Twinsectra v Yardley

Twinsectra Ltd agreed to advance a sum of £1 million to a Mr Yardley for the purpose of acquiring property. Twinsectra was, however, unwilling to release the funds directly to Yardley or to his solicitors, Leach. It therefore required an undertaking from another firm of solicitors, Sims, before the money would be transferred. Sims gave an undertaking to Twinsectra that the loan monies would be used solely for the acquisition of property and would be retained by Sims until so applied. The undertaking thus imported conditions limiting the permissible use of the funds.

Contrary to the terms of the undertaking, Sims transferred the £1 million to Leach, Yardley's own solicitors. Leach in turn disbursed substantial portions of the money to Yardley at his direction, and those monies were not applied exclusively in the acquisition of property as stipulated. Yardley subsequently became insolvent and Twinsectra was unable to recover the full amount of the loan from him.

Twinsectra brought proceedings against multiple defendants. The central claim relevant to the House of Lords appeal concerned Mr Leach, the solicitor who had received the money from Sims and had paid it out to Yardley in breach of the terms on which the money had been advanced. Twinsectra alleged that Leach was liable for dishonest assistance in a breach of trust or fiduciary duty.

At first instance the trial judge found that there was a Quistclose-style trust over the loan monies — that is, the money was held on trust for Twinsectra unless and until it was applied for the purpose specified in the undertaking — but that Leach had not been dishonest and therefore was not liable as an accessory. The Court of Appeal upheld that decision. The matter came before the House of Lords principally on the question of the mental element required for accessory liability in equity.

The case thus raised two distinct but related questions: first, whether a Quistclose trust arose over the loan monies so as to subject them to a fiduciary obligation; and second, and more prominently, what standard of dishonesty was required to render a third party who assisted in a breach of trust personally liable as an accessory.

The primary issue before the House of Lords was the correct test for dishonesty in the context of accessory liability for breach of trust — specifically, whether dishonesty for the purpose of what is often called "knowing assistance" or "dishonest assistance" required a purely subjective assessment of the defendant's state of mind, a purely objective assessment by reference to the standards of honest and reasonable people, or some combined approach. This question directly engaged the scope and meaning of the principle laid down by the Privy Council in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378.

A secondary issue concerned the nature and existence of the trust over the loan monies advanced by Twinsectra to Sims. The House was required to consider whether the specific terms of the undertaking given by Sims were sufficient to constitute the monies as subject to a Quistclose trust — that is, a purpose trust of the kind recognised in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 — or whether the money was simply lent on contractual terms with no trust superimposed.

A further subordinate question was whether Leach's conduct, assessed against whichever legal standard was determined to be correct, actually satisfied the requirements for liability, and consequently whether the trial judge's finding that Leach had not acted dishonestly was open to reversal on appeal.

Their Lordships unanimously affirmed the existence of a Quistclose trust over the loan monies. The funds advanced by Twinsectra to Sims were not beneficially owned by Yardley or by Sims. The terms of the undertaking — that the money be used solely for the acquisition of property and retained by Sims until so applied — were sufficiently clear and restrictive to prevent the money from passing beneficially to either solicitor. The beneficial interest remained with Twinsectra pending application of the funds for the stipulated purpose. This analysis followed directly from the reasoning in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, where Lord Wilberforce had held that money advanced for a specific purpose, which could not be achieved, resulted in a resulting trust back to the lender. The House endorsed Lord Millett's earlier extrajudicial analysis of Quistclose trusts, affirming that the beneficial interest never leaves the lender unless and until the purpose is accomplished.

When Sims transferred the money to Leach in breach of the undertaking, Leach received funds that were still subject to the Quistclose trust. When Leach then disbursed those monies to Yardley otherwise than for the acquisition of property, he participated in a breach of that trust. The threshold question of whether a trust existed and whether it had been breached was therefore resolved in favour of Twinsectra. The focus of the appeal thus shifted decisively to the mental element of accessory liability.

The leading modern authority on accessory liability was Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378, in which the Privy Council, delivering the judgment through Lord Nicholls, had reformulated the law as requiring "dishonest assistance" rather than the older formulation of "knowing assistance" with its graduated categories of knowledge derived from Baden, Delvaux and Lecuit v Société Générale pour Favoriser le Développement du Commerce et de l'Industrie en France SA [1983] BCLC 325. Lord Nicholls in Royal Brunei had stated that dishonesty was an objective standard — what a reasonable and honest person would have regarded as dishonest — and that the defendant's own view of his conduct was irrelevant save to the extent that his subjective knowledge of the relevant facts was necessary to assess what he knew or believed.

The majority of the House of Lords in Twinsectra, in opinions delivered primarily by Lord Hutton (with whose reasoning Lord Slynn, Lord Steyn, and Lord Hoffmann agreed), held that the test of dishonesty for accessory liability combines both objective and subjective elements. Dishonesty requires, first, that the defendant's conduct was dishonest by the standards of reasonable and honest people; and second, that the defendant himself was aware that his conduct was, by those standards, dishonest. This two-limbed formulation is commonly referred to as the "combined" or "dual" test, and it bore a close structural resemblance to the test for dishonesty in criminal law as articulated in R v Ghosh [1982] QB 1053.

