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Dishonest Assistance with Breach of Trust

Arka Legal Services

The law imposes very strict obligations on trustees to act honestly and diligently in the management of trust assets. However, in addition to these duties on trustees, the law also imposes duties on anyone dealing with trustees, not to assist in any activity which may amount to a breach of trust. This prohibition of knowing assistance with breach of trust can, potentially, give rise to an order from the court putting the assistant in the position of the trustee, and making that person responsible for any loss caused to the trust. This rule is particularly important to finance professionals in the Cayman Islands, because the client disclosure rules will inevitably give the knowledge of operating in the capacity of a trustee.

The genesis of the rule is to be found in the nineteenth century English decision of Barnes v Addy1, in which a solicitor facilitated the appointment of a new trustee of a trust, knowing that the appointment was in breach of the terms of the trust. The new trustee misappropriated half of the assets of the trust. The beneficiaries therefore commenced proceedings against the solicitor, for recovery of the lost portion of the trust.

The court found in favour of the beneficiaries. The remedy granted was a somewhat unusual one, in that the court did not award damages, but rather made a declaration that the solicitor was a trustee for the sum lost. The practical effect of that decision was that the solicitor was required to reimburse the trust for the whole amount lost, even though he had never received any of the funds. The rationale of the decision was that where a stranger to the trust undertakes an activity which facilitates the misconduct of the trustee, and does so with the knowledge that this is not in accordance with the terms of the trust deed, then such conduct will amount to knowing assistance in a breach of trust.

Cases of this type are generally commenced in circumstances in which the trustee has absconded, or the assets of the trust have been lost. The remedy that the court may impose allows the beneficiaries to have the trust reimbursed where the primary wrong-doer is either unable or unavailable to do so.

Liability of this type is particularly onerous where the stranger receives no benefit from the breach of trust. However, the liability is not imposed on the basis of the benefit received, but on the basis of the knowledge that assistance is being provided for an improper transaction. This case, and the cases which follow it, reflect the extremely strict approach adopted by the common law courts to the duties of trustees.

More recent cases, such as the House of Lords’ decision in Twinsectra v Yardley2, have made it clear that there are four criteria which must be established, in order for there to be liability imposed on a person other than the trustee of the trust:

  1. There must be a trust;
  2. There is some form of fraud or dishonesty by the trustee;
  3. The third party provides some form of assistance to that dishonest activity; and
  4. Does so with the knowledge that it is in breach of the terms of the trust.

It is the last requirement which has proven to be the most controversial in recent years. The case law has gradually evolved from a mere knowledge of the breach of trust, to a requirement that there be an element of dishonesty associated with the breach. However, there remains some confusion as to whether there must be actual dishonesty on the part of the person who provides the assistance, or whether it is enough that an ordinary and reasonable person would have considered the assistance to be dishonest.

Although this may appear to be a “fine” point for lawyers to argue about, it does have important practical implications. The former standard – that of actual dishonesty – imposes a requirement of proof that may be almost impossible to establish in most cases. However, a more objective standard simply requires the circumstances of the breach to be put to the court, and the court will be asked to conclude whether an ordinary and reasonable person would have considered the behavior in question to be dishonest.

The Twinsectra decision seems to have had the effect of imposing a heavier burden on beneficiaries, in that they now need to prove actual dishonesty, or dishonest intention. Although the Privy Council – consisting of the same judges of the House of Lords who sat in the Twinsectra case – subsequently tried to clarify the position, and suggested that an objective standard of dishonesty is all that must be demonstrated by the claimant. However, the reasoning of the Privy Council was somewhat convoluted and flawed, and thus there remains some confusion as to the standard of honesty required to impose liability on a person who has assisted in a breach of trust.

The imposition of what is effectively a subjective test of dishonesty imposes a standard of dishonesty which falls only a little short of requiring an intention to commit a dishonest act. This is perhaps the reason for the Privy Council's attempt to clarify the position, and establish that the test is in fact an objective one, rather than a subjective test. Nevertheless, with the devaluing of this equitable claim, it has been suggested that the common law may now be sufficiently equipped to deal with claims of this sort, through the mechanism of tort, specifically "a tort of interference with a fiduciary relationship". Such a tort would obviate the need for the convoluted interpretations of the concepts of honesty and dishonesty, and focus on the acts of the parties and their consequences.

These issues have great practical importance both for the beneficiaries of trusts in the Cayman Islands, but also for any person involved in the local finance industry. The unfortunate reality is that there will be trustees who breach their duties, and abscond with the funds which they are appointed to protect. The law has put in place mechanisms to ensure that beneficiaries are not deprived of their entitlement under the trust. However, it would appear that the gradual evolution of the law has ensured that it is becoming more difficult with the passing of time for beneficiaries to redeem their entitlements.

1(1879) LR 9 Ch App 244.

2[2002] AC 164.