Dishonest Assistance: Underdeveloped & Underrated

by Nathalie Annette Kee Xuan Li ~ 10 September 2020

Dishonest Assistance:  Underdeveloped & Underrated


Contributed by:

Nathalie Annette Kee Xuan Li (Associate)

Tel: 603-6201 5678 / Fax: 603-6203 5678

Email: kxl@thomasphilip.com.my

Website: www.thomasphilip.com.my

All law students and lawyers are familiar with the cause of action that is the breach of fiduciary duty. As lawyers, when representing the aggrieved, we jump up and down when we catch the scent of a company director who ‘forgets’ how to differentiate company assets from his own, or an overly-ambitious lawyer who takes on 20 briefs too many.

But let’s not also forget:

  • The bank that allows a Ponzi scheme to grow over decades
  • The lawyer that facilitates her client’s money laundering activities through her firm’s client account
  • The accountant that arranges a bribe for her client

These situations may give rise to a claim for dishonest assistance, as they are people or bodies that have prima facie assisted in a breach of fiduciary duties. It is important to note that dishonest assistance is a secondary liability. As such, it cannot be a sole cause of action and is contingent on a finding of breach of fiduciary duty between the relevant fiduciary and the beneficiary.

The most contentious aspect of the law on dishonest assistance is – surprise, surprise – what passes for dishonesty. An in-depth case analysis shows that the Malaysian courts do not have a unanimous view on which test is to be applied and that there is potential for refinement.

Before we dive into the Malaysian position, we must understand how the UK struggled for many years to decide on a single test.

The flip-flopping UK position

The case of Barnes v Addy (1874) LR 9 Ch App 244 represents the foundation for the modern law on dishonest assistance. Many Malaysian cases have acknowledged its contribution to the subject. Because Lord Selborne in Barnes v Addy referred to ‘knowledge’ of a dishonest or fraudulent design, the test for dishonest assistance was known as ‘knowing assistance’ for the most of the 20th century.

It was the Privy Council case of Royal Brunei Airlines v Tan [1995] 3 All ER 97 that caused the shift from ‘knowing assistance’ towards ‘dishonest assistance’.

  1. Royal Brunei Airlines: The Objective Approach

The case of Royal Brunei Airlines, the test for dishonesty is predicated on Lord Nicholl’s judgment as follows (emphasis added):

“Before considering this issue further it will be helpful to define the terms being used by looking more closely at what dishonesty means in this context. Whatever may be the position in some criminal or other contexts (see, for instance, R v Ghosh [1982] 2 All ER 689, [1982] QB 1053), 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.

...

The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another’s property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour.”

  1. Twinsectra v Yardley: The Subjective-Objective Approach

Later came the House of Lords' case of Twinsectra v Yardley [2002] 2 AC 164, which applied a subjective-objective approach whereby:

  1. The defendant’s behaviour was dishonest by the standards of honest people; and
  2. The defendant must be shown to have appreciated that her behaviour contravened ordinary standards of conduct.

It is important to note that Twinsectra v Yardley maintains the distinction between the defendant’s personal beliefs and morals, and the defendant’s appreciation of what an honest person would have (or have not) done.

  1. Barlow Clowes v Eurotrust: Return to the Objective Test

While the Privy Council in Barlow Clowes v Eurotrust [2006] 1 All ER 333 affirmed the objective test in Royal Brunei Airlines as the governing one. The test enunciated was whether the defendant realized that her actions rendered her participation dishonest by ordinary standards of honest conduct, and there was no need for her to have reflections about what those normally acceptable standards were'. This decision was still persuasive compared to Twinsectra v Yardley because it was a Privy Council decision. This case has been followed by some Malaysian cases such as the Court of Appeal case of Kuan Pek Seng @ Alan Kuan v Robert Doran & Ors and other appeals [2013] 2 MLJ 174.

Finally, the UK has now reverted back to the objective approach, as can be seen in the UK Supreme Court case of Ivey v Genting Casinos (UK) Ltd t/a Crockfords [2017] UKSC 67 (albeit obiter) and the English Court of Appeal in Group Seven Limited & Ors v Notable Services LLP & Ors [2019] EWCA Civ 614.

 

Summary:

UK courts have finally settled on the objective approach.

 

The Malaysian position

In the past, the Malaysian courts have followed the objective approach of Royal Brunei Airlines “with subjective elements”.

Lately, the Federal Court has repeatedly affirmed that the subjective-objective test in Twinsectra v Yardley as the governing test for dishonesty, such as in CIMB Bank Bhd v Maybank Trustees Bhd & Ors [2014] 3 MLJ 169.

See also: Malaysian International Trading Corporation Sdn Bhd v Rhb Bank Berhad [2016] MLJU 13 and CIMB Bank Bhd (formerly known as Bumiputera Commerce Bank Bhd) v Sebang Gemilang Sdn Bhd & Anor [2018] 3 MLJ 689.

Yet, there appear to be subsequent High Court cases which ignore the subjective-objective approach and continue to apply the objective approach.

 

Summary:

The Malaysian apex court has decided that the subjective-objective approach is the correct test. Despite this, subsequent lower courts appear to be continuing to apply the objective approach.

 

Potential for growth

As it stands, the subjective-objective approach is the applicable test.

However, the test is very flawed and one can see why both Malaysian and UK courts prefer the objective test. For one, the subjective-objective approach provides uncertainty in the law, and the courts have less control over shaping precedent over what is dishonest and what is not.

Further, there is a risk of too much emphasis being placed on subjective considerations as opposed to objective considerations. This is owing to our great capacity for empathy, i.e. placing ourselves in other people’s shoes.

While the quality of empathy is one of the many unique characteristics that define what it means to be human, such empathy may be misplaced especially where corporations and financial institutions are concerned. This is because what is subjective in the case of an artificial legal entity is necessarily a legal fiction. In reality, there are many decision-makers at multiple levels of an artificial legal entity, with each with their own subjective morals. A defence on behalf of such an entity advancing ‘subjective considerations’ is likely advanced by counsel for the sake of defending her client. How does one determine the ‘perspective’ and ‘morals’ of a bank?

Also, the problem with an approach that considers subjective perspective, is that a defendant can rely on a defence that her own moral code did not consider her wrongdoing to have been dishonest. This is akin to what is known as the ‘Robin Hood defence’ i.e. the defence that one genuinely believed that robbing a millionaire and distributing the proceeds to poor people was not dishonest conduct.

Given that both UK and Malaysian courts already have a propensity to consider some ‘subjective elements’ when exercising the objective approach, it is strongly arguable that the objective approach is to be preferred, to allow the courts more leeway to determine what is appropriate conduct. Many a time, defendants have found themselves bringing an action against an insolvent or missing fiduciary, and further failing to find an assistant not liable for dishonest conduct because of their alleged inability to see that what they did was not wrong, even though by the standard of an ordinary person, what they did was grossly inappropriate and questionable.

Perhaps, in the future, our Federal Court can still refine and retool this underrated cause of action, if only more people brought actions for dishonest assistance – and knew it existed in the first place!