Review of dishonest assistance and knowing receipt in New Zealand

1 Mar 2022

Introduction

The torts of dishonest assistance and knowing receipt have long been recognised in the New Zealand courts. The New Zealand courts tend to apply the English authorities on these torts, as they do in many other areas of the common law, with any necessary adjustments for the New Zealand context. In 2020, the New Zealand High Court provided a comprehensive background and analysis on the law of dishonest assistance and knowing receipt in both England and New Zealand.⁽¹⁾

The case involved the operation of a Ponzi scheme with losses of $115 million. For over 20 years, David Ross, through Ross Asset Management Ltd (RAM), purported to operate an investment fund for clients. Their money was to be held on trust for the client by RAM in a separate bank account. RAM opened a bank account with ANZ Bank New Zealand Ltd (ANZ) in 1990. Until 2002, client money was kept in sub-accounts under each client's name. In 2002, RAM opened another account in the name "Ross Asset Management Ltd Client Account". From then on, clients made deposits into that account.

RAM combined client money with its own money and used client money to make payments to David Ross, to pay for RAM's operating expenses and to make payments to other clients as the supposed returns on their investments. The Ponzi scheme collapsed in 2012 when some investors found they were unable to withdraw money from RAM. Claims were brought against RAM's bank for dishonest assistance, knowing receipt and in negligence. The summary of dishonest assistance and knowing receipt below has been informed by the Court's analysis in the case.

Principles of a dishonest assistance claim

The four elements required for a claim of dishonest assistance are:⁽²⁾

the existence of a trust;
the breach of the trust by the trustee that results in loss;
conduct by a third party (the defendant) that assists the breach of trust; and
"dishonesty" on the part of the defendant in so assisting.

In relation to the second element, breach of trust, the New Zealand High Court has noted that it is not settled in New Zealand whether a breach of fiduciary duty would also be sufficient for a dishonest assistance claim. In Royal Brunei, the Privy Court did consider a breach of fiduciary duty to be sufficient.

The main controversy in recent case law has been in relation to the meaning of "dishonesty" in relation to the tort.

In Royal Brunei, Lord Nicholls held that "dishonesty" in the context of a dishonest assistance claim, does not have its ordinary subjective meaning (that is, a person acting in a manner they know is dishonest). Rather, it follows an objective standard, with knowledge being the subjective element. Whether this standard is met is assessed by what the defendant knew at the time, and whether the defendant acted as an honest person would have in those circumstances.⁽³⁾For a court to decide whether the test for dishonesty is met, Lord Nicholls set out:⁽⁴⁾

“In most situations there is little difficulty in identifying how an honest person would behave . . . . Unless there is a very good and compelling reason an honest person does not participate in a transaction if he knows it involves a misapplication of trust assets to the detriment of the beneficiaries.”

The House of Lords held that the defendant in that case had caused or permitted his company to apply money it held on trust in a way that he knew was not authorised by the trust, and that, in simple terms, this amounted to dishonest behaviour.⁽⁵⁾

In a subsequent House of Lords case, Twinsectra Ltd v Yardley,⁽⁶⁾Lord Hoffman and Lord Hutton give the principal judgments of the majority and agree that the test in Royal Brunei requires:

“more than knowledge of the facts which make the conduct wrongful. They require a dishonest state of mind, that is to say, consciousness that one is transgressing ordinary standards of honest behaviour.(7)”

Lord Hutton further considered that Royal Brunei clarified that the requirement was "knowledge by the defendant that what he was doing would be regarded as dishonest by honest people". Lord Millet dissented. His dissent is more in keeping with the wording of Royal Brunei, stating that "it is sufficient that [the defendant] knows that the money is not at the free disposal of the principal"⁽⁸⁾and that:

“[the defendant] should be liable if he knows of the arrangements by which the person obtained control of the money and that his authority to deal with the money was limited, and participates in a dealing with the money in a manner he knows is unauthorised.(9)”

Following Twinsectra, the tort came before the New Zealand Court Appeal.⁽¹⁰⁾The Court deliberately left consideration of Lord Millet's dissent in Twinsectra for another day as the resolution of the case was not affected by the issue, but one of the judges noted reservation about the practical implications of the refined test, preferring simplicity.

Further development occurred in the Privy Council in Barlow Clowes,⁽¹¹⁾which clarified that the defendant does not have to appreciate that their conduct is dishonest, so adopting Lord Millet's interpretation of Royal Brunei. This position has been adopted in New Zealand. ⁽¹²⁾In one of the latest New Zealand authorities, the New Zealand Supreme Court confirmed that, in a claim for dishonest assistance, the test for dishonesty is an objective one but based on the defendant's subjective knowledge.⁽¹³⁾

Knowing receipt

Liability for knowing receipt was expressed in 1874 as follows:⁽¹⁴⁾

“strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a court of equity may disapprove, unless those agents received and become chargeable with some part of the trust.”

