Twinsectra Ltd sued an entrepreneur, Mr Yardley, and two solicitors, Mr Sims and Mr Paul Leach (of Godalming), for failing to repay a £1m loan. Twinsectra Ltd had given £1m to Mr Sims to pass onto Mr Yardley as a loan for buying real estate near Apperley Bridge, Bradford. Twinsectra Ltd had said it would only give the loan if someone guaranteed Mr Yardley's repayment. Mr Yardley's solicitor, Mr Leach, refused to give the guarantee, but Mr Sims accepted. Mr Sims had owed £1.5m to Mr Yardley from previous dealings. They agreed that if Mr Sims took the loan into his account first, the prior debts would be considered repaid. Mr Sims promised Twinsectra Ltd to not release the money unless the loan conditions were satisfied. The clause read as follows.
"The loan moneys will be retained by us [Sims & Roper] until such time as they are applied in the acquisition of property on behalf of our client. The loan moneys will be utilised solely for the acquisition of property on behalf of our client and for no other purposes".
However, Mr Sims then gave the money to Mr Yardley’s solicitor anyway (Mr Leach), who passed it on to Mr Yardley. Instead of using the money for the investment, Mr Yardley, in breach of contract, used £357,720.11 to pay off some of his debts. Twinsectra Ltd sued Mr Yardley to get the money back and also both solicitors. Mr Sims was now bankrupt. Twinsectra argued the money was bound by a trust, that Mr Sims was in breach of trust, and Mr Leach dishonestly assisted the breach.
The trial judge found that Mr Leach was not dishonest because he honestly believed that the undertaking did not run with the money. However, he made a contradictory finding that Leach had deliberately shut his eyes. In the Court of Appeal, Potter LJ held that Mr Leach was in fact dishonest, precisely because he had deliberately shut his eyes. A presumption in the transferor’s favour can only be made where there is no evidence that there was an intention to create a trust, or make a gift, or make a loan of the property to the transferee.[1]
Judgment
The House of Lords all held the loan from Twinsectra Ltd was held on trust by the solicitors. Lord Slynn, Lord Steyn, Lord Hoffmann and Lord Hutton held that the money was held on express trust, created through the terms of the agreement between Twinsectra Ltd and Mr Sims. It then held (controversially; an issue revisited in Barlow Clowes Ltd v Eurotrust Ltd[2]) that Mr Leach had not been dishonest enough for accessory liability. It was necessary for Mr Leach to have realised that he had been acting dishonestly. Lord Millett dissented.
He firstly held that the nature of the trust, by which the solicitors held Twinsectra Ltd's loan money was a resulting trust, with a power to apply the money in accordance with the loan contract's terms. He viewed this to be the proper characterisation of this and all Quistclose trusts. He then would have held that Mr Leach was dishonest enough.
Lord Slynn and Lord Steyn gave two short opinions, agreeing with Lord Hoffmann and Lord Hutton.
Lord Hoffmann said the following.
12. [...] The terms of the trust upon which Sims held the money must be found in the undertaking which they gave to Twinsectra as a condition of payment. Clauses 1 and 2 of that undertaking made it clear that the money was not to be at the free disposal of Mr Yardley. Sims were not to part with the money to Mr Yardley or anyone else except for the purpose of enabling him to acquire property.
13. In my opinion the effect of the undertaking was to provide that the money in the Sims client account should remain Twinsectra's money until such time as it was applied for the acquisition of property in accordance with the undertaking. For example, if Mr Yardley went bankrupt before the money had been so applied, it would not have formed part of his estate, as it would have done if Sims had held it in trust for him absolutely. The undertaking would have ensured that Twinsectra could get it back. It follows that Sims held the money in trust for Twinsectra, but subject to a power to apply it by way of loan to Mr Yardley in accordance with the undertaking. No doubt Sims also owed fiduciary obligations to Mr Yardley in respect of the exercise of the power, but we need not concern ourselves with those obligations because in fact the money was applied wholly for Mr Yardley's benefit.
