines Sdn Bhd v. Tan [1995] 2 AC 378, PC, 389.
 Dishonesty is not the same as negligence.

 The defendant’s expertise and the circumstances will be taken
into account:
17
dishonesty?
Royal Brunei Airlines Sdn Bhd v. Tan [1995] 2 AC 378, PC, 391
Lord Nicholls of Birkenhead:
 [W]hen 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.
18
dishonesty?
Twinsectra v Yardley [2002] 2 AC 164, HL
 Unfortunately, in Twinsectra v Yardley, the HL diverted to the criminal standard set out
by the Court of Appeal in R v Ghosh [1982] QB 1053.
 It was held in Ghosh that the prosecution had the burden of establishing:
 the defendant’s conduct would appear dishonest if judged objectively by the standards of
reasonable and honest people;
 if so, the defendant must have realised that judged by those standards, what he was
doing was dishonest.
19
dishonesty?
A solicitor, Mr. Leach, had paid money over to his client

without imposing any restrictions. Yet he knew that the lender,
Twinsectra, had stated that the money could only be used for a
particular purpose (a “Quistclose” trust).
20
 Guidance regarding the nature inherent in the concept of dishonesty?
 The majority of the House of Lords would begin confusing the civil standard of
dishonesty with the criminal standard.
 The case involved money held under Quistclose trust by a solicitor who
transferred it in breach of trust to the borrower’s solicitor, Leach, for the benefit
of his client.
 Although Leach was aware that the money was to be exclusively used for the
acquisition of property, he paid over the money to his client without ensuring
that it would be so used.
 The lender/beneficiary sued Leach for dishonest assistance.
21
dishonesty?
Lord Hutton at [35]:
 A finding by a judge that a defendant has been dishonest is a grave finding, and it is
particularly grave against a professional man, such as a solicitor. Notwithstanding that
the issue arises in equity law and not in a criminal context, I think that it would be less
than just for the law to permit a finding that a defendant had been "dishonest" in
assisting in a breach of trust where he knew of the facts which created the trust and its
breach but had not been aware that what he was doing would be regarded by honest men
as being dishonest.
22
dishonesty?
Lord Hutton at [35]:
 A finding by a judge that a defendant has been dishonest is a grave finding, and it is
particularly grave against a professional man, such as a solicitor. Notwithstanding that
the issue arises in equity law and not in a criminal context, I think that it would be less
than just for the law to permit a finding that a defendant had been "dishonest" in
assisting in a breach of trust where he knew of the facts which created the trust and its
breach but had not been aware that what he was doing would be regarded by honest men
as being dishonest.
23
dishonesty?
In context, if a person (accused) is able to defend with his subject view, what happens?
No liability? But clearly dumb, dull, dim, or imbecile
24
dishonesty?
 The House of Lords recognised that there were
three possible tests for dishonesty:
i. purely subjective;
ii. purely objective; and
iii.a hybrid test. 25
 Under the hybrid test, a defendant’s conduct is assessed
partly objectively, against the standards of reasonable and
honest people, and partly subjectively, meaning that he
would not be dishonest unless he knew that the conduct
would be regarded to be dishonest by reasonable and
honest people (rather than his own personal standards).
 The hybrid standard is essentially the test in criminal law 26

