Knowing assistance: when can a third party be held liable for breach of trust by a fiduciary?
/By Emily Chappelow
In the following case note, we turn our attention to a recent Victorian Court of Appeal decision which may offer some guidance to those seeking clarity on the position of accessories potentially exposed to allegations of a breach of trust or fiduciary duty.
Background
The Victoria Court of Appeal recently handed down its decision in the case of Harstedt Pty Ltd v Marijan Tomanek [2018] VSCA 84.
The applicant, Harstedt Pty Ltd (Harstedt), was one of a number of investors promised profits under a failed investment scheme. Harstedt had deposited $250,000 into a ‘non-depleting’ bank account held in the name of Apollo Development Enterprises Pty Ltd (Apollo), on the understanding that the funds would not leave Apollo’s account. Months later, without Harstedt’s knowledge or consent, a director of Apollo and another investor transferred Harstedt’s funds to a bank account in Spain, that was not in the name of Apollo. The funds (approximately $4 million in total) then disappeared completely.
Harstedt commenced proceedings against Apollo, and others related to Apollo and the transaction, including Mr Marijan Tomanek (Tomanek). Tomanek was the secretary of Apollo, and one of the signatories of the bank account. Relevantly, the proceedings were commenced on the bases that:
· Apollo had committed a fraudulent breach of trust when it transferred Harstedt’s funds; and
· Tomanek was liable as a knowing assistant under the second limb of Barnes v Addy[1].
While judgment was entered by the trial judge against Apollo, the case against Tomanek was dismissed on the basis that he had no knowledge of the dishonesty of Apollo’s breach of trust. Harstedt then sought leave to appeal against that dismissal.
The Appeal
Ultimately, the Victorian Court of Appeal granted the application for leave but dismissed the appeal. In doing so, the Court of Appeal provided useful guidance on circumstances in which a third party may be liable as an accessory to another’s breach of trust or fiduciary duty, an area of the law that has historically been riddled with ambiguity.
Liability can arise:
· under the second limb of Barnes v Addy (that is, that a third party can be accessorily liable for breach of a fiduciary duty where they assist with knowledge in a dishonest and fraudulent design on the part of the trustee);
· where the third party knowingly induces or immediately procures the trustee’s breach;
· where the third party company is the corporate vehicle or alter ego of wrongdoing fiduciaries who use it to secure the profits of, or to inflict the losses by, their breach of fiduciary duty; or
· where the third party is not actually a trustee, but nevertheless presumes to act as a trustee and then commits a breach of trust or profits from the position (a trustee de son tort).
By the time of the appeal, it was in contention that Apollo owed Harstedt a fiduciary duty, as trustee of an express trust created when Harstedt deposited the $250,000 in to Apollo’s bank account. Tomanek also acknowledged that Apollo had breached its fiduciary duty to Harstedt by way of its fraudulent and dishonest conduct.
The question for the Court of Appeal was whether Tomanek had knowledge of Apollo’s fraudulent conduct, and whether he knowingly assisted Apollo.
The Court of Appeal recognised the elements requiring consideration to be:
· the existence of a fiduciary duty owed by the fiduciary (as trustee or otherwise);
· a dishonest and fraudulent design on the party of that fiduciary;
· assistance by the third party in that design; and
· knowledge on the party of the third party of the circumstances constituting that design.
The Court of Appeal considered the third and fourth elements in detail.
Knowledge
The Court of Appeal was satisfied on the balance of probabilities that Tomanek ‘…knew of the essential facts which constituted dishonest and fraudulent breach of trust by Apollo’.[2] In coming to that finding, they acknowledged that it was customary to analyse the requirement of knowledge for accessorial liability for breach of fiduciary duty by reference to the four categories of knowledge originally set out in Baden v Société Générale pour Favouriser le Dévelopment du Commerce et de l’Industrie en France SA[3], and accepted by the High Court as applicable in Australia:[4]
· actual knowledge;
· wilfully shutting one’s eyes to the obvious;
· wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make; and
· knowledge of circumstances which would indicate the facts to an honest and reasonable person.
Assistance
The Court of Appeal said that while the authorities offer little guidance on the meaning of ‘assistance’ in a dishonest and fraudulent design, there are at least two principles that emerge from the authorities on this point. Relevantly, ‘assistance’ will be established where:
· but for the action of the third party, the breach of fiduciary duty would not have occurred (noting that common examples of this are the role of a bank or similar transaction); or
· the third party has facilitated a breach of fiduciary duty that would have occurred in any event.
Harstedt contended active involvement by Tomanek. However, the Court of Appeal disagreed and held that Harstedt had not established anything beyond Tomanek’s knowledge of Apollo’s dishonest and fraudulent design, and that knowledge in and of itself did not facilitate Apollo’s breach of trust, or any loss or damage arising from that breach of trust.
Key takeaways
Harstedt failed to prove knowing assistance on the part of Tomanek, the fourth and final element of a claim under the second limb of Barnes v Addy. Harstedt also did not allege that Tomanek had received, dealt with, or otherwise misappropriated the funds. While this area of the law remains ambiguous, by this decision, the Victorian Court of Appeal confirmed that all four elements set out in the second limb of Barnes v Addy must be made out for a party to succeed in a claim of this nature. The decision also provided clarity on how to appropriately address each element.
The Court of Appeal also opined that while a company officer has certain responsibilities in a company and attends to its business affairs, this cannot lead to an automatic conclusion that in circumstances where the company is a trustee that has committed a breach of trust through the implementation of a dishonest and fraudulent design, that that person assisted or participated in that dishonest and fraudulent design solely by reason of his or her responsibilities or role within the company, and nothing more. For that reason, it is critical to establish knowing assistance by a third party.
[1] (1874) 9 Ch App 244.
[2] Harstedt at 105.
[3] [1992] 4 All ER 161.
[4] Farah (2007) 230 CLR 89.