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Accessorial liability for breach of a fiduciary duty: an update

Feature Articles

Cite as: (2004) 78(4) LIJ, p.62

Victorian practitioners should not follow recent English cases in applying a compound test to determine liability as an accessory to a breach of fiduciary duty. Instead, they should apply the test in Consul Developments Pty Ltd v DPC Estates Pty Ltd.

By Hamish Redd

In 2002 the House of Lords handed down its decision in Twinsectra Ltd v Yardley.[1] The case concerned the issue of liability of a party that has assisted with a breach of fiduciary duty but has not received any proceeds of that breach. The usual starting point for a discussion concerning liability of third parties in a breach of fiduciary duty is the 1874 English case Barnes v Addy.[2] In that case the court distinguished between those who had knowingly received property as a result of a breach of a fiduciary duty (“the first limb of Barnes v Addy”) and those who participated in a breach of fiduciary duty but did not receive any proceeds of the breach (“the second limb of Barnes v Addy”). The typical factual scenario for accessory liability involves an adviser – accountant, financial planner or lawyer – who does not receive any proceeds of the breach, but who may have been an architect in the plan resulting in the breach. Both Twinsectra and this article concern the second limb, referred to here as “accessory liability”.

A commentary has been bubbling through the Australian Law Journal since the Twinsectra decision was handed down, seeking to clarify what the Australian position is regarding accessory liability.[3] This article seeks to clarify the law as it applies in Victoria for accessory liability; in doing so it will discuss the decision in Twinsectra and how it differs from Australian High Court authority, before turning attention to the approach taken by Victorian courts.

Twinsectra

The relevant facts of this case are as follows. In 1992, Twinsectra Ltd was willing to lend £1m to Mr Yardley as bridging finance for him to purchase a property for redevelopment. Twinsectra would only agree to lend the money, however, if a solicitor personally undertook to repay the money or to pay it to Yardley only for the acquisition of defined property. Yardley’s regular solicitor, Mr Leach, refused to provide an undertaking on either of these grounds. Another solicitor, Mr Sims, did provide such an undertaking and Twinsectra subsequently transferred the money to him. In breach of the undertaking, Mr Sims provided the money to Mr Leach. Mr Leach did not ensure that the money was disbursed to Yardley only for the acquisition of defined property. The loan was not repaid and Twinsectra sued Mr Yardley as the borrower, but also both of his solicitors. The action was successful and appeal proceedings were concerned with the liability of Mr Leach and whether his conduct was dishonest, so as to be liable as an accessory to the primary breach.

The House of Lords consisted of Lords Slynn, Steyn, Hoffmann, Hutton and Millett. Lord Hutton gave the leading judgment and Lord Millett dissented. Both the majority and Lord Millett were heavily influenced by the previous decision of the House of Lords on accessory liability: Royal Brunei v Tan.[4]

In Royal Brunei, Lord Nicholls explained that dishonesty was the touchstone of accessory liability (at 387). His Lordship later elaborated (at 389) that “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”. This passage was quoted with approval by Lord Hutton in Twinsectra (at 810).

In approving of Lord Nicholls’ test, Lord Hutton explained further (at 812) 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”. In other words, the Twinsectra test is a combined test based on dishonesty where the defendant knows that their actions in assisting in the breach would be regarded as dishonest by honest people.

Does Twinsectra apply in Australia?

In the recent New South Wales Court of Appeal case, Cadwallader v Bajco Pty Ltd,[5] the defendants relied in part on Royal Brunei and Twinsectra. Heydon JA (as he then was) responded (at [199]) that the Court was not bound by the Privy Council or the House of Lords and that “[a] more appropriate starting point for an assessment of the tests for secondary liability would be the decisions of this Court in and since DPC Estates Pty Ltd v Grey and Consul Developments Pty Ltd [1974] 1 NSWLR 443 and of the High Court in that case”.