dishonesty?
i. purely objective; and
ii. a hybrid test.
 Lord Millett, on the other hand, held that the test of dishonesty was an
objective one and concluded that Leach should be liable for dishonest
assistance.
27
 According to Lord Millett:
“In my opinion Lord Nicholls was adopting an objective standard of
dishonesty by which the defendant is expected to attain the standard
which would be observed by an honest person placed in similar
circumstances. Account must be taken of subjective considerations
such as the defendant's experience and intelligence and his actual
state of knowledge at the relevant time. But it is not necessary that
he should actually have appreciated that he was acting dishonestly;
it is sufficient that he was.” 28
Guidance regarding the nature inherent in the concept of
dishonesty?
Barlow Clowes International v Eurotrust International [2005] UKPC 37, [2006] 1 All ER
333
In the mid-1980s Mr Clowes, through a company called Barlow Clowes, operated a
fraudulent investment scheme. He attracted about £140m, mainly from small UK investors.
In 1988 the scheme collapsed, with little money left. The money had been paid away partly
through bank accounts operated by the defendants: an offshore financial services company
and its directors. Were they liable for dishonest assistance in breach of trust?
29
dishonesty?
Barlow Clowes International v Eurotrust International [2005] UKPC
37, [2006] 1 All ER 333
The Privy Council rejected the Ghosh test:
A defendant's knowledge of a transaction had to be such as to render his
participation contrary to normally acceptable standards of honest
conduct; there was no super-added requirement that a defendant should
realise that his conduct fell short of ordinary standards of honesty (i.e. the
second strand of Ghosh was rejected).
 30
dishonesty?
Barlow Clowes International v Eurotrust International [2005] UKPC
37, at [10]
Lord Hoffmann:
 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.
31
Abou-Ramah v Abacha [2006] EWCA 1492, CA.
Bank did not suspect that the particular transactions involved money
laundering.
Arden LJ adopted the objective test in Privy Council case, Tan and
Barlow, so that the defendant was not required to be conscious of
their wrongdoing.
32
Starglade Properties Ltd v Nash [2010] EWCA Civ 1314.
A company agreed to hold certain money it would receive on trust partly for
the benefit of the claimant. A company director decided to deliberately
frustrate that agreement by paying the money to the company’s creditors.
Morritt LJ considered the test to be a single standard of honesty objectively

determined by the court.
33
Ivey v Genting Casinos (UK) Ltd (trading as Crockfords Club) [2017] UKSC
67: Overruled R v Ghosh [1982] QB 1053
This case, in which a professional gambler sues a casino for

winnings at Punto Banco Baccarat, raises questions about (1) the
meaning of the concept of cheating at gambling, (2) the relevance
to it of dishonesty, and (3) the proper test for dishonesty if such is
an essential element of cheating.
34
 Mr Ivey, the claimant in this case, deployed a highly specialist technique

called edge-sorting which had the effect of greatly improving his chances
of winning. He had the help of another professional gambler, Cheung Yin
Sun ('Ms Sun'). First, they set up the conditions which enabled him to
win. Then, later that evening and the following day, over the course of
some hours, he won approximately £7.7m.
 The casino declined to pay, taking the view that what he had done
amounted to cheating. His case is that it was not cheating, but deployment
of a perfectly legitimate advantage. 35
 'Edge-sorting' becomes possible when the manufacturing process causes

tiny differences to appear on the edges of the cards so that, for example,
the edge of one long side is marginally different from the edge of the
other. Some cards printed by Angel Co Ltd for the Genting Group (which
owns Crockfords) have this characteristic, apparently within the narrow
tolerances specified for manufacture.
36
 The pattern is not precisely symmetrical on the back of the cards. The
machine which cuts the card leaves very slightly more of the pattern, a
white circle broken by two curved lines, visible on one long edge than on
the other. The difference is sub-millimetric, but the pattern is, to that very
limited extent, closer to one long edge of the card than it is to the other.
Before a card is dealt from a shoe, it sits face down at the bottom of the
shoe, displaying one of its two long edges. It is possible for a sharp-eyed
person sitting close to the shoe to see which long edge it is.
37
 Being able thus to see which long edge is displayed is by itself of no help
to the gambler. All the cards have the same tiny difference between their
right and left long edges, so knowing which edge is displayed tells the
gambler nothing about the value of the next card in the shoe. The
information becomes significant only if things can be so arranged that the
cards which the gambler is most interested in are all presented with long
edge type A facing the table, whilst all the less interesting cards present
long edge type B. Then the gambler knows which kind of card is next out
of the shoe. 38
 Crockfords' practice after a large win such as this is to conduct

an ex post facto investigation to work out how it occurred.
After quite lengthy review of the CCTV footage and
examination of the cards, the investigators succeeded in
spotting what had been done. Nobody at Crockfords had heard
of edge-sorting before.
39
[54] dishonesty was introduced by R v Ghosh [1982] 2 All ER 689, [1982] QB 1053. Since
then, in criminal cases, the judge has been required to direct the jury, if the point arises, to
apply a two-stage test.
Firstly, it must ask whether in its judgment the conduct complained of was dishonest by the
lay objective standards of ordinary reasonable and honest people. If the answer is no, that
disposes of the case in favour of the defendant.
But if the answer is yes, it must ask, secondly, whether the defendant must have realised
that ordinary honest people would so regard his behaviour, and he is to be convicted only if
the answer to that second question is yes.
40
[56] Ghosh was a tangle of what were perceived to be inconsistent decisions,

