Accessorial Liability

The second limb of Barnes v Addy (1874) LR 9 CH App 244 at 251-252) provides a cause of action against persons who provide knowing assistance to a trustee or fiduciary who dishonestly and fraudulently breaches their duties as trustee or fiduciary.

There are three elements that must be satisfied in order to establish liability under the second limb of Barnes v Addy. These are:

  • A dishonest and fraudulent breach of trust or duty by the trustee or fiduciary;
  • Knowledge on the part of the defendant;
  • Assistance by the defendant towards the trustee’s or fiduciary’s dishonest and fraudulent breach.

The High Court of Australia in Farah Constructions v Say-Dee (2007) 230 CLR 89 confirmed that the fiduciary’s or trustee’s breach of fiduciary duty or trust must be a dishonest and fraudulent breach. Not all breaches of fiduciary duty necessarily involve dishonesty and fraud.

In The Bell Group (in liq) v Westpac Banking Corporation (no. 9) [2008] WASC 239 Owen J said with reference to the decision in Farah Constructions that:

“It seems, therefore, that the impugned conduct must be attended by circumstances that would attract a degree of opprobrium raising above the level of a simple breach of trust or breach of fiduciary duty.”

Knowledge

Before a defendant can be liable under the second limb of Barnes v Addy, the defendant must have knowingly assisted in “the dishonest and fraudulent design of the part of the Trustee(s)”.

The High Court noted “the expression “dishonest and fraudulent” is to be understood by referenced to equitable principles ….and includes a breach of trust or fiduciary duty”.

Equitable fraud was defined by Justice Evershed in Kitchen v Royal Air Force Association [1958] 1 WLR 563 as:

“…conduct which, which having regard to some special relationship between the two parties concerned, is an unconscionable thing for one to do towards the other.”

It is not necessary that the assistant be dishonest.

In Farah Constructions, the High Court held that the four relevant categories of knowledge are:

  • First category: actual knowledge
  • Second category: Wilfully shutting one’s eyes to the obvious;
  • Third category: Wilfully and recklessly failing to make such enquiries as an honest and reasonable person would make;
  • Fourth category: Knowledge of circumstances which would indicate the facts to an honest and reasonable person.

The first three categories of knowledge are generally understood as involving “actual knowledge” as understood both at common law and in equity.

The forth category is an instance of “constructive knowledge” as developed in equity and is seen as providing that the “morally obtuse” cannot escape liability to recognise an impropriety that would have been apparent to an ordinary person applying the standards of such persons.

Assistance

Before a defendant can be liable under the second limb of Barnes v Addy, the defendant must have assisted in the breach of trust or fiduciary duty.

Precisely what acts or omissions will suffice to constitute the required assistance will vary from case to case.

In the case of Quince v Mc Laughlan [2008] QCA 376, the Court held that an example of assistance was “standing by” or by not properly exercising trustee powers to stop the misuse of the trust funds.

As against the actual defendant to the action it is necessary to establish a mental element and a conduct element. The minimum mental element is “knowledge of the circumstances which would indicate the facts to an honest and reasonable person”. The conduct element may be satisfied by any action which furthers the trustee’s dishonest and fraudulent purpose.

Therefore by analogy I would submit that Directors of a corporate trustee who “stood by” while the employees of the corporate Trustee committed a dishonest Breach of Trust would be seen to be assisting in the dishonest Breach of Trust if they were aware of the conduct of those employees.

 

 

 

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