14. The judge gave two reasons for rejecting a trust. The first was that the terms of the undertaking were too vague. It did not specify any particular property for which the money was to be used. The second was that Mr Ackerman, the moving spirit behind Twinsectra, did not intend to create a trust. He set no store by clauses 1 and 2 of the undertaking and was content to rely on the guarantee in clause 3 as Twinsectra's security for repayment.
15. I agree that the terms of the undertaking are very unusual. Solicitors acting for both lender and borrower (for example, a building society and a house buyer) commonly give an undertaking to the lender that they will not part with the money save in exchange for a duly executed charge over the property which the money is being used to purchase. The undertaking protects the lender against finding himself unsecured. But Twinsectra was not asking for any security over the property. Its security was clause 3 of the Sims undertaking. So the purpose of the undertaking was unclear. There was nothing to prevent Mr Yardley, having acquired a property in accordance with the undertaking, from mortgaging it to the hilt and spending the proceeds on something else. So it is hard to see why it should have mattered to Twinsectra whether the immediate use of the money was to acquire property. The judge thought it might have been intended to give some protective colour to a claim against the Solicitors Indemnity Fund if Sims failed to repay the loan in accordance with the undertaking. A claim against the fund would depend upon showing that the undertaking was given in the context of an underlying transaction within the usual business of a solicitor: United Bank of Kuwait Ltd v Hammoud [1988] 1 WLR 1051. Nothing is more usual than for solicitors to act on behalf of clients in the acquisition of property. On the other hand, an undertaking to repay a straightforward unsecured loan might be more problematic.
16. However, the fact that the undertaking was unusual does not mean that it was void for uncertainty. The charge of uncertainty is levelled against the terms of the power to apply the funds. "The acquisition of property" was said to be too vague. But a power is sufficiently certain to be valid if the court can say that a given application of the money does or does not fall within its terms: see In re Baden's Deed Trusts [1971] AC 424. And there is no dispute that the £357,720.11 was not applied for the acquisition of property.
Lord Hoffmann then said that the defendant must be conscious of the fact that he was "transgressing ordinary standards of honest behaviour" in order to be liable for dishonest assistance. He rejected Lord Millett's dissenting judgment on the ground it departed from Royal Brunei.
Lord Hutton's judgment considered three possible tests in the area of accessory liability: a purely subjective test, a purely objective test and a "combined test". He interpreted Lord Nicholls in Royal Brunei Airlines v Tan to have articulated a combined test: for a person to be held liable as an accessory to a breach of trust, he had to have acted dishonestly by the ordinary standards of reasonable and honest people and have been himself aware that by those standards he was acting dishonestly.
He rejected the purely subjective test outright, and rejected the purely objective test as his Lordship regarded a finding by a judge that a defendant has been dishonest as a grave finding, particularly against a professional man. Therefore, he considered it "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". Lord Hutton rejected Lord Millett's dissenting judgment as his Lordship considered Lord Millett to have adopted a purely objective test.
Lord Millett's dissent maintained that Royal Brunei decided that the test of dishonesty is largely objective, although 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. The question is whether an honest person would appreciate that what he was doing was wrong or improper, not whether the defendant himself actually appreciated this. His Lordship gave 3 reasons for this:
Consciousness of wrongdoing is an aspect of mens rea and an appropriate condition of criminal liability: it is not an appropriate condition of civil liability.
The objective test is in accordance with Barnes v Addy and the traditional doctrine.
The claim for "knowing assistance" is the equitable counterpart of the economic torts. These are intentional torts; negligence is not sufficient and dishonesty is not necessary. Liability depends on knowledge. A requirement of subjective dishonesty introduces an unnecessary and unjustified distinction between the elements of the equitable claim and those of the tort of wrongful interference with the performance of a contract.
By applying the Royal Brunei test, Lord Millett held that Leach was dishonest.