some of which were said to apply a 'subjective' test, and others of which
were said to apply an 'objective’ one. Those terms are not always as plain to
jurors as they have become to lawyers, but it is convenient to adopt them
here when examining the reasoning in Ghosh. That case arrived, as has been
seen, at a compromise rule which is partly objective and partly subjective.
41
Thirty years on, however, it can be seen that there are a number of serious problems about the second leg
of the rule adopted in Ghosh.
1. It has the unintended effect that the more warped the defendant's
standards of honesty are, the less likely it is that he will be convicted of
dishonest behaviour.
2. It was based on the premise that it was necessary in order to give proper
effect to the principle that dishonesty, and especially criminal
responsibility for it, must depend on the actual state of mind of the
defendant, whereas the rule is not necessary to preserve this principle.
42
3. It sets a test which jurors and others often find puzzling and
difficult to apply.
4. It has led to an unprincipled divergence between the test for
dishonesty in criminal proceedings and the test of the same
concept when it arises in the context of a civil action.
43
5. It represented a significant departure from the pre-Theft Act

1968 law, when there is no indication that such a change had
been intended.
44
6. Moreover, it was not compelled by authority. Although the pre-Ghosh

cases were in a state of some entanglement, the better view is that the
preponderance of authority favoured the simpler rule that, once the
defendant's state of knowledge and belief has been established, whether
that state of mind was dishonest or not is to be determined by the
application of the standards of the ordinary honest person, represented in
a criminal case by the collective judgment of jurors or magistrates.
45
Post Ivey v Genting Casinos (UK) Ltd (trading as Crockfords Club) [2017]
UKSC 67 dishonesty test is an objective one
Group Seven Ltd v Nassir [2019] EWCA Civ 614; [2020] Ch 129
 To determining whether a defendant's assistance was dishonest the court should first
ascertain all the relevant facts, including the defendant's knowledge and beliefs, and then,
having regard to the totality of those facts, determine whether the defendant's conduct
had been objectively dishonest according to the standards of ordinary decent people; that
there was no requirement that the defendant had subjectively appreciated that what he
had done was dishonest
46
 Liability for dishonest assistance is generally compensatory although
couched in the language of liability to account as a constructive trustee.
 Furthermore, the accessory is generally regarded as jointly and severally
liable to the errant trustee/fiduciary.
 This has given rise to the question of whether or not the liability is primary
or secondary.
 According to Steven Elliott and Charles Mitchell, “Remedies for
Dishonest Assistance” (2004) 67 MLR 16, the liability is secondary in
nature, which explains the joint and several nature of liability.
47
 However, according to Pauline Ridge, “Justifying the Remedies for
Dishonest Assistance” (2008) 2014 LQR 445, the basis of liability is
primary and joint and several liability is justified on policy and pragmatic
grounds instead.
 One problem with a pure secondary liability thesis is that it should lead
logically to an accessory being liable to account for profits it did not make
but were made by the errant trustee/fiduciary.
 But even Elliott and Mitchell are not prepared to go so far, suggesting that
an accessory should only be accountable for profits that it has itself made.
48
 Asboth the pure primary and pure secondary accounts
have necessitated adjustments to accommodate desired
remedial outcomes, it has been suggested that the
accessory’s liability straddles both primary and
secondary liability.
 Most of the older cases were concerned with

compensation rather than an account of profits.
49
However, in Novoship (UK) Ltd v Mikhaylyuk
[2015] QB 499, the English Court of Appeal
accepted that it was possible to award an account
of profits where the accessory had himself
profited from the assistance in the breach of
fiduciary duty.
50
 The accessory there, Nikitin, had assisted the dishonest

fiduciary, Mikhaylyuk, who had taken bribes, in the
negotiation of shipping charters.
 Asa result of an unexpected change in the market,

Nikitin profited from these charters.
51
 Although the Court of Appeal held that an account of profits was,

in principle, available since the liability of a dishonest accessory
was based on liability to account as a constructive trustee, the
Court of Appeal acknowledged that the accessory was not a true
fiduciary and, therefore, the remedy had to be adjusted to account
for this.
52
 A number of distinctions were noted by the Court of Appeal.