The High Court of Australia has not had occasion to consider accessory liability since the 1975 case of Consul Development Pty Ltd v DPC Estates Pty Ltd.[6] The leading judgments in that case were given by Gibbs J and Stephen J (with whom Barwick CJ agreed). The language used by the High Court differs from that of the House of Lords and the Privy Council. Instead of referring to objective standards and a “combined test”, the High Court emphasised that accessory liability requires knowledge (including a conscious refraint from inquiry) of fraud or a breach of trust. The table below contrasts the approach taken by the High Court of Australia in Consul, and the House of Lords and Privy Council in Royal Brunei/Twinsectra. (see table below)

Stephen J (with whom Barwick CJ agreed) emphasises equity’s concern with the conscience of the accessory, whereas the English approach diverges in this regard into “objective” territory. While the comments of Gibbs J concerning “moral obtuseness” appear to resonate with the English approach, the judgment of Stephen J – by virtue of Barwick CJ’s concurrence – must be considered the High Court authority.[7] The High Court has not had occasion to directly consider accessory liability since 1975. In the recent Federal Court case of Spangaro v Corporate Investment Australia Funds Management Ltd,[8] however, Finkelstein J turned to Consul when discussing the law in Australia for recipient and accessory liability.[9] For Victorian practitioners, it is particularly worthwhile to look at the approaches of the Victorian Supreme Court and Court of Appeal.

Accessory liability in Victoria

Koorootang Nominees Pty Ltd v ANZ Banking Group[10] was a case concerning the first limb of Barnes v Addy, or “recipient liability”. Hansen J, in the course of a judgment spanning more than 100 pages, reviewed the cases on both recipient and accessory liability; the judgment was recently described by Mason P of the New South Wales Court of Appeal as a “masterly review”.[11] Noting that courts have traditionally drawn a distinction between accessorial and recipient liability, Hansen J comments (at 78) that the “leading authority” for accessory liability in Australia is the High Court’s decision in Consul. Koorootang was decided three years after Royal Brunei, yet it is clear that his Honour felt bound, quite correctly, by the 1975 case of Consul.

The next reported case after Koorootang was the Victorian Court of Appeal judgment in Macquarie Bank Ltd v Sixty Fourth Throne.[12] This case was also a recipient liability case, but when referring to accessory liability (at 156), Tadgell JA writes: “[I]t may be that the same test [Royal Brunei] should be applied in Australia, treating dishonesty as including wilful blindness and what Gibbs J ... called ‘moral obtuseness’”.

Ashley AJA considered the matter further (at 163) and reached a different conclusion:

“[I]n Australia, the law appears to be that actual knowledge (within which description should be included a state of wilful blindness or contrived ignorance) of the fraudulent or dishonest design must be possessed by the person assisting, whereby it can be said that such person is a participant in the dishonest activity”.

His Honour also noted (at 163) that Royal Brunei does not require any fraud on the part of the trustee before there could be accessory liability, and that the objective standard required in England is “somewhat different” to the test proposed by Stephen J in Consul.

In Lurgi (Australia) Pty Ltd v Ritzer Gallagher Morgan Pty Ltd[13] – a case concerning the liability of an accountant as an accessory – Byrne J commented (at [45]) that: “What is required [to attract liability as an accessory] is that the assistance be provided by a person who, at the time, knew of both the trust and of the breach of trust or who wilfully shut their eyes to the obvious”.

This analysis is consistent with Consul although it is, with respect, obscured by Byrne J’s earlier comment in the same paragraph that “the precondition of this liability is a state of mind of the participant which involves dishonesty, in the sense that this word is used by the Privy Council in Royal Brunei”. As has already been demonstrated, the dishonesty contemplated by Royal Brunei and Twinsectra (which would not be handed down until two years after Byrne J’s judgment) is somewhat different to that required by Barwick CJ and Stephen J in Consul: the former establishes a rigorous compound test not required by the latter.

On the basis of Consul and the subsequent cases in Victoria, practitioners should avoid the temptation of jumping on the Royal Brunei/Twinsectra bandwagon,[14] and instead follow the judgment of Stephen J in Consul and the Victorian cases reviewed above.

Pleading

One of the practical effects of following Consul is the importance of pleading the accessory’s state of mind. Consul requires knowledge (including a conscious refraint from inquiry) of a suspicion on the accessory’s behalf of an improper or dishonest design in the transaction.

To successfully mount an accessory claim (or counterclaim as the case may be), it is important to recall the words of Stephen J in Consul (at 408) that “without proof of knowledge no remedy will lie against [the accessory] for participation in the dishonest scheme of the fiduciary”.

In Cadwallader v Bajco Pty Ltd,[15] the defendant relied on accessory liability as a claim against another party, but failed to plead the accessory’s state of mind. Heydon JA (as he then was) spent a considerable portion of his judgment discussing the defendant’s defective pleading in this regard: if a party wishes to rely on another party’s mental state as a ground on which a court should refuse or grant relief, then it will need to be pleaded. Material facts that are relied on in trial, of course, must be pleaded.