Lord Millett's analysis of the Quistclose trust closely mirrored the same approach he had suggested twenty years earlier in an article in the Law Quarterly Review.[3] He suggested there are four possible answers to the question of the nature of a Quistclose trust. The beneficial interest could lie with (1) the lender, (2) the borrower, (3) an ultimate purpose, and (4) no-one, in the sense that the beneficial interest remains "in suspense". The beneficial interest could not remain in suspense, a purpose trust would be void under English law, and if the borrower held the beneficial interest the remaining money could not go back to the lender. So, Lord Millett concluded that the beneficial interest must remain with the lender, until the purpose for which the funds are lent is fulfilled on "resulting trust".[4]
He says the following regarding the role of intention in passing the beneficial interest of a resulting trust, referring to and endorsing Dr. Chamber's model:[5]
92. ... [A resulting trust] responds to the absence of an intention on the part of the
transferor to pass the entire beneficial interest, not to a positive intention to retain it. Insofar as the transfer does not exhaust the entire beneficial interest, the resulting trust
is a default trust which fills the gap and leaves no room for any part to be in suspense.
By contrast, Lord Hoffmann characterised the trust as being an express, rather than a resulting trust. Although there may not have been words used to this effect, the solicitor's undertaking that the money should only be used for one purpose so that the money is not at the borrower's free disposal, was sufficient intent to create a trust.
This discourse has resulted in continued academic controversy, with it being argued that automatic resulting trusts following a failure of purpose defy legal analysis.[6]
↑ [2002] UKHL 12, "100. As Sherlock Holmes reminded Dr Watson, when you have eliminated the impossible, whatever remains, however improbable, must be the truth. I would reject all the alternative analyses, which I find unconvincing for the reasons I have endeavoured to explain, and hold the Quistclose trust to be an entirely orthodox example of the kind of default trust known as a resulting trust."
Barclays Bank Ltd v Quistclose Investments Ltd[1968] UKHL 4 is a leading property, unjust enrichment and trusts case, which invented a new species of proprietary interest in English law. A "Quistclose trust" arises when an asset is given to somebody for a specific purpose and if, for whatever reason, the purpose for the transfer fails, the transferor may take back the asset.
Peter Julian Millett, Baron Millett,, was a British barrister and judge. He was a Lord of Appeal in Ordinary from 1998 to 2004.
English trust law concerns the protection of assets, usually when they are held by one party for another's benefit. Trusts were a creation of the English law of property and obligations, and share a subsequent history with countries across the Commonwealth and the United States. Trusts developed when claimants in property disputes were dissatisfied with the common law courts and petitioned the King for a just and equitable result. On the King's behalf, the Lord Chancellor developed a parallel justice system in the Court of Chancery, commonly referred as equity. Historically, trusts have mostly been used where people have left money in a will, or created family settlements, charities, or some types of business venture. After the Judicature Act 1873, England's courts of equity and common law were merged, and equitable principles took precedence. Today, trusts play an important role in financial investment, especially in unit trusts and in pension trusts. Although people are generally free to set the terms of trusts in any way they like, there is a growing body of legislation to protect beneficiaries or regulate the trust relationship, including the Trustee Act 1925, Trustee Investments Act 1961, Recognition of Trusts Act 1987, Financial Services and Markets Act 2000, Trustee Act 2000, Pensions Act 1995, Pensions Act 2004 and Charities Act 2011.
Bristol and West Building Society v Mothew [1996] EWCA Civ 533 is a leading English fiduciary law and professional negligence case, concerning a solicitor's duty of care and skill, and the nature of fiduciary duties. The case is globally cited for its definition of a fiduciary and the circumstances in which a fiduciary relationship arises.
United Kingdom insolvency law regulates companies in the United Kingdom which are unable to repay their debts. While UK bankruptcy law concerns the rules for natural persons, the term insolvency is generally used for companies formed under the Companies Act 2006. Insolvency means being unable to pay debts. Since the Cork Report of 1982, the modern policy of UK insolvency law has been to attempt to rescue a company that is in difficulty, to minimise losses and fairly distribute the burdens between the community, employees, creditors and other stakeholders that result from enterprise failure. If a company cannot be saved it is liquidated, meaning that the assets are sold off to repay creditors according to their priority. The main sources of law include the Insolvency Act 1986, the Insolvency Rules 1986, the Company Directors Disqualification Act 1986, the Employment Rights Act 1996 Part XII, the EU Insolvency Regulation, and case law. Numerous other Acts, statutory instruments and cases relating to labour, banking, property and conflicts of laws also shape the subject.
