The High Court has rejected an allegation of dishonest assistance against a bank, in circumstances where the claimants argued that the restructuring of the bank's customer was a scheme to defraud its creditors and avoid the customer paying its liabilities. The court held that the customer's directors had not breached their duties to the company, and so no question of accessory liability in dishonest assistance on the part of the bank arose. However, the court also found that the bank had not acted dishonestly in any event: Henderson & Jones Ltd v Ross & Ors  EWHC 1276 (Ch).
This judgment will be of interest to those in the banking sector, as claims for dishonest assistance are a fairly common cause of action against financial institutions, albeit this was a novel scenario. By way of reminder, such claims involve an allegation that the defendant dishonestly assisted a fiduciary (such as a director) to commit a breach of fiduciary duty (such as the general duties of directors under the Companies Act 2006). For financial institutions, it is important to note that such liability, if established, may result in vicarious liability for the employer in respect of the acts of individual employees.
In this case, the claimant argued that a senior employee in the bank's restructuring unit had turned a "blind eye" to the detrimental impact of the restructure on the company and its underlying purpose to defraud creditors. In support of this allegation, it was suggested that, because the bank was sufficiently secured in terms of its exposure, it was only interested in refinancing its loan to the business.
Having considered the evidence, and noting there were a number of problems with the bank's purported motive, the court confirmed it would have rejected the dishonest assistance claim against the bank (even if it had found the directors acted in breach of fiduciary duty), as it could not be said that the bank failed to act as a reasonably honest person by not asking further questions. Indeed, the evidence indicated that the bank "took a significant interest in its customer" over an extended period to ensure the business was turned around and, where an issue was identified, the bank took specific legal advice and proposed actions consistent with maintaining the company's business.
The decision highlights the importance of the enquiries made by the bank and the fact that these were contemporaneously documented. The judgment also provides a good summary of the principles underpinning dishonest assistance claims.
At a consequentials hearing (Henderson & Jones Ltd v Ross & Ors  EWHC 1585 (Ch)), the court refused the claimant's application for permission to appeal and awarded the defendants their costs on the indemnity basis.
The Court of Appeal has also refused the claimants' request for permission to appeal the High Court's decision.
The claimant in this case was a litigation investment company and assignee of the claim. It commenced proceedings concerning the restructure of a group of companies (the Group) of which The Hospital Medical Group Limited (THMG) was formerly the main trading company. The defendants to the claim were directors of THMG, a former director and consultant to THMG, Barclays Bank (the Bank, as a secured lender to THMG) and THMG's solicitors.
The claimant argued that the restructuring was intended to put THMG's assets beyond the reach of its creditors, including in respect of potential liabilities arising from: (1) the Poly Implant Prothèse (PIP) breast implant scandal; and (2) sums due to HMRC in respect of VAT liabilities. It was alleged that the restructuring was unlawful in a number of respects, notably that the directors of THMG breached their fiduciary duties to the company and that the Bank dishonestly assisted such breaches.
The court set out the factual background in great detail in the judgment. In very brief summary, in 2011, THMG's file was passed to its Bank's Business Support Unit (BBS) in light of a number of developments with the company, including a forecast debt service covenant breach (and a required loan note restructure to avoid breach). The restructure of the Group completed in November 2012. In January 2013, the Bank's BBS function ceased its involvement with THMG in light of the company's strong upward trajectory. However, by 2015, the THMG board resolved that the company was unable to pay its debts and in February 2016, THMG entered creditors' voluntary liquidation. Although THMG had been in negotiations with the PIP claimants' solicitors in July 2015, these broke down and THMG's parent company was no longer willing to offer support. The claimant argued that these were the natural and probable consequences of the 2012 restructure, designed to make THMG reliant on parent company support. In May 2016, default judgment on liability was entered against THMG in the PIP litigation.
The claimant commenced proceedings seeking common law damages and/or equitable compensation. The defendants denied liability, arguing that the restructure was not unlawful but was reasonably and honestly undertaken for value, for good commercial reason and in THMG's interests. As such, no liability could attach to the directors for breach of duty, and as such the Bank and the other defendants could not be liable as accessories in dishonest assistance and were not dishonest in any event.