The majority reasoned that it would be unjust and contrary to ordinary moral intuitions to brand a person as dishonest — with the serious reputational and legal consequences that entails — if that person genuinely believed his conduct was acceptable even if ordinary people would have regarded it as dishonest. Dishonesty, as a term of reproach carrying moral condemnation, was not to be imposed without the defendant's own recognition that he was behaving in a way that fell below ordinary standards of honest conduct. Lord Hutton drew on the criminal law analogy to reinforce the proposition that true dishonesty requires a subjective element of awareness.

Lord Millett delivered a powerful dissent on the dishonesty question. He argued that the majority had misread Royal Brunei Airlines v Tan [1995] 2 AC 378 and that Lord Nicholls had in fact propounded a purely objective standard: whether the defendant's conduct departed from the standard of the honest and reasonable person, assessed by reference to the defendant's own knowledge of the facts but without any requirement that the defendant subjectively appreciated the dishonesty of his behaviour. On Lord Millett's approach, a defendant could not escape liability by professing a personal ethical code that departed from the norms of honest conduct held by society at large.

Lord Millett's dissent proved highly influential in subsequent legal development. He argued that the majority's combined test introduced an undesirable element of subjectivity that could allow defendants who had deliberately closed their eyes to obvious risks — or who had a self-serving but unreasonable view of the propriety of their conduct — to escape liability. In his view, the proper approach was to ask simply whether, knowing what the defendant knew, an honest person in his position would have appreciated that the conduct in question was improper.

Applying the majority's combined test to the facts, the House upheld the trial judge's finding that Leach had not been dishonest. Although Leach had transferred funds to Yardley in circumstances that many honest solicitors would have regarded as improper, the trial judge had found — and the House saw no reason to disturb that finding — that Leach had not himself appreciated that what he was doing was dishonest by ordinary standards. Leach had acted on his client Yardley's instructions, and while he had been careless or even negligent, he had not consciously crossed the line of dishonesty as the majority defined it.

The House therefore dismissed the appeal against Leach on the dishonest assistance claim. This outcome was criticised by some commentators on the basis that it rewarded a degree of wilful blindness or moral insensitivity in professional advisers, but it followed logically from the majority's insistence that the subjective element of dishonesty must be established. The combined test as applied in Twinsectra drew a distinction between the adviser who knew he was doing wrong and the adviser who simply failed to ask the right questions.

On the Quistclose trust point, the reasoning of the House confirmed that such trusts are a species of resulting trust. Where money is paid for a specific purpose and on terms that preclude its use for any other purpose, equity will impose a trust in favour of the payer. The money does not form part of the payee's beneficial estate and cannot be taken by the payee's creditors if the payee becomes insolvent. This reasoning reinforced and clarified the analysis advanced in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 and gave principled doctrinal foundation to a form of trust that had previously been regarded by some scholars as anomalous.

The House of Lords held, by a majority, that the test for dishonesty in a claim for dishonest assistance in a breach of trust is a combined objective and subjective standard: the defendant's conduct must be dishonest by the standards of ordinary honest people, and the defendant must himself have been aware that his conduct was by those standards dishonest. A purely objective test was rejected by the majority, though Lord Millett in dissent favoured the purely objective approach.

Their Lordships unanimously held that the loan monies advanced by Twinsectra were subject to a Quistclose trust in favour of Twinsectra, and that the terms of Sims's undertaking prevented the beneficial interest in the funds from passing to either Sims or Yardley unless and until the funds were applied for the purpose of acquiring property. The transfer of the funds by Sims to Leach, and by Leach to Yardley, constituted a breach of that trust.

Applying the combined test to the facts, the House upheld the finding that Leach had not acted dishonestly and therefore dismissed the appeal against him on the accessory liability claim. Twinsectra's appeal was accordingly dismissed.

The most enduring significance of Twinsectra v Yardley [2002] UKHL 12 lies in the controversy surrounding the majority's formulation of the dishonesty test. The combined test, with its subjective second limb, was subsequently revisited and effectively modified by the Privy Council in Barlow Clowes International Ltd v Eurotrust International Ltd [2006] 1 WLR 1476. Lord Hoffmann, delivering the judgment of the Privy Council, clarified that the majority in Twinsectra had not in fact intended to depart from the objective standard articulated in Royal Brunei. He explained that the subjective element required only that the defendant's knowledge of the facts be taken into account, not that the defendant must actually appreciate the dishonesty of his conduct by ordinary standards. This clarification moved the law considerably closer to Lord Millett's dissenting position in Twinsectra and to the purely objective approach favoured by Lord Nicholls in Royal Brunei.

The Supreme Court in Ivey v Genting Casinos (UK) Ltd t/a Crockfords [2017] UKSC 67 subsequently confirmed, in the context of the criminal law, that the second limb of the Ghosh test — requiring that the defendant appreciate his own dishonesty — was wrong and should no longer be followed. Although Ivey was a civil case concerning the Gaming Act, the Supreme Court's reasoning applied equally to the criminal law and by extension cast further doubt on the majority reasoning in Twinsectra