Dishonest assistance, or knowing assistance, is a type of third party liability under English trust law. It is usually seen as one of two liabilities established in Barnes v Addy, the other one being knowing receipt. To be liable for dishonest assistance, there must be a breach of trust or fiduciary duty by someone other than the defendant, the defendant must have helped that person in the breach, and the defendant must have a dishonest state of mind. The liability itself is well established, but the mental element of dishonesty is subject to considerable controversy which sprang from the House of Lords case Twinsectra Ltd v Yardley.
Vandervell v Inland Revenue Commissioners [1967] 2 AC 291 is a leading English trusts law case, concerning resulting trusts. It demonstrates that the mere intention to not have a resulting trust does not make it so.
Re Vandervell Trustees Ltd [1974] EWCA Civ 7 is a leading English trusts law case, concerning resulting trusts.
A Quistclose trust is a trust created where a creditor has lent money to a debtor for a particular purpose. If the debtor uses the money for any other purpose, then it is held on trust for the creditor. Any inappropriately spent money can then be traced, and returned to the creditors. The name and trust comes from the House of Lords decision in Barclays Bank Ltd v Quistclose Investments Ltd (1970), although the underlying principles can be traced back further.
Knowing receipt is an English trusts law doctrine for imposing liability on a person who has received property that belongs to a trust, or which was held by a fiduciary, having known that the property was given to them in breach of trust. To be liable for knowing receipt, the claimant must show, first, a disposal of his trust assets in breach of fiduciary duty; second, the beneficial receipt by the defendant of assets which are traceable as representing the assets of the claimant; and third, knowledge on the part of the defendant that the assets he received are traceable to a breach of fiduciary duty.
Target Holdings Ltd v Redferns[1995] UKHL 10 is an English trusts law case, concerning the test for causation and the extent of compensation for breaches of trust.
Westdeutsche Landesbank Girozentrale v Islington LBC[1996] UKHL 12, [1996] AC 669 is a leading English trusts law case concerning the circumstances under which a resulting trust arises. It held that such a trust must be intended, or must be able to be presumed to have been intended. In the view of the majority of the House of Lords, presumed intention to reflect what is conscionable underlies all resulting and constructive trusts.
Foskett v McKeown[2000] UKHL 29 is a leading case on the English law of trusts, concerning tracing and the availability of proprietary relief following a breach of trust.
Barnes v Addy (1874) LR 9 Ch App 244 was a decision of the Court of Appeal in Chancery. It established that, in English trusts law, third parties could be liable for a breach of trust in two circumstances, referred to as the two 'limbs' of Barnes v Addy: knowing receipt and knowing assistance.
Dubai Aluminium Co Ltd v Salaam [2002] UKHL 48 is an English vicarious liability case, concerning also breach of trust and dishonest assistance.
Royal Brunei Airlines Sdn Bhd v Tan[1995] UKPC 4 is an English trusts law case, concerning breach of trust and liability for dishonest assistance.
Barlow Clowes International Ltd v Eurotrust International Ltd [2005] UKPC 37 is an English trusts law case, concerning breach of trust and liability for dishonest assistance.
El Ajou v Dollar Land Holdings plc[1993] EWCA Civ 4 is an English trusts law case concerning tracing and receipt of property in breach of trust.
AIB Group (UK) plc v Mark Redler & Co Solicitors [2014] UKSC 58 is an English trust law case, concerning the applicable principles of causation for a breach of trust. It held that a "but for" test of causation applies for equitable compensation.
Byers v Saudi National Bank[2023] UKSC 51 is a decision of the Supreme Court of the United Kingdom in the long running litigation between the liquidators of SAAD Investments Company Limited and various parties relating to the alleged defrauding of the insolvent company by one of its principals.
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