The knowledge component of knowing receipt involves when the person receiving property "becomes chargeable" with the trust. How that test is satisfied – that is, what will constitute actual or constructive knowledge, has been an unsettled area of law.

Prior to Royal Brunei, the leading case in New Zealand was Westpac v Savin.⁽¹⁵⁾It involved the sale of boats by an agent, with the sale proceeds paid into the agents' overdrawn bank account and, therefore, not accounted to vendors. The agent went into liquidation and vendors pursued the bank. The Court held that knowing receipt required "actual or constructive notice" that the money received was the property of the vendors and that payment of the money into the overdrawn account was a breach of fiduciary duty by the agent. The bank was held liable in that case as it had constructive notice of the agent's breach of fiduciary duty.

The judgment included a discussion on what was sufficient to constitute constructive knowledge and referred to the five categories of knowledge from Baden.⁽¹⁶⁾Although the point did not need to be determined, the judge noted that he considered all five categories could constitute the requisite knowledge in a knowing receipt case. This included knowledge obtainable from inquiries an honest and reasonable person would feel obliged to make, being put on inquiry as a result of knowledge of suspicious circumstances.

The Privy Council in Royal Brunei did not deal with knowing receipt, other than by noting that it was restitution-based, in contrast to dishonest assistance, and that different considerations applied to the two heads of liability. Similarly, the House of Lords in Twinsectra dealt with dishonest assistance only, but Lord Millet noted that liability for knowing receipt was receipt-based, not dependent on fault. He went on to say that actual knowledge is not required, and constructive notice is sufficient and may not even be necessary.

In the next New Zealand case, Equiticorp Industries,⁽¹⁷⁾the judge relied on the Baden categories. In the next UK case, however, Akindale, ⁽¹⁸⁾the Court expressed doubts about the utility of the Baden categories. It instead adopted a test of "unconscionability".

In Marr v Parkin,⁽¹⁹⁾the New Zealand Court of Appeal noted that the law of knowing receipt is unsettled, particularly as to the degree of knowledge or notice required before the recipient of the property would be held accountable, but the Court did not need to determine the issue in that case. In a subsequent Court of Appeal case,⁽²⁰⁾the Akindale unconscionability standard was rejected, having been adopted at first instance and instead the Savin standard of actual or constructive knowledge was referred to. The following year, another Court of Appeal case(21) held that the knowledge test for dishonest assistance claim was equally appropriate for knowing receipt, as the test captured when a receipt would be "unconscionable". In Scott v ANZ (which was a strike out application), the High Court, having reviewed the case law, held that the precise nature of the test of whether a recipient should make enquiries should be determined at full trial. As it has since been settled, no further judicial analysis is expected in the proceeding.

Comment

Several areas of the torts of dishonest assistance, as well as the knowledge test for a knowing receipt claim, are unclear or evolving in both the United Kingdom and New Zealand. Further case law on the issue can be expected, particularly given the financial strain experienced by many businesses throughout the pandemic, with insolvencies forcing plaintiffs to seek compensation from parties such as banks and other receivers of funds or property.

For further information on this topic please contact Felicity Monteiro or Nik Skara at Wilson Harle by telephone (+64 9 915 5700) or email (felicity.monteiro@wilsonharle.com or nik.skara@wilsonharle.com).

Endnotes

(1) Scott v ANZ Bank Limited [2020] 3 NZLR 145.
(2) As set out in McKay v Sandman [2018] NZCA 103, citing Royal Brunei Airlines Sdn v Tan [1995] 2 AC 378 (PC).
(3) Royal Brunei at 389, Scott v ANZ at [47].
(4) Royal Brunei at 389.
(5) Royal Brunei at 393.
(6) [2002] UKHL 12, [2002] 2 AC 164.
(7) Twinsectra at [20].
(8) Twinsectra at [135].
(9) Twinsectra at [137].
(10) US International Marketing Ltd v National Bank of New Zealand Ltd [2004] 1 NZLR 589.
(11) Barlow Clows International (in liq) v Eurotrust International Ltd [2005] UKPC 37.
(12) Westpac New Zealand Ltd v MAP & Associates Ltd [2011] NZSC 89, [2011] 3 NZLR 751 and confirmed in Scott v ANZ.
(13) Sandman v Mackay [2019] NZSC 41.
(14) Barnes v Addy (1874) LR 9 Ch App 244 at 251-252.
(15) [1985] 2 NZLR 41.
(16) Baden v Société Générale pour favoriser le Developpement du Commerce et de l'Industrie en France [1993] 1 WLR 509.
(17) Equiticorp Industries Group Ltd (In Statutory Management) v The Crown (Judgment No. 47) [1998] 2 NZLR 481.
(18) Bank of Credit and Commerce International (Overseas) Ltd v Akindale [2000] EWCA Cir 502 [2001] Ch 437 (EWCA).
(19) [2015] NZ CA 371.
(20) Vernon v Public Trust [2016] NZCA 388.
(21) McLennan v Livaja [2017] NZCA 446, [2018] NZAR 405.