 First, in contrast with Murad v Al-Saraj [2005] WTLR
1573, which held that a fiduciary was liable to account for
all profits within the scope of his fiduciary duty regardless
of causation, an accessory would only be accountable for
profits caused by his assistance.
53
 Secondly,such causation was not simply “but for”

causation but the question of whether the assistance
was an effective cause of the profits.
 On the facts, since the profits were effectively
caused by unexpected market shifts, no account of
profits would be ordered.
54
 Finally, even if effective causation is proven, the

court retains the discretion to withhold the remedy
of account of profits if it considers it
disproportionate in the light of the nature and extent
of the wrongdoing.
55
 Peter Devonshire, “Account of Profits for Dishonest

Assistance” (2015) 74 CLJ 222 has criticised the
availability of an account of profits as against a
dishonest accessory, pointing out that such an accessory
is a stranger to the fiduciary relationship whereas the
remedy of account of profits reflects the imperative of
that fiduciary relationship.
56
Application
 A solicitor intended to finance his luxury side career gambling by defrauding a law
firm’s client for a new investment scheme he created for this sole purpose. The solicitor
approached the firm’s accountant to set up the investment scheme and duly did so.
 Looking at this fact pattern, what sort of personal liability would an accountant be
liable?
57
Application 2
 Indogas Ltd is a successful crude oil trading company with a few board of directors:
James, Charles, Alice, and Leo. The company has a trading bank account with
Citibank that is authorised and managed by James and Charles. From 2006-12,
whenever Indoga Ltd was paid for its supply of crude oil into the very same trading
bank account, James and Charles instructed CityBank to transfer the money out
immediately to Alice, Leo and other related companies' accounts controlled by them. A
total of USD $50 millions has been misappropriated. The company is now seeking
CityBank to account for the USD50m.
 Please advise the CityBank.
58
Application 2 (Common Law Debt Claim)
 See PT ASURANSI TUGU PRATAMA INDONESIA TBK (formerly known as PT

TUGU PRATAMA INDONESIA) v CITIBANK N.A. - [2023] HKCU 494
59
Accessory Liabilities: Personal Liabilities
clothes under the title CT.
Action against 3rd Party
(a) Recipient liability (Knowing (b) Assistance liability (Knowing

receipt) assistance)
1. Breach of Fiduciary duty 1. Breach of Fiduciary duty
(trustee or fiduciary) (Trustee or fiduciary)
2. Receive the assets 2. Assist (act)
3. Knowledge or unconscionable 3. Knowledge (Objective
test Dishonesty)
60
A pleasant learning journey with you all and good
luck with your forthcoming exams
Revision Lecture on 17th April 2024
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ACCESSORY

(b) Assistance liability (dishonest

a breach of trust or fiduciary duty

In order to establish liability on the part of a third party

 No need to show receipt of trust property by the defendant

 There is usually no possibility of the claimant (usually the beneficiary)

1. Need to show breach of trust

Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378.

 According to Lord Nicholls:

2. Need to show assistance

(i) actual knowledge;

 How do you know he was acting negligently or dishonesty?

 Dishonesty is not the same as negligence.

A solicitor, Mr. Leach, had paid money over to his client

 The hybrid standard is essentially the test in criminal law 26

Morritt LJ considered the test to be a single standard of honesty objectively

This case, in which a professional gambler sues a casino for

 Mr Ivey, the claimant in this case, deployed a highly specialist technique

 'Edge-sorting' becomes possible when the manufacturing process causes

 Crockfords' practice after a large win such as this is to conduct

[56] Ghosh was a tangle of what were perceived to be inconsistent decisions,

5. It represented a significant departure from the pre-Theft Act

6. Moreover, it was not compelled by authority. Although the pre-Ghosh

 Most of the older cases were concerned with

 The accessory there, Nikitin, had assisted the dishonest

 Asa result of an unexpected change in the market,

 Although the Court of Appeal held that an account of profits was,

 A number of distinctions were noted by the Court of Appeal.

 Secondly,such causation was not simply “but for”

 Finally, even if effective causation is proven, the

 Peter Devonshire, “Account of Profits for Dishonest

 Please advise the CityBank.

 See PT ASURANSI TUGU PRATAMA INDONESIA TBK (formerly known as PT

Action against 3rd Party

(a) Recipient liability (Knowing (b) Assistance liability (Knowing

Revision Lecture on 17th April 2024

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