In a lengthy judgment, the High Court found that the directors had not breached their fiduciary duties to THMG. In light of this, the court held that no question of accessory liability in dishonest assistance arose on the part of the Bank. Nevertheless, given the severity of the accusations, the court went on to consider the allegations of dishonesty, holding that the Bank had not been dishonest in any event. We focus below on the dishonest assistance claim against the Bank.
As to the dishonesty element of the claims, the court noted that it is required first to ascertain the actual (subjective) state of the person's knowledge or belief as to the facts. Once that has been established, the court then determines (objectively) whether the conduct of the person was (dis)honest by applying the standards of ordinary decent people. The court noted that it is not necessary for a defendant to appreciate their dishonesty by those standards, citing the case of Ivey v Genting Casinos (UK) Ltd (trading as Crockfords Club)  AC 391.
The court confirmed that the knowledge of a fact can be imputed to a person if that person has turned a "blind eye" to it or has deliberately abstained from enquiry to avoid certain knowledge of what the person suspects to be the case. For blind eye knowledge to be imputed, it must first be shown (subjectively) that the person suspected that certain specific facts may exist and, second, that the person then made a conscious decision to refrain from taking any steps to verify the existence of those facts. The court noted that a person's suspicions, falling short of actual or blind-eye knowledge are still relevant at the first stage of the dishonesty test (per Group Seven Ltd and Anor v Notable Services LLP and Anor  EWCA 614).
As a preliminary matter in respect of the claims of dishonest assistance against the Bank, the court accepted that the absence of a discernible motive does not preclude a finding of dishonesty, referring to the case of Webb v Solicitors' Regulation Authority  EWHC 2078. However, the authorities recognised that motive and overall probability form an important part of the assessment of the evidence in a fraud case and that it is inherently improbable, absent some financial or other incentive, that professionals would act dishonestly.
In this case BS, the relevant senior employee (ie. the individual whose knowledge or suspicion of wrongdoing the claimant argued founded the Bank's liability), was descried by the court as an "impressive witness". The court found him to be an "honest banker (and witness)" with experience spanning decades and commented that although his "innate honesty might not preclude a lapse, this seems inherently improbable". While the documentary record was acknowledged by the court to be incomplete (particularly with respect to THMG's documents and those of its former auditors), the court relied heavily on BS's meeting notes/emails and specific legal advice taken by the bank in reaching the conclusions outlined below.
On motive, the court held that there were a number of problems with the alleged motive. The claimant had argued that, although the Bank had realised the dishonest design intended for THMG as part of the restructure, BS's only concern was to complete the refinancing as soon as possible as the Bank was amply secured for its own exposure to THMG's business. However, the court found, contrary to the claimant's allegations, that the Bank "took a significant interest in its customer", over an extended period of some 14 months to ensure that the business was turned around and its strategic review, including the restructure, was successfully implemented to place the Group on a sound financial footing.
In furtherance of this, BS had taken a close interest in matters which might have impacted THMG's brand, including in respect of PIP, and BS had concluded that this had, in fact, had a positive impact given how THMG had been able to position its approach to the PIP issue in the market. Moreover, where issues were identified, BS had taken specific legal advice, considered its impact on the Bank's facilities and proposed actions consistent with the maintenance of THMG's business standing.
The court accepted BS's evidence that he would have looked at matters holistically at the Group level rather than in respect of the individual companies within the Group. This approach, the court considered, was an entirely reasonable approach from the Bank's perspective.
The court also held that the reason BS had asked questions about a particular point was not because he was suspicious but because he was confused about what he understood to be new transaction steps and wanted to understand them. Indeed, the court also noted that the report from the Bank's lawyers in respect of the matter did not indicate any suspicion. The court also considered that it was significant that BS's email exchanges went to seven different persons. The court therefore considered that the Bank had not turned a blind eye or failed to act as a reasonably honest person by not asking further questions; on the contrary, BS had expressly broached the subject.
In light of the court's analysis and of what the court described as a "very thin motive suggested for a banker of more than 30 years' standing at the time to act dishonestly", the court held that it would have rejected the dishonest assistance claim against the Bank.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.