Claims of accessory liability can often be run in the alternative to a claim for direct liability (for example, that an adviser has become a fiduciary). Practitioners should be alert to the possibility of pleading both claims.

Summary

Despite the excitement surrounding the Twinsectra decision, it has only academic interest for Australian practitioners until the High Court decides otherwise. The Supreme Court of Victoria has generally stuck to Consul as the binding authority on accessory liability applicable in Victoria.

The effect of this is that the test for accessory liability in Victoria is less rigorous than that required in England: the latter prefers a compound test involving knowledge by the defendant that what they were doing would be regarded as dishonest by honest people, so that there are both subjective and objective elements for a claimant to prove.

The emphasis in the Consul theory of accessorial liability is concerned with the conscience of the accessory. On this ground, facts will be needed to prove that the accessory actually knew of the breach of trust or fraud: this includes wilfully shutting one’s eyes to the obvious. Accordingly, practitioners will need to plead the accessory’s knowledge of the dishonest design if proceedings are commenced in this regard.[16]

Objective considerations do not form part of the test for accessorial liability in Victoria. For now, the law on accessory liability appears grounded in equity’s concern with the conscience of an accessory.

Comparison of Australian and UK approaches

Consul

Royal Brunei/Twinsectra

Gibbs J: “It does not seem to me to be necessary to prove that a stranger who participated in a breach of trust or fiduciary duty with knowledge of all the circumstances did so actually knowing that what he was doing was improper. It would not be just that a person who had full knowledge of all the facts could escape liability because his own moral obtuseness prevented him from recognising an impropriety that would have been apparent to an ordinary man.” (at 398)

Nicholls LJ in Royal Brunei: “[I]n 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 389)

“The individual is expected to attain the standard which would be observed by an honest person placed in those circumstances.” (at 390)

Stephen J (Barwick CJ concurring): “[W]ithout proof of knowledge no remedy will lie against [the accessory] for participation in the dishonest scheme of the fiduciary.” (at 408)

Approves 2nd limb of Barnes v Addy that accessory requires “knowledge of suspicion on his part of an improper or dishonest design in the transaction”. (at 408)

Hutton LJ in Twinsectra: “[D]ishonesty 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.” (at 812)

Stephen J: Knowledge includes conscious refraint from inquiry but not constructive notice. (at 412)

Twinsectra approves Royal Brunei’s comment that “knowingly” is better avoided as a defining ingredient of the principle ... the Baden scale of knowledge is best forgotten”. (at 811)


HAMISH REDD is a member of the Victorian Bar, practising in all aspects of commercial law, with a specialty in equity and trusts, wills and probate and human rights. He has previously published with the Wills and Probate Bulletin and the International Trade and Business Law Annual.


[1] [2002] 2 AC 164 (Twinsectra).

[2] (1874) LR 9 Ch App 444.

[3] “Varieties of dishonesty – case note; Twinsectra v Yardley” (2002) 76(12) ALJ 744; “The Twinsectra case (knowing assistance; Quistclose)” (2003) 77(5) ALJ 290; see also “Rights in personam and the knowing receipt of trust property” (2003) 77 ALJ 280.

[4] [1995] 2 AC 379 (Royal Brunei).

[5] [2002] NSWCA 328.

[6] (1975) 132 CLR 373 (Consul).

[7] The Bench comprised Barwick CJ, McTiernan, Menzies, Gibbs and Stephen JJ. McTiernan J dissented and Menzies J died before judgment was delivered.

[8] [2003] FCA 1025.

[9] Note 8 above, at [59]-[60].

[10] [1998] 3 VR 16, 102 (Koorootang).

[11] Mason P, “Where has Australian restitution law got to and where is it going?” (2003) 77 ALJ 358, 368.

[12] [1998] 3 VR 133.

[13] [2000] VSC 277.

[14] It is interesting to note that Halsbury’s Laws of Australia could not resist: see Butterworths, Halsbury’s Laws of Australia, (online, accessed 7 August 2003) 430 Trusts, “Accessory liability” [430-615].

[15] Note 5 above.

[16] Rule 13.02 Supreme Court (General Civil Procedure) Rules 1996 (